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Ehlers Advisor • March 2009 <br />Refinance, Restructure, Refocus <br />By Mark Ruff, Finccnc~ctl Advisor and Brian Shannon, Ftnanc~al Analyst <br />These are trying times u~ many ways. Many of us are trying to <br />fnad a perspective; trying to balance the uncertainty of what is <br />to come ii1 the next few years with the optimism that better <br />economic times are ahead. <br />City will need to wait four to five years for the tax forfeiture <br />process to result in a sale of tlae p~•operty and hope foi• some <br />recovery of the special assessments (special assessments are <br />paid first iii this situation). <br />One piece of good news is that interest rates are low and. <br />refinancing for savings will help short-term budgets. However, <br />a more wholesale <br />restructuring of debt is <br />also an option that local <br />goveri~nents are <br />considering. <br />Many communities <br />issued debt over the Iasi <br />five to ten years, <br />anticipating growth, <br />Gtowtl~ was expected to <br />provide new tax <br />~•evenues or was <br />expected to pay water <br />and sewer hookup fees <br />(otherwise known as <br />sAC/WAC fees), or was <br />expected to simply <br />make good on the <br />special assessments <br />levied against the <br />piopeity. <br />Many communities <br />issued general obligation <br />(G.O.) debt expecting <br />these increased tax <br />revenues, water and <br />sewer fees, or special <br />assessments to pay for <br />the debt service. Even <br />when the growth <br />assumptions were <br />moderate, the stark <br />reality of today's real <br />estate market is causing <br />financial st~•ain. with <br />some special <br />assessments now in <br />delinquency or with CITY B: Annual Payments After CABs Issu <br />new water or sewer <br />treatment plants in place, communities are looking foi• options <br />to reduce payments dramatically. <br />How does a City afford. $200.,000 per year of debt service <br />payments for four or five years with oz~.y $344,000 cash? The <br />City has no reserves <br />available to make <br />payments in the interim, <br />and tlae tax levy to <br />support the annual debt <br />service would cause a 30 <br />percent hlcrease in the <br />tax rate. One possib' 'ty <br />is to ~•est~lictu~•e the debt <br />to be interest only for six <br />years and a balloon <br />payment in year seven, <br />assuming compliance <br />with requirements of <br />Minnesota statutes. rn <br />year seven, the City <br />could decide to pay it all <br />off with proceeds of a <br />sale or it could decide to <br />refinance the bonds for <br />~.0 more years and pay <br />from other revenue <br />sources at that tune. <br />One word of warning. <br />fssLiing new debt <br />with a Long call date <br />(prepayment date) could <br />set City A up for another <br />disaster. ff the economy <br />does turn around faster <br />than expected, tl~e City <br />does not want special <br />assessments sitting in a <br />debt service find for <br />several years with no <br />prospect of paying down <br />the debt. <br />ed In <br />2009 with banger Term Debt As with. much in life, <br />there are few win win <br />situations. Wlvle restiti~eturing debt can provide flexibility to <br />better match cash-flows, tlae rating agencies see this as a red <br />flag that requi~•es more explanation, Often, if restr~ict<lring is <br />part of a broader plan to improve financial operations and <br />create financial flexibility, rest~licttu ing is pefceived as more <br />acceptable. That leads us to example City B. <br />urger City B expanded its sanitary sewer treatment plant in <br />2005 and issued ~ 10 million of G.O. Bonds to be paid from <br />sAC/WAC fees and from user fees. At that tune, the City was <br />seeing 200 homes per year built. City B thought they we~•e <br />conservative when they st~•~rctured the debt assuming <br />SAC/w~AC fees f~•om f 5o homes per year. All of a sudden, the <br />bottom fell out of the market and o~~y 24 new homes were <br />The good news is that Mhnnesota State Law and the bond <br />market offe~• great nexib' 'ty in addressing short-te~~.n cash flow <br />needs. Below are two case studies that are great examples. <br />Smaller City A issued $1.5 million G.O. lmptovement Bonds for <br />streets, sewer, and water for a new subdivision in 2004. The <br />developer loos walked away from the lots and the special <br />assessments. No bank load a mortgage on the property. The <br />City has $300,000 from a letter of credit provided by the <br />developer when the bonds we~•e issued, but no prospect in the <br />near term for const~l~etion of the lots. In the worst case, the <br />•3• <br />CITY B: Annual Payments Before Restructuring & Assuming Higher Growth to Pay Dept <br />