Market drop benefits Minnetrista

Trust me I’m not celebrating the stock market decline and the impact it’s having on our 401Ks but the last few days and the timing of Minnetrista’s General Obligation (G.O.) bond issue for the water tower was nothing short of serendipitous for the city. When stocks decline investors run toward government bonds for stability and this week’s market drop spelled for a great bond deal for Minnetrista.

Last night the council approved $2,390,000 in G.O. bonds with $1,910,000 going toward the new water tower and $480,000 for capital equipment. With the cash incentives offered by investors we were able to lower the amount of the bond by $125,000 and got an excellent interest rate of 1.622%.

I had previously expressed concern about issuing G.O. bonds for building a water tower because they pledge the full faith and credit of the city when the intention is, and always has been, for water revenues (and only water revenues) to pay for 100% of the debt If you never changeservice on the water tower. G.O. bonds actually mandate that if city water revenues don’t keep pace sufficiently to pay the debt that the city must levy for it. That still concerns me and I would’ve preferred to have issued a revenue bond instead where the investor takes that risk instead of taxpayers. A revenue bond may have seen as good of an outcome as the G.O. bond did yesterday, but I was outvoted and accept that.

Given the great bonding deal we got yesterday I decided to vote to approve it. The reduction of $125K in the bond and the excellent rate we received mitigates, in my opinion, some of the risk factors involved in meeting the debt payments.

I abhor profiting from misfortunes but if a silver lining can be found in the recent stock market volatility I’m grateful that at least there is a benefit to Minnetrista, if not my 401K.

New water tower financing – Who assumes risk?

There is a big risk factor looming in November that could profoundly impact the direction of our economy. Minnetrista will be relying on revenues coming from current and future water users to finance a new $2.3M water tower in the southern sector and while we’ve been enjoying a robust growth period with a booming housing market, what if all that comes to a halt? We’ve seen what happened in 2008 and elections are known to impact the economy in profound ways.

The city council has heard from financial consultants, engineering firms, and staff urging

water tower

the city to act now but none of them are Minnetrista taxpayers. They are stakeholders benefiting, directly or indirectly, from issuing the bond, constructing the tower, or growing the city’s debt and size of the city’s budget. That’s just a fact, but an important fact to consider. They are all competent and good at what they do but their interests are, understandably, their interests.

Don’t get me wrong, we need to build the water tower and we need to do it soon. Our growth numbers show that by 2030, if growth continues at the current rate, we won’t be able to service the southern sector adequately. But it takes about 2 years to get a water tower online and there is no imminent crisis, despite what some stakeholders may assert.

There are two possible ways, with some very important differences, to finance this project. The council, however, was advised Monday night to consider only the first:

  • General Obligation (G.O.) Bonds – Pledge the full faith & credit of the city and require the city to use whatever means possible, including increasing the citywide tax levy, to cover the debt. These are called “General” obligation bonds because they are typically used to finance projects that benefit the general community at large, not just a sector of it. In this case, however, this project only benefits city water users. With a G.O. bond the entire Minnetrista tax base assumes the risk of whether our housing growth and associated water revenue increases at a sufficient rate to cover the bond.
  • Revenue Bonds – Finance income-producing projects and are secured by a specified revenue source, in this case water fees and new connection charges. A revenue bond would rely solely on the revenue coming from water fees to pay for the bond without putting the “full faith & credit” of all Minnetrista taxpayers on the line. That means the city would not be required to increase the tax levy to cover the debt if, for any reason, future water fees weren’t enough. Revenue bonds put the risk on the investor purchasing the bonds rather than all Minnetrista property owners, regardless of whether they’re on city water.

My preference was to hold off on authorizing the bond issuance until after the November elections when the risk associated with our growth projections might be better understood. If it appears the economy will remain on track going forward, a G.O. bond may be a good option then. Considering the economic uncertainly that lies ahead I am not comfortable pledging the full faith and credit of the entire city on a G.O. bond today. A revenue bond wouldn’t do that and is the only responsible choice today, in my opinion, to protect Minnetrista property owners.

Unfortunately the council succumbed to the pressure and voted 4-1 Monday night to pass a resolution (pg 57) amended to provide for the sale of $2.5M in G.O. bonds ($2M for the tower; $500K for CIP) with plans to award the sale of the G.O. bonds on March 9, 2020.

I’ll need to update this debt chart:

debt growth
2016 Includes all debt types, levied and unlevied (revenue pledged)

*The narrative in this post is publicly available by viewing the Monday 2/3/2020 council meeting video and listening to the 2/3/2020 work session recording.

“Windfall” dilemma?

Would you keep remitting payments to the bank once your mortgage is paid off? Of course not. This seems to be a dilemma, however, for the city of Minnetrista that has been making payments to the city of Mound for the bond taken out in 2004 to pay for their municipal building/fire station. Minnetrista contracts with Mound for fire services and, along with the other cities Mound fire supports, has been paying $68K annually to help them pay off the bond. The bond will be retired in 2022. Here’s the brief discussion from our meeting December 2:

 

Mound fire youtube discussion
Discussion of $68K “windfall” to city of Mound

 

Put the brakes on

Watch a representative from Ehlers, the city’s contracted financial advising firm, who gets paid to help cities borrow money, defend Minnetrista’s weak debt profile from Standard & Poors in this video from Monday night’s council meeting, rationalizing that because everyone else does it, it really isn’t a big deal. Well, of course a firm specializing in debt issuance would see it that way.

S&P Debt RatingMinnetrista’s debt service is 18.6% of total government fund expenditures and that is high, according to Standard & Poors which isn’t a firm specializing in debt issuance. They specialize in evaluating the credit worthiness of organizations. Perhaps we should heed the assessment from S&P rather than go along with the don’t worry be happy advice from our debt issuance firm.

debt growthBecause a city can just take the money out of constituents’ pockets it carries an obligation to make sure it manages debt responsibly. Even the Ehlers rep estimated Minnetrista would need to almost cut its debt service in half (reduce it to 10%) to change the S&P rating. Minnetrista needs to put the brakes on. Apparently so do a lot of other Minnesota cities.

Monday night’s discussion centered around refinancing some G.O. bonds and the city’s ratings relative to receiving favorable bids. Having a AA++ rating is a good thing and the city’s finances are strong partly because our residents are relatively affluent which translates into what they call a “high tax capacity” (there is plenty more to take) and there are funds stashed away in “special” funds that aren’t being used. But bond ratings are not the point here. Saddling future generations with debt that keeps growing is the point.

The eight page Standard & Poors rating wasn’t in our council packet or available to the public prior to the meeting.  I had to request a copy of the rating assessment to review prior to the meeting and asked that it be provided to the council. They had planned to hand it out during the council meeting. If residents would like a copy they can call city hall.

 

Preliminary tax levy increased 5.87% and 2040 Comp Plan to come back for study

Monday was a long night for the city council with a full and challenging agenda. Unfortunately for Minnetrista taxpayers the council chose to adopt (4 to 1) the highest increase (5.87%) presented by staff for the 2020 preliminary tax levy, despite having hundreds of thousands of dollars that have been sitting in unused special funds for years with no foreseeable liabilities against them. We continue to raise taxes and debt special fundswhile cannibalizing our fund reserves, all the while having access to these public funds which, in my opinion, belong in our general fund reserves to give an accurate view of the city’s balance sheet. If the city needs to buy trees we can budget for them. If the city needs to purchase additional emergency sirens we can budget for them. Setting up “special funds” keeps this money out of the public’s view and, more importantly, out of the general fund and gives a distorted view of the city’s finances, which is used to justify tax increases year after year.

The preliminary levy increase may be lowered before the final levy adoption in December but it cannot increase any higher. December 2, 2019 was the date set last night for public comment on the 2020 final levy adoption. You’ll hear some council members defend their votes citing that the preliminary increase was reduced last year before the final levy was adopted. What you won’t be told is that it was done without cutting a single penny of spending and irresponsibly dipping into our general fund reserves.

The city’s 2040 Comprehensive Plan was on the agenda for final approval Monday night. I had some serious concerns about it noted here having to do with private wells, GreenStep Cities, inaccurate numbers projecting future water demand, and making commitments to revise or adopt future ordinances without the council having access to the wording of these ordinances. Council agreed to bring the plan back to a work session in October for discussion.

 

Rubber Stamp rides again

RUBBER STAMP RIDES AGAIN. Apparently Minnetrista council members are fine voting to update city policy without knowing what the updates are. In a 4-1 vote last night that’s exactly what happened. rubber stampUnder the consent agenda at our council meeting was an item updating the city’s Post-Issuance Debt Compliance Policy. In the policy/backgrounder (pg 30) provided there was nothing summarizing what was being updated and council was not given the changes in any form where we could see what, exactly, was being changed. Call me crazy but I said I couldn’t vote to approve updates without knowing what they are. The Mayor felt otherwise and indicated that as long as the finance director and city attorney had read it, that should be enough for council. I was cut off when I attempted to remind the council that approving city policy is the council’s job, not the job of city staff. Apparently not in Minnetrista.

Minnetrista preliminary tax increase highest of all surrounding cities

I attended the League of Women Voters city council candidate forum at Minnetrista city hall Thursday night. Once the video is available I’ll post it and give a recap. For now just wanted to post some information city council candidate Elroy Balgaard shared that night on the surrounding communities and how their preliminary tax levy changes compare to Minnetrista’s.2019 surrounding cities preliminary leviesThis information didn’t go over well with the incumbents who asserted these communities can’t be compared but it should be noted that the city of Orono is quite comparable to Minnetrista in size and growth yet their increase is 40% lower than Minnetrista’s. Yes, there’s always a chance preliminary tax levies may come down before they are adopted in December but I’d be shocked if Minnetrista’s increase came down to even Wayzata’s at 4.29%.

Minnetrista grew 2.5% last year. Why do we need a 6.01% budget increase to pay for that?

Even though there will be a public hearing on December 3, the Minnetrista final 2019 tax levy will most likely, given history, be adopted without change that same evening and the public hearing is not likely to influence that. Sort of makes one wonder what the point is of having a public hearing.