Thursday, January 17, 2013
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City treasurer suggests replacing loan with bond

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[January 17, 2013]  Tuesday evening, City Treasurer Chuck Conzo introduced a new idea to the Lincoln City Council for the financing of a $9.8 million loan the city received in 2002 from the Illinois Environmental Protection Agency.

The loan from the IEPA was given to the city for the remodeling of the city's waste treatment plant.

In 2001 the city began working on a modification to the plant that would bring it up to EPA standards in the state of Illinois. The modification wasn't necessarily one the city did by choice, but rather something they were forced to do by the EPA.

At that time, the EPA was offering low-interest loans to all municipalities that completed their upgrades. The city applied for such a loan and received approval in 2002 for a $9.8 million loan at an interest rate of 2.557 percent.

Conzo said the city started the loan in 2005, and it is scheduled to be paid off in 2024. He said the original amount of the loan was $9,551,000. As of the end of this month, the remaining balance on the loan will be in excess of $6 million. He confirmed the interest rate of the loan was 2.557 percent and said at that time this was a low rate.

He then commented that in the last few years there have been significant dips in interest rates. While this has hurt the city in their interest-earning accounts, Conzo said they were now in a position where they could take advantage of the low interest and refinance this EPA loan through an alternative revenue bond.

The city is familiar with bond issuance as they have a common practice of issuing general obligation bonds to help support cash flow. The bonds themselves are quite similar to loans in that they have to be paid back over time with interest. They differ in that they are secured by specific dollars coming into the city. In the general obligation bond, these dollars come from tax revenues.

In the alternative revenue bond Conzo is suggesting, this would not be the case. The bond security would be revenue from the sewer bills, so there would be no change in taxes, no tax referendums or increases in taxes to Lincoln residents.

Conzo said he, Mayor Keith Snyder and finance chair Melody Anderson have been talking with John Vezzetti of Bernardi Securities of LaSalle about issuing this new bond, and Vezzetti has prepared a variety of proposals for the city to consider.

Conzo walked through a couple of these options. He said the first option would be a refinance of the EPA loan through a bond issuance at 2.21 percent. He said the bottom line was that over the length of the bond, the city would save $89,291.

He said another option was a monetized savings option that would bring a net savings of $83,000.

In the third option, three examples were included in what Conzo said was an equity contribution plan. In this plan the city would pay some of the loan upfront and finance the rest of it through the bond.

For the first example, Conzo said that if the city paid $150,000 upfront, then issued the bond for the balance, their savings at the end of the bond would come to $300,000. However, he also said he thought making that kind of upfront payment for the city was "kind of steep."

The second example included a $40,000 upfront payment and would save the city $113,000. The final example was an upfront of $15,000 and would save the city $106,000 overall.

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Vezzetti was on hand at the meeting to answer questions. During the discussion he said that it was important to understand what is going on with interest rates. He talked about the going rates in the 1970s being at about 5 percent, then in the '80s spiking up to the 12-15 percent range. He said they have spiraled downward since then and have recently been at all-time lows. He noted there had been a slight spike in rates recently, but he also sees they may be going back down again.

Speaking specifically about the EPA loan, Vezzetti said the loan carried no interest penalties for early payoff, which is important.

Vezzetti had provided each member of the council with an information packet. He pointed that out to them, then asked if anyone had questions.

Snyder asked if the figures presented to the council were determined assuming the city had an "A+" credit rating. Vezzetti confirmed that to be the case. Snyder then asked if there was any reason to believe the city would not have an A+ rating.

Vezzetti said that was something the city needed to pursue to see what their rating would be. He said the ratings would be done by either Standard & Poor's, Moody Financial, or Fitch. He added that in his proposal, getting the rating was included in the cost of the refinancing.

Vezzetti said he had put together a timeline for the refinance and that it needed to be done as soon as possible because of interest rate changes.

He said the city would have to pass an authorizing ordinance, then publish it for 30 days. After the 30 days there would need to be a bond hearing; then the actual bond could be issued. He projected that the city could and should have a goal of the middle part of March for the closing date.

He was also asked what happens if the rates go up during this process. Vezzetti said that from the time the ordinance is passed, the city actually has three years to enact it. Therefore, if rates go up, they have the option to wait and see if they go back down. In addition, Vezzetti said if they don't go back down, the city can drop the idea altogether and stay with the EPA loan they have now without any kind of penalty.

Conzo also noted that between now and the middle of March, the rates could drop even more, thus saving the city more than is currently being projected.

Conzo also told the council that as an alternative revenue bond, a tax abatement ordinance would need to be passed annually.

It is expected that the council will deliver a vote on this next week, but it is at their discretion to table any item they feel they are not ready to make a decision on.


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