Debt Levy
2023 Budget Story - Homepage Link
Introduction
The City's long-term debt consists of 13 bond issuances, each with a maturity over 1 year. The City has issued long-term debt to finance large projects including street improvements, building construction, utility improvements, tax increment financing, and equipment purchases. The City may also issue long-term debt to refund older issuances to take advantage of better interest rates. Traditionally, principal payments are made once per year while interest payments are made semi-annually.
Long-term debt allows the City to perform improvements sooner by spreading the payments over many years. Through careful monitoring and stewardship, cash flows can be more predictable and expenses smoother through the use of long-term debt. The trade-off with the use of long-term debt is that the total cost of a project increases due to the added interest payments and the costs to issue the long-term debt. The City currently has three types of long-term debt outstanding: General Obligation Improvement Bonds, General Obligation Tax Increment Bonds, and Equipment Certificates. The sources from which the long-term debt is paid back are typically indicative of the type of debt. For example, Tax Increment Bonds are backed by the full faith and credit of the City, but tax proceeds are the first commitment to the repayment of debt. It's important to note the City has never used general property taxes to support the debt associated with any Tax Increment Finance District.
The statutory procedure for municipal borrowing is known to the general public as issuing “bonds,” which in many respects are similar to the bonds issued by private corporations. However, municipal bonds are unique in the world of finance and are strictly governed by state statutes (and, in the realm of tax-exemption, by complex federal laws and regulations).
The bonds most commonly issued by cities are governed by Minnesota State Statute 475, though that chapter interacts with many other statutes that address specific types of borrowing. Confusingly, Chapter 475 does not use the term “bonds,” but instead refers only to the issuance of “obligations.” Many other statutes use only the term “bonds.” For practical purposes, these terms are synonymous, and this chapter will reference both terms as the context requires.
Bonds by Type of Security
General Obligation Bonds
The most common type of bonds issued by cities are “general obligations,” which are defined in Chapter 475 as “obligations which pledge the full faith and credit of the municipality to their payment.” (Note that Chapter 475 also broadly defines “municipality” to include counties, towns, and school districts; but this chapter will of course focus just on cities). The pledge of “full faith and credit” means that the issuing city must use any assets it owns to pay the bonds—including use of its power of ad valorem tax levy. In effect, when a city issues a general obligation bond, it is promising to levy a tax in the amount needed to pay principal and interest on the bonds for their entire term. That tax levy is unlimited by any statute, and is not affected by any other tax the city may already impose.
Therefore, when investors purchase a general obligation bond, they are relying upon the general financial condition of the city and, indirectly, upon the condition of the city’s residents and businesses, which may be required to pay an additional property tax.
This type of bond is, by far, the most secure—the type most likely to be repaid in full—and therefore carries the lowest interest rates. (In public finance as well as private, higher risk generally means higher interest rates; lower risk, lower rates). Therefore, general obligation bonds are usually the most inexpensive method for cities to finance their capital needs.
General Obligation Revenue Bonds
This type of bond is actually just a sub-species of general obligation bond. These are issued when a statute authorizes a city to pledge a specific revenue source and, in addition, pledge the city’s full faith and credit. In most cases, the pledged revenues are expected to pay all (or some designated portion) of the debt service on the bonds, but the full faith and credit pledge means that the city must cover any shortfalls with an ad valorem tax levy.
Bond investors view these hybrid bonds as simply general obligations of the city—the investor looks primarily at the underlying financial strength of the issuing city, and does not rely on the strength of the expected revenue stream. As a result, these type of bonds carry essentially the same interest rates as general obligations that have no additional revenue pledge. General obligation revenue bonds are probably the most common type of bonds issued by Minnesota cities. General obligation revenue bonds can be issued for reasons such as:
- Bonds used to finance water, sewer, and storm sewer improvements, where the utility revenues are (in most cases) expected to pay debt service.
- Bonds used to finance public improvements that are specially assessed, without voter approval, where special assessments are expected to pay at least 20 percent of the city’s cost to build the project.
- If bonds, without voter approval, where tax increments are expected to pay at least 20 percent of the debt service on the bonds.
- Bonds issued to finance municipal hospitals and nursing homes (with voter approval).
Revenue Bonds
Revenue bonds are obligations for which the issuing city promises to pay principal and interest only from a specific revenue source. If the revenues are not sufficient to pay debt service, the city has no obligation to levy a tax or otherwise make a payment—bond holders simply get paid less (which may or may not trigger a “default” in the bonds). Obviously, revenue bonds are less secure than general obligation bonds, as the likelihood of repayment depends on the long-term strength of the revenue stream pledged to the bonds. As a result, interest rates on this type of bond are higher (to compensate the investor for increased risk). Revenue bonds can be issued for reasons such as:
- Bonds issued to finance “revenue producing conveniences,” which are public enterprises that produce their own revenue, such as electric utilities, municipal liquor stores, municipal golf courses and ice arenas.
- So-called “conduit bonds” issued to finance various private health care, housing, and manufacturing facilities.
- Tax increment financing (“TIF”) bonds, when they are payable solely by the tax increment generated from one or more tax increment financing districts.
Equipment Certificates of Indebtedness or Capital Notes
Equipment certificates of indebtedness or capital notes are obligations issued by the City to finance capital equipment. (The terms “certificates” and “notes” are common in public finance for short term obligations such as these; they have a maximum term of 10 years or, in the case of replacement of certain ice-making equipment, 20 years).
Common Types of Bonds
General obligation improvement bonds: finance any public improvement that may be specially assessed under Chapter 429; the most common include roads, water improvements, and sewer improvements.
General obligation street reconstruction bonds: finance street reconstruction (but not construction of new or expanded streets with limited exceptions).
General obligation park and recreation bonds: finance municipal park and recreation facilities.
General obligation (building) bond: finance various types of public buildings (usually ones that do not qualify as “capital improvements” for financing with capital improvement bonds referenced above). Bonds are often named for the specific type of building, e.g., general obligation community center bonds.
General obligation housing improvement area bonds: finance various improvements in a designated areas of owner occupied housing. Authorized improvements are described in the ordinance adopted by the city establishing the housing improvement area. The improvements may include public improvements and improvements to land and buildings within the improvement area. The Bonds are secured by “fees” levied against properties in the improvement area. The fees may be spread based on property valuation, housing unit, unit size, or any other basis. The parameters for the fees are set by resolution. The fees may be certified and collected through the property tax system.
General obligation utility revenue bonds: finance water, sewer, or storm sewer improvements where the bonds are paid primarily from utility system revenues. (The bonds may be named for the specific type of utility being financed—e.g., sewer revenue bonds).
General obligation abatement bonds: finance various public and private improvements; usually part of economic development programs, but may also finance public infrastructure in any context.
General obligation tax increment bonds: finance various public and private improvements that promote economic development or redevelopment, and are eligible for financing under the Tax Increment Financing Act. The City has established tax increment financing districts and has issued general obligation tax increment bonds in accordance with Minnesota Statutes. It is anticipated that the tax increment revenues, derived from the captured assessed value of property in the tax increment district, will provide substantially all funds necessary to retire the bond principal and interest. In addition, future tax levies may be placed on the tax rolls annually as scheduled for supplementary financing.
Tax increment revenue bonds: finance various public and private improvements that promote economic development or redevelopment, and are eligible for financing under the Tax Increment Financing Act.
Utility Revenue Bonds: Water, Surface Water and Waste Water Fund revenues will be used to repay this debt. The liability is recorded in the applicable enterprise fund.
Conduit bonds: Unlike almost all other bonds, “conduit bonds” are initiated by and issued for the benefit of private entities. Under the state statutes that authorize these bonds, the city issues the bonds and loans the proceeds to the private entity. That private entity repays the loan in an amount sufficient to pay principal and interest on the bonds. As a practical matter, the loan is(normally) handled entirely by a separate bond trustee (usually the trust division of a bank). After the bonds are issued, the city has almost no role in payment or administration of the bonds. The bonds are revenue bonds—the city does not pay debt service or any other cost related to the transaction. As such, the bonds have no effect on the issuing city’s credit rating and are not counted against any statutory limitations on borrowing.
Debt Limit
One of the most significant limitations in Chapter 475—at first glance—is the so-called “debt limit.” The general rule is that cities may not incur “net debt” in excess of 3% of the estimated market value of all taxable property in the city (the limit is 2% in first class cities unless acharter authorizes a higher rate, but even the charter rate is capped at 3-2/3percent of market value). However, the definition of “net debt” excludes from this limit all bonds for which some revenue is pledged, and even bonds that simply finance any “public convenience from which a revenue is or may be derived,” whether or not that revenue is technically pledged to the bonds. Therefore, the vast majority of bonds that cities issue are not subject to the so-called debt limit. This includes improvement bonds (secured in whole or in part by special assessments), utility general obligation revenue bonds (secured by utility revenues), and of course pure revenue bonds of all types.
Budget Details
2023 Debt Levy Budget Highlights
Traditionally, the City of Oakdale had issued two series of bonds each year that were intended to be at least partially repaid by the general tax levy:
- General Obligation Improvement Bonds to facilitate street reconstruction and overlays; which are generally repaid over 10 years.
- Equipment Certificates for the purchase of heavy machinery and vehicles; which are repaid over 5 years.
In 2021, as part of the annual capital improvement planning process, Council created the Vehicle Equipment Replacement Fund (VERF) to plan for the replacement of all vehicles and rolling equipment. This fund ensures 10 years of cash flows and is being funded first by internal transfers of fund balance and then each year as Equipment Certificate debt is satisfied, that debt levy is then used to supplement the annual funding in the VERF. This will allow the City to save the costs associated with issuing bonds and interest payments – in addition to reducing the overall debt level of the City.
The chart below shows the total debt levy annually for the City, with the segments representing the General Obligation Improvement Bonds compared to Equipment Certificate Bonds. This shows that while the overall debt levy is decreasing for the City, annual street improvements and the responsible replacement of important vehicles like Police Squads, Fire Trucks, and Snow Plows will continue just as they have for many years.
General Obligation Bonds, Series 2022A - For 2022, the City plans on a single bond issuance which encompasses several street improvement areas.
- 2022 Street Reconstruction and Improvement Project - This is part of the annual street improvement program in Oakdale, with the improvements in and around the Anna's Grove Development.
- 40th Street Reconstruction - This project will relocate 40th Street into the new alignment created by the Willowbrooke development. Improvements include: paving, curbing, sidewalk, trail, and street lighting.
- Ideal Avenue Reconstruction - Ideal Avenue is currently a two lane rural section from 36th Street to 44th Street. This project add two turn lanes and upgrade storm sewer capacity, and provide trail improvements to accommodate traffic.