WORKSHOP ITEM - Joe Huss, Finance Director
Title
CAPITAL IMPROVEMENT BONDS - REQUIRED USES AND SPENDING TIMELINE
Background
In August 2019, the city issued what are known as Capital Improvement Bonds to fund the renovation and third floor expansion of City Hall. The issuance of this debt was the culmination of a planning process that began in the fourth quarter of 2017. A chronology of the project is as follows:
• 10/12/17 Workshop - Discussion on space planning for City Hall. Council consensus was to bring item forward for Council approval to authorize space needs study.
• 11/02/17 Council meeting - Approved agreement w/ 292 Design to perform a space planning study for an amount not to exceed $24,200.
• 07/19/18 Workshop - City Council reviewed space needs study and asked staff to report on how the project would be financed at a future Workshop.
• 10/11/18 Workshop - Discussion on Funding City Hall Expansion Improvements. Estimated cost of improvements at that time was $6.5 million and included the construction of a garage/storage building. Staff recommended use of Capital Improvement Bonds to fund the project. Council was supportive of a bond issue to finance the project and requested staff to refine costs.
• 11/15/18 Workshop - Discussion of cost details for City Hall expansion. Council directed staff to request proposals for an architect to design the expansion and other improvements and to remove the garage.
• 02/21/19 Council Meeting - Council approved $234,300 contract with Wold Architects to design City Hall expansion and improvements.
• 03/21/19 Council Meeting - Council adopted 5-year Facilities CIP and authorized the issuance of up to $4.2 million in bonds for the renovation of City Hall.
• 07/08/19 Council Meeting - Council adopted resolution calling for the sale of CIP Bonds.
• 08/05/19 Council Meeting - City Council approved the sale of $4.2 million of Capital Improvement Bonds.
Capital Improvement (CI) Bonds are one of a number of ways a city can fund certain capital improvements. Per Minnesota statutes and IRS regulations, CI bonds can be issued to fund the acquisition or betterment of public lands, buildings, or other improvements for the purpose of city hall, public safety, or public works facilities. The improvements must have an expected useful life of five years or longer. CI bonds cannot be used for light rail, park, library, road, or bridge facilities. Use of CI bonds is also limited to projects that are identified in a 5-year CIP that is approved by the city council at a public hearing. CI bonds are considered general obligations, the repayment of which would be backed by the full faith and credit of the issuer.
The use of CI bonds requires the approval of at least two-thirds of the City Council after discussion at a public hearing, the notification of which must be published in the official city newspaper at least 14 but not more than 28 days prior to the hearing. The bonds are subject to a referendum if a petition requesting a vote on the issuance, signed by a number of voters equal to at least 5% of the votes cast in the last municipal election, is filed with the City Clerk within 30 days after the public hearing.
Additionally, there are regulations that, if not followed, would jeopardize the tax exempt status of the bonds. As with any bond issue, the proceeds from the sale of CI bonds must be used for the intent stated on the resolution authorizing the issuance of the bonds. That resolution, adopted on March 21, 2019 stated that the bonds would be used to fund the City Hall expansion project. Furthermore, as a general rule, the project being funded with bond proceeds and the expenditure of those proceeds, must be substantially complete within three years of the issuance of the bonds. In this instance, failure by Blaine to comply with these regulations and not have the project substantially complete and paid for within three years would cause the CI bonds, issued and purchased as tax-exempt bonds, to become taxable bonds. The conversion of the bonds from tax-exempt to taxable would not only be a hardship for bondholders, but would also negatively affect Blaine’s AAA credit rating.
Recommendation
Staff is requesting that Council consider the above when approving the next steps in the City Hall Expansion Project.