SPECIAL JOINT MEETING OF THE CITY COUNCIL AND THE BUILDING AUTHORITY OF THE CITY OF NOVI
THURSDAY, NOVEMBER 5, 1998 AT 7:30 P.M.
NOVI CIVIC CENTER ACTIVITIES ROOM - 45175 W. TEN MILE ROAD
Council Member Schmid called the meeting to order at 7:41 p.m.
ROLL CALL Mayor McLallen (arrived 7:45), Mayor ProTem Crawford (arrived 8:41), Council Members DeRoche, Kramer (absent/excused), Lorenzo, Mutch, Schmid
ALSO PRESENT Ed Kriewall, Craig Klaver, Les Gibson, Don Saven, Dan Davis, Mark Sturing, Larry Czekaj, Dennis Neiman, Bob Bendzinski, Joe Heffernan
Mayor McLallen arrived at 7:45 p.m.
PURPOSE OF SPECIAL MEETING: To discuss financial issues of both the Ice Arena and Senior Citizen Housing Project.
AUDIENCE PARTICIPATION - None
1. Discussion of financial issues of both the Ice Arena and Senior Citizen Housing Project
Craig Klaver advised that a couple questions came up regarding the Ice Arena. He explained the predominant question was about the money that was a part of the project and whether it was a loan or a transfer. Mr. Klaver believes it became clear to the city staff members that every time they answered one question among themselves, a couple more questions came forward (i.e., depreciation). Further, Mr. Klaver reminded Council that another layer of complications occurred because the Ice Arena did not begin as a Building Authority project. Mr. Klaver continued by stating that after he, Mr. Davis and Mr. Gibson discussed this issue they decided that they were at one of those junctures where they really needed to take a step back and invite the consultants to provide a presentation about the bonding process both legally and procedurally. He added that Mr. Heffernan from Plante & Moran is present also to answer some accounting questions. He noted that they will also discuss the Senior Citizen Housing Project.
Dennis Neiman advised that his and Mr. Bendzinski’s offices have provided separate detailed reports as a resource for Council.
Mr. Neiman advised there are three types of bonds. He explained the first is what is known as a General Obligation Bond that can be broken into two categories; unlimited tax and limited tax. Mr. Neiman advised general obligation really means that it is an obligation of general funds; a general obligation, not specific to a specific revenue source. He continued by stating that as far as the bond holder is concerned, the bond is payable from the general funds of the community. Mr. Neiman advised if the bonds are voted in Michigan, then the obligation of the community can be an unlimited tax obligation (i.e., police bond). He explained that the voter’s approval authorizes the city to levy taxes without limitations to rate or amount.
Mr. Neiman advised bonds limited in nature (i.e., ice arena) are a limited tax. He explained this means the city is pledging its general obligation in general funds, but only to the extent that it is completely raised money and the city is not authorized or obligated to levy taxes outside the charter’s rates to pay for it.
Mr. Neiman advised another kind of bond is known as Revenue Bonds and there are various types. He advised the most common revenue bond that the City of Novi is familiar with are water and sewer bonds. He explained the city issues bonds to finance capital improvements to the utility system, and the bonds are payable solely from the revenue derived from the operation of the system. He noted that the revenue sources should cover the debt service and operate the system.
Mr. Neiman reported the third kind of bond issue is a type of revenue bond. He explained that it is not a revenue bond in name, but it is payable from a revenue source. He continued by stating that although the city may pledge the general funds as back up to make the bonds more marketable and receive a lower interest rate, they are really payable from a specific revenue source. Mr. Neiman reported three examples are: Special Assessment Bonds, MTF Bonds (city pledges receipt of payments from the state’s Act 51) and bonds used for funding facilities such as an ice arena or senior housing. Mr. Neiman explained that to make the bonds more marketable, the city will pledge faith and credit, but expect that the debt service, the operation and the maintenance of the facility to be paid from the revenues derived from the operation of a revenue producing facility.
Bob Bendzinski advised there is one other type of bond issue that the city has outstanding and they refer to them as Contract Bonds. He explained the city entered a contract with the county and issued bonds prior to 1978 for water and sewer. Mr. Bendzinski continued by stating that these bonds carry the full faith and credit unlimited taxing powers of the city, but they would be considered unlimited tax with a revenue source behind it.
Bob Bendzinski referred to Tab 3 of his report and advised that there is a listing of ratings from Mooneys and Standard & Poors. He advised both agencies have put Novi in the AA category. Mr. Bendzinski reported that ratings provides a complete credit analysis of the community by considering general demographics of a community, the management of a community, the financial condition of a community and the city’s major taxpayers. Mr. Bendzinski advised that he represents a community where a large automobile manufacturing plant is located within its boundaries is considered to be detrimental. He explained if they stop producing cars, the thought process is that many people would be out of a job.
Mr. Bendzinski advised the ratings are somewhat subjective and noted that they reflect more of a national average. To his knowledge, Mr. Bendzinski advised Bloomfield Hills is the only city in Michigan with an AAA rating. He advised that most other cities the same size as Novi are in the AA category, but there are a lot more municipalities in the A, BBB or BAA-1 categories than there are in the AA categories. He continued by stating that Michigan is part of the "rust belt" and the auto industry plays a major factor in the ratings. Mr. Bendzinski advised that they have been very successful in getting certain ratings upgraded because of the strong economic base, the strong growth, the ability to control the growth at a reasonable level and a community’s ability to attract good growth. He advised that they also consider jobs and income levels.
Mr. Neiman advised that bond procedures are dependent on the type of debt issue. He advised that there are three categories of debt. They are: Building Authority, GO Debt and Revenue Debt. Because of state law, Mr. Neiman reported that most issues require some voter approval. He explained voters should approve the issue or to issue the debt, a petition for referendum is not filed. Mr. Neiman explained a voted debt (unlimited tax) is required to follow the normal election process with proper notification and so forth. After that, Mr. Neiman reported they can adopt the bond that was issued and then tap the millage. If it is a revenue bond, Mr. Neiman advised the 1933 Revenue Bond Act requires the city to publish a notice of its intent to issue the debt. He advised it will state that the city will issue up to "x" million dollars in debt over "y" years at an interest rate not to exceed "z" for the following purposes. He noted the purpose could be generic, one specific project or a series of projects. Mr. Neiman advised that the notice indicates that the city is going to issue bonds unless not less than 10% of the registered electors sign a petition filed with the City Clerk’s office. He continued by stating that if forty five days elapse from the date of publication and no petition for referendum is filed, the city has been authorized to (not required to) issue the debt. Mr. Neiman noted that Special Assessment Bonds follow a similar procedure.
Mr. Neiman reported that the Building Authority Act is somewhat different. He explained the Building Authority Act requires the referendum period to appear on the contract and not on the debt. He asked Council to recall that they adopted a resolution for the ice arena that said that the city intended to enter a contract with the Building Authority.
Mr. Neiman advised one statute that does not require a notice of intent is the MTF Bond. He explained these are bonds issued in anticipation that if a city wants money, there is no referendum right. He added that the referendum right is not constitutional or due process; it is legislature. He explained legislature can impose those kinds of restrictions or take them away. He continued by stating that once the referendum periods have expired, Council would adopt either a bond ordinance or a bond resolution. He continued by stating that the Building Authority would be the actual issuers of the debt, but supported by the contract law obligation of the city to make the payments to the Building Authority.
Mr. Nieman advised that the power of the Building Authority is set forth in their Articles of Incorporation. He then recalled that there was much discussion over the power of the authority and the articles are fairly specific as to what they can do. Mr. Neiman reported that the authority can do nothing irrespective of what the powers in the articles say that Council does not want them to do. He explained the Building Authority only has the authority to enter a contract with the city. He continued by stating that although they are a legal entity separate and distinct from the city, they are actually the alter ego of the city and hopefully, the relationship is symbiotic. Mr. Neiman reported that Building Authority Bonds are limited tax obligations and are payable from the city’s general fund unless the city votes the obligation. Further, Mr. Neiman advised that the full faith and credit pledged means that the city will make the payments if other monies are not available for payment. He noted that they expect payment for the bonds from the ice arena and senior housing projects to be derived from the revenues of those facilities. He added the full credit pledge is there to make the bonds significantly more attractive from a market standpoint.
Concerning the bid process, Mr. Bendzinski advised that the city has sold two types of bond issues and while they are familiar with both, they are more familiar with the competitive bid process. Mr. Bendzinski advised that all of the city’s bonds have been sold through the competitive bid process except for the refunding bond issues. For the competitive bid process, Mr. Bendzinski advised that they must publish a notice of sale (The Bond Buyer) five to fourteen days in advance of the bond sale depending on the type of bond that is being sold. Mr. Bendzinski continued by stating that the bids are delivered at a specified time and date to the City Clerk’s office or his office in Detroit. Mr. Bendzinski advised that the bids and a recommendation are then presented to Council at their next meeting.
Mr. Bendzinski reported the other process is a competitive bid for the city’s refunds. He explained that the city has done advance refunding which means that the city escrows a certain amount of money to call the bonds. Mr. Bendzinski advised that he generally recommends that the city negotiate the sale because one responsibility of the underwriter is to structure the escrow for the money that they borrowed so that paying off the bonds when they are called is sufficient. He noted that Miller-Canfield’s tax department uses complicated calculations to comply with the Internal Revenue’s regulations. Therefore, that it is not something done on a daily basis.
Mr. Bendzinski further reported that the market determines interest rates. He advised that they can set up guidelines and a notice of sale, but if they do, they must see that it perhaps indicates that there is a maximum interest rate of 8% and the difference between the highest and the lowest is maybe 2%. Mr. Bendzinski explained the reason for that is so that they do not have someone bidding an 8% interest rate for a certain year and then a 1% interest rate later so that the debt service would fluctuate. He continued by stating that either the debt service is levied and level, or the millage rate is level.
Mr. Bendzinski referred to Tab 6 that shows how they calculate interest. He advised the interest is calculated based upon what is known as bond years; one bond year is one year. He continued that they would take the number of bonds that are outstanding and multiply it by the one bond year to get the number of bond years. Consequently, if they had a $100,000.00 bond issue payable over ten years in the first year they would have ten bond years with a $10,000.00 principal payment each year. In the second year they would have twenty bond years and multiply it by the interest rate, then add a discount and divide that by the accumulated bond years with the net interest rate. Mr. Bendzinski advised that would then be the net effective rate that they would pay over the life of the bond issue.
Mr. Neiman further explained that they would have $10,000 a year for ten years and the interest rate in the tenth year carries ten times the weight for one hundred bond years. Therefore, Mr. Neiman advised that if the interest rate in the first year is 5% with an interest rate in the tenth year of 6%, the tenth year carries ten times the weight. He continued by stating that if they average the bid, it is going to be much closer to 6% because the 6% is weighted. He explained that is a function of time value.
Mr. Bendzinski added that another factor that changes in the interest process is if they change the structure and made $5,000.00 back in the first nine years and $55,000.00 in the last year, the interest rate average is not going to be a pure average when they divide the numbers because the weight of that average is much higher in the tenth year. He continued by stating that when they compare issues, they must look at the average life and the bond years associated with it.
Mr. Neiman added that this is similar to a thirty year mortgage versus a twenty year mortgage. He explained that the average life of a thirty year mortgage is approximately twenty three years and a twenty year mortgage will be somewhere around fourteen years. He continued by stating they could structure it in a way so that it works with the market and with the needs of the community.
With competitive bidding, Councilman DeRoche understands that sometimes because of different bond maturities, they are awarded to different people or just one person and they sell them. Mr. Bendzinski disagreed and advised that Michigan does not allow for maturity bidding at this point although it is starting to be done in different parts of the country where they bid maturity by maturity. However, the City of Novi has always sold their bonds as all or none.
Councilman DeRoche asked whether they allow the purchaser to separate them in the future. Mr. Bendzinski replied once they sell them, the purchaser can sell them in the secondary market.
Mr. Gibson added that they sold $3.5M worth of bonds for the police building in $5,000.00 denominations. Therefore, he explained if somebody buys all of them, they then sell them or keep them as their own investment.
Mr. Neiman stated it is irrelevant as to what the purchaser does with them. He explained they are more concerned that they purchase all of them because the city does not want to be in a position where someone only buys a piece of them.
Mr. Bendzinski added that banks may not be interested in purchasing bonds during certain times of the year.
Mr. Neiman believes they should discuss debt limitations. He recalled that Councilwoman Lorenzo had asked what is a proper analysis. In terms of legality, Mr. Neiman advised that according to Michigan law, a municipality may not issue debt unless there is specific authorization. He explained there is no inherent power for a municipality to issue debt because they are creatures of the state and have only those powers that the state chose to give them. He noted that one of those powers is borrowing money. He explained unless they can find a borrowing authority, a municipality cannot incur the debt. As example, Mr. Neiman reported that he knows of small communities that have periodically gone to their local bank to borrow money without realizing that incurring debt in this manner is illegal for them. In addition to having to define the statute, they also are subject to the debt limits because there is a certain provision in Michigan’s constitution that says legislation shall impose debt limits for cities and villages, but not for townships. He noted that townships can incur debt fully up to their SEV. However, Mr. Bendzinski noted that townships are very limited about how they can incur debt. Mr. Neiman agreed, but added there is no debt limit for regular townships, but there are limits for charter townships. In addition, Mr. Neiman reported that a county has constitutional debt limits, so they cannot change debt. Mr. Neiman continued by stating that the debt limit is prescribed in the Home Rules Cities Act that is the same act under which cities derive their powers and their charter. He noted it is basically 10% of a city’s state equalized valuation, but added there are many exceptions. Mr. Neiman referred to the Footnote 2 on Tab 5 that excludes the following from municipalities’ debt limitation: SA Bonds, Mortgage Bonds, Transportation Fund Notes or Bonds, all Revenue Bonds, bonds issued basically for abating pollution (DNR or DEQ), combined sewer and self insurance. Mr. Neiman reported that Novi’s debt is $85M and once they subtract all of the excludable debt, the debt amounts to $60M. Mr. Neiman believes Novi is typical in terms of the amount of their voter approved GO debt. He added that Novi’s legal debt margin is $119M and noted that their valuation is up for next year as well.
Mr. Bendzinski added that state law allows 10% minus the exclusions for debt margins. However, he added that the rating agencies tend to look at it somewhat differently. He explained they look at the total direct debt and they also like to see that number below 10% and prefer 3-5% to maintain an AA rating. Further, depending on the growth of a community, Mr. Bendzinski reported that they will let that amount go as high as 7%. He continued by stating that is a part of the subjectivity of the rating process.
Mr. Neiman added that mature communities having limited capital needs will be looked at differently than a community that continues to grow even under a controlled basis. Further, Mr. Neiman believes they also look at where are the sources of payment for some of the debt. For example, Mr. Neiman reported if they have a GO debt that is payable from specified sources, they will tend to look at it in a favorable way. He agreed there is subjectivity to any rating process, but if a community has a lot of GO debt that is payable for example, from water and sewer, they count and discount the debt because they recognize that it is paid for by a specified source.
Councilman Schmid asked what is meant by the 3-5%? Mr. Bendzinski replied that state law permits them to use 3-5% of the SEV. He added that when the rating agencies refer to percent of cash value, they are referring to true cash value and they are doubling it. Therefore, they will actually go from 10-15%. Mr. Bendzinski then referred to the debt ratios under Tab 4 of his report and that the percent of the 1998 SEV is 3.38% and if they add in all of the overlapping debt (debt of municipalities that the taxpayers must support), the amount increases to 10.38%. He continued by stating if they look at the debt, the overlapping portion is twice as much as the net direct.
Mr. Neiman referred to the Schedule of Bond Maturities and stated he believes it is very instructive. He explained it not only tells them about the different kinds of debt that they have, it also tells them when they are paying the debt off. Mr. Neiman believes this is something that the Administration has been very diligent and good about recommending fairly prompt repayment of debt. He noted the rating agencies look at this factor favorably.
Mr. Bendzinski added that one rating agency cited the accelerated debt payment as a positive factor in last year’s rating.
Mr. Bendzinski referred to the next few pages and reported that it includes the city’s outstanding debt in terms of what each one is issued for.
Mr. Heffernan understands that the numbers are the principal installments due and do not include the interest; Mr. Bendzinski agreed.
Councilwoman Lorenzo asked whether all of the debt ratio numbers be for 1998? Mr. Bendzinski advised that they should.
Councilwoman Lorenzo understands the percent of Net Direct and Overlapping Debt for 1998 SEV is at 10.38%. Mr. Neiman advised that amount includes the overlapping. He explained there is $125M in overlapping debt that is more than twice of what Novi’s debt is.
Councilwoman Lorenzo understands that does not count. Mr. Bendzinski disagreed and explained if they built out all of the schools and the city had debt that was for rehabilitation of the buildings, the sewer system and road system which amounted to $30M and the schools had variable debt, and they maintained the fund balances, the taxing margins, and the economics, a community’s rating could be upgraded.
Mr. Nieman added that part of a rating is a geographic accident. He explained if Novi were several miles south, there is a chance that the rating would not be as good because they would be in Wayne County. Further, he added that they have no control over what the school district does. He further advised that the predominant part of a rating analysis is a community’s finances, the management, the fund balance, the margins and a city’s directive. However, he added that the school debt is a minor factor and if it becomes perhaps $2M, it may impact the ratings. Mr. Neiman advised that Wayne and Oakland counties have different ratings, but their unlimited GO debt should be identical theoretically because there is nothing they can do legally that would impair them. However, he added that the rating agencies do not agree with that.
Mr. Heffernan recalled that agencies like to see a 3-5% range for debt with perhaps 5-7% for a growing community. He then referred to Tab 4 and advised that the amount that compares with the 3-5% is the direct debt relative to true cash value. Mr. Neiman agreed.
Mr. Bendzinski restated location and what surrounds a community is very crucial. He advised except for Grosse Pointe, there were no AA communities located in Wayne County until last week.
Mr. Bendzinski advised that schools are different and automatically get an AA rating if they get into the School Bond Loan Fund that guarantees the payment if they fail to make the payment.
Councilman DeRoche understands that Novi could not really get beyond 5%, because the state would roll them back. Mr. Neiman agreed and reminded Council that they are paying off debt every year and that the city’s SEV is increasing every year.
Councilman DeRoche asked how much can the city borrow and still maintain their AA rating? Mr. Bendzinski replied it is not a quantitative answer. Mr. Neiman added if they could throw a number out, it would be pure speculation. He explained if they talk about a number, they are talking about a net number that assumes the city’s valuation is not increasing and that the city is not paying off debt; which is incorrect. Mr. Neiman continued by stating it is really how much more additional net borrowing over what they are paying down.
Mr. Bendzinski believes the city’s rating would drop instantly if they decided to go forward with a Building Authority bond issue for $100M to construct a mega-city hall because the city does not warrant a $100M city hall. He asked how would they pay for this? Mr. Neiman interjected, that would be the key.
Councilman DeRoche is not talking about spending the money, he was talking about getting a better idea about the numbers.
Mr. Neiman stated if they voted all their bonds and assuming that valuation is increasing and they are not paying off their debt, if they had a revenue source, it may not impact the city if they issued another $60-$80M net. However, if the city issued bonds for a mega-city hall where there is no apparent warrant, the agencies would question the need. He added they would also wonder how the city would pay for it. He continued by stating they would ask if the city had additional millage and if they did not, then it would mean the city would be paying out some services. Mr. Neiman stated that is why it is difficult to say there is a problem once a city hits a certain amount. He explained it is a function of net, it is a function of the payment source and it should be perceived as something that is of some value to the community. He stated it should add some kind of enhancement to the life style of the community and a mega-city hall would not achieve that.
Mr. Bendzinski reminded Council that they currently have three projects moving forward; the police department project, the senior housing project and the golf course. Mr. Bendzinski advised when they issue the bond for the police department, it will have no impact. Regarding the senior housing project, Mr. Bendzinski advised that project will be revenue driven and that should not have any impact assuming that the economics of the city does not change and the balances stay. Mr. Bendzinski said in regard to the golf course and whether someone is for it or against it, if the city were to issue those bonds and had the revenues to pay for it, it is his professional opinion that it would not impact the city’s rating because there would be a revenue source in place.
Councilman DeRoche asked how would they view Novi if these projects and the $25M road project moved forward? Mr. Neiman replied that they spent a lot of time preparing for the last rating upgrade. He explained they do not give upgrades easily because they must convince agencies that a community warrants an upgrade.
Councilman DeRoche wondered whether the roads would raise any concerns. Mr. Neiman replied that the agencies have already looked at this recently and they are aware of what to expect down the road. Mr. Neiman explained the agencies already took these things into account when the city received their upgrade.
Councilman DeRoche understands that the $60M debt is not going to raise any concerns.
Mr. Bendzinski advised if the city did nothing but issue the police bonds in 1999 and then come back a year from now with these numbers, the city’s debt margin will be less so the debt ratios will be lower and the debt margins will be greater because they are going to pay off almost $5M worth of bonds in 1999. Mr. Bendzinski restated that the grading issue is not a quantitative assessment.
Councilman DeRoche personally believes that they would raise some concerns if they move forward with all these projects and that the agencies will want to see that a plan is in place. Further, he added that the roads will super-inflate what the city’s future needs are going to be.
Mr. Neiman cannot say Councilman DeRoche is wrong, but he would disagree in one respect. He explained they have a lot of experience with this and have a clear understanding about what the agencies are looking at. He continued by stating one key is whether a community has a revenue source to pay for the debt.
Mr. Bendzinski agreed a community must have a plan that reflects upon the management of the city. However, he noted that Novi does have a plan; they have the millage.
Councilman DeRoche asked at what point is the SEV capped? Mr. Bendzinski replied that the SEV grows and is used for debt margin purposes. Mr. Neiman added that the city’s SEV is increasing by approximately 12%.
Mr. Neiman added that Novi has promised to repay their debt expeditiously and reminded Council that all of their road program bonds have had fifteen year terms.
Councilman Schmid asked who will pay for these projects if they all failed Mr. Neiman replied the payment would come a general fund obligation.
Councilman Schmid asked what would happen if the general fund had no money? Councilman DeRoche understands the city’s first priority would be to pay the bonds. Mr. Neiman agreed that is true legally. However, if there are no funds, the city would go into receivership or file bankruptcy. However, he noted that there has never been a city in Michigan that has actually followed through with bankruptcy.
Councilman Schmid is concerned about increasing taxes for senior citizens. Mr. Bendzinski advised that a city cannot raise taxes beyond its charter limitations.
Mayor McLallen asked whether they could sell the assets? Mr. Neiman advised that they could as long as the proceeds are used to pay off the bonds. Mr. Bendzinski added that they would have to get enough proceeds either from the sale or from city contribution to pay off the entire amount of the bond. He explained they cannot only pay a portion of the bond.
Mayor McLallen understands the city is an excellent position given the types of bonds, given that the risks are contained and controlled and they have the ability to levy without changing their rating.
Councilman DeRoche would disagree and believes they have large issues pending that if they make the wrong decisions over the next two to three years, they could make costly mistakes (i.e., rating).
Mayor McLallen is not getting the same sense of concern from their consultants and asked whether her or Councilman DeRoche’s position is closer to the professional’s opinion. She believes that even if they issue the maximum amount for the bonds that the city’s rating will not be affected.
Mr. Bendzinski restated that the agencies are fully advised of Novi’s police facility, the senior housing and the road needs for the next three to five years.
Mr. Neiman added they are substantial needs. Councilwoman Lorenzo believes substantial is relative.
Mr. Neiman asked Council to remember that they are paying the debt as they speak and they are not asking for luxury items. He continued by stating if they issue $10M to $30M for necessary road improvements, he does not believe the agencies would look twice at those numbers. Mr. Neiman believes they would focus on the pay down of their debt and Novi has paid down a substantial amount in the last ten years.
Councilwoman Lorenzo asked if it would be a good idea to pace themselves based on that. Mr. Neiman reminded Council that the SEV is increasing and the debt is decreasing, and added that he and Mr. Bendzinski have never told Council what they should do. He stated that the city comes to them with their needs that were determined legislatively and ask them what is the best way to fund the improvements. Consequently, Mr. Neiman believes that Council needs to make those kinds of decisions collectively.
From a rating standpoint, Mr. Bendzinski reminded Council that they look at them from a national level. Therefore, he advised that the agencies know how much projects cost based on a national level and know whether the costs are inflated. Mr. Bendzinski restated that it goes back to good management. Mr. Neiman added that they would also vote those so there is a revenue source to pay for them.
Mr. Heffernan believes the question is whether it is risky to finance the needs and he believes the answer he is hearing is that they need to look at each one in terms of a repayment plan for each individual issue. He continued by stating if it is a general obligation supported by the voters, then it is extremely low risk. However if it is something that the voters do not support, they need to ask themselves whether the project is viable. However, he would agree the key is the repayment plan.
Mr. Neiman cannot recall any of any deal with the city that was paid for by the general fund because there was always a source of payment available. He added that he and Mr. Bendzinski also try to be very conservative in their estimates and would prefer to err on the side of caution.
Mr. Czekaj understands that the agencies also look at what a community should be doing in relationship with comparable cities. Mr. Neiman disagreed and stated that he does not believe they get that involved in the decision making process. However, he agreed they do question what is on the horizon for the next five years (i.e., road program). He continued by stating that although the agencies want cities to consider their priorities for capital, they do not ask them to be right.
Mr. Bendzinski believes there would be a greater impact on the rating if they were to postpone improvements. He added that the agencies look at trends and if the population trend is decreasing, they will ask why. He noted they will find out why the population is decreasing by looking at a city’s budget.
In general terms, Mr. Czekaj asked what is the sensitivity analysis of the interest rate and how does it compare with construction costs. For example, he asked what would happen to the rate if they were to postpone the road project for two years. Mr. Neiman replied that there are too many assumptions to make that determination.
Mr. Bendzinski believes there is too much emphasis being put on debt limits and debt ratios. In his experience, Mr. Bendzinski has had few clients down graded, but he cannot recall having a client down graded for the debt margins going up and everything else remaining constant. He continued by stating that a down grading usually relates to continuous poor financial conditions. Mr. Neiman agreed and restated the criteria considered by the agencies (i.e., demographics, management style, general fund balance, pension liability, labor contracts etc.). He added that Novi has good credibility with the agencies and assured Council that the presentations made by their administrative officials have been well done.
Councilman Schmid understands the city could borrow as much as $40-$60M without affecting their bonding rating. Mr. Neiman agreed and restated that is true as long as there is a revenue source (i.e., voter approval or revenue producing).
BREAK - 9:26 p.m. until 9:33 p.m.
Mr. Heffernan explained how rates and financial statements are developed. Mr. Heffernan advised that the rates must be set in a way to break even. He reported that there are two components to debt; interest and principal. He reported the principal is a relatively small portion and the interest is a large portion in the early years and the opposite is true in the later years of the term. He continued by stating that the financial statements are also going to be showing operations and maintenance costs (O & M), and it will essentially be the same as the cash flow. However, he added it will not include interest and debt principal.
Because of accounting rules, Mr. Heffernan advised that they show depreciation instead of debt principal. He continued by stating that depreciation in a financial statement is the total cost of the facility (i.e., ice rink, senior housing) that they are amortizing over the total term. Mr. Heffernan noted that will be a relatively flat amount each year. However, Mr. Heffernan restated that interest will drop and it will appear as though they will be making money when they combine the interest rate with depreciation. From a financial statement point of view, he explained it appears as though they are losing money in the early years (showing net losses) and they will show a profit in the later years. Mr. Heffernan advised the profit is there because of the fact that they are measuring depreciation instead of principal. Mr. Heffernan added that they can look at principal as representing the total cost of the project. Mr. Heffernan continued by stating that principal and interest have a good match without any kind of debt and the sum will be almost equal every year as opposed to what they need to measure on a financial statement (i.e., depreciation). Mr. Heffernan explained depreciation will stay steady, but the interest that will drop in later years will show a profit. Mr. Heffernan advised that they try to cover the actual costs when rates are set in a municipal environment.
Mayor McLallen asked what would happen if there are fluctuations in the O & M? In reality, Mr. Heffernan advised that they would have to adjust everything for inflation and they would know that the rate that they charge will increase by one point. Mr. Heffernan noted as the O & M increases, the total rates will increase. Further, he advised that the debt principal and interest are normally set to be relatively flat, but it may not be. However, the cash flow is what the rate setting will be based on and will bring in enough from the users to be able to pay what they need to pay.
In terms of the senior housing project, Mr. Klaver believes this has a significant impact in construction costs and they may have to reevaluate some numbers for what they will charge for rent.
Mr. Heffernan advised if there is an annual 3% increase in O & M that means they would only have a 1% increase in the cash flow and that the senior housings would then increase by 1% per year. He noted that they may look at this as a fairly good deal right now, but ten years from it will be a great deal because they will only increase by 1% and the private sector will increase by 3%.
Mr. Bendzinski advised that they have always recommended that their clients keep separate records to make certain that the O & M costs are being covered from what they are charging for O & M and that the debt service charge is being charged from the debt service charge (i.e., water and sewer system). Mr. Bendzinski explained they structure rents in a way that pays the debt service obligation and that should remain constant in theory assuming they meet certain occupancy levels. However, they have found that when municipalities combine these amounts, they use some of the surpluses and do not review the O & M to make certain it is covered.
Mr. Heffernan understands the rent would have two components and that the cash should be physically separated. Mr. Bendzinski agreed and recommended putting that cash in a reserve.
Mr. Neiman advised that they have had some bad experiences with communities that have not paid attention to their O & M costs. He advised that they make some very conservative assumptions based on a 92-92˝% occupancy and although in theory they should not have to raise the rents, they should raise them somewhat periodically to build additional reserve for improvements to the facility. He added that the O & M charge really needs to be reviewed annually and communities get in trouble if they do not. He explained they take the debt service income to subsidize the O & M expense instead of making certain that the O & M is self-liquidating.
Mr. Bendzinski added if the O & M costs increase by 5% and if they raise the O & M costs ($200.00) by 5% that amounts to $10.00. However, if they raise the total by 5% ($200.00 and $500.00) by 5%, the amount would be $35.00. Mr. Bendzinski reminded Council that the private sector will raise their entire rent by 5%; they will not just increase their O & M. Mr. Bendzinski continued by stating that they could keep pace with inflation by only raising O & M because the debt is fixed.
Mr. Czekaj understands they are talking about association fees. Mr. Bendzinski advised it is really O & M.
Mayor McLallen asked whether this theory applies to the ice arena? Mr. Neiman replied that the theory does not apply to the ice arena because the ice arena is similar to the water and sewer system.
Councilman Schmid is concerned about the city’s seniors and asked whether they have considered the possibility of social security not keeping pace with inflation. Mr. Neiman replied that they do consider that factor and added that they want the project to be self-liquidating. He explained they are going to provide the seniors with an affordable, quality project in comparison with the private sector. He explained that the private sector will increase at a much higher rate because they pay taxes, they must get a return on their investment and they borrow at higher rates and lower terms. He continued by explaining that all these factors will drive the rent structure.
Councilman Schmid asked how do they account for potential inflationary factors? Mr. Neiman replied it is no different from water and sewer. He explained they would prepare a budget each year to determine expected costs by line item and divide that by the number of units to determine the monthly charge.
Councilman Schmid does not believe they can continually raise the rent in senior housing. Mr. Neiman disagreed because the rent in a municipal senior housing facility will always be less than the private sector.
Councilman Schmid disagreed because seniors are on a fixed income. Mr. Heffernan there is no guarantee about how to stop that, but they do know that the mechanism they use will hold the inflation rate back to approximately one third of what the private sector will be.
Mr. Czekaj believes once they make the commitment to provide senior housing, there will always be a question of cost and unless the city chooses to subsidize, they may be forced to have people move because they cannot afford the rent.
Mayor McLallen advised that they have never promoted this project as being subsidized and that they need to look further into this issue.
Mayor McLallen asked whether there are any questions for the members of the Building Authority?
Councilwoman Lorenzo asked when will the city be reimbursed the $42,000.00 start up costs for the ice arena? Mr. Klaver understands Councilwoman Lorenzo is referring to the transfer of the ice arena money.
Mr. Gibson recommends that the city wait until they can analyze how the arena is doing. Mr. Gibson advised that the city was committed to pay Center Ice the revenues from the current season and once accomplished, then the cash will be available to reimburse the city for the $42,000.00.
Councilman Schmid asked whether they charge interest on that money? Mr. Gibson advised that the city does not usually charge interest.
Mr. Davis advised that they did not give this money to Center Ice Management directly as a start up loan. He explained they were looking to opening the facility before the revenue stream being in place. He continued by stating that they needed to staff the facility prior to the fiscal year starting and the money was for April, May and June (the last three months of the last fiscal year). He added when the construction was in progress, they were hoping to open in July and they needed the ability to have the facility ready. However, he reminded Council that the wall problem slowed the process.
Councilman DeRoche stated that is what he knows as working capital. He explained a new business must ask how much cash is needed until the revenues catch up with the working capital contribution.
Mr. Davis agreed and added that they had anticipated being open in July and noted they did have income for programs in July. However, when the wall problem surfaced, they had to refund that money. Mr. Davis advised that they plan to wait until the end of the fiscal year to see how they are doing and treat it like a fifteen month budget. He added it is his goal to recoup that money within the operational side of the budget. In regard to whether the money is a transfer or a loan, Mr. Davis advised that is something for Mr. Gibson to decide.
Mr. Gibson advised that the money was processed as a transfer of revenue rather than a loan. He explained that they view a transfer differently from an accounting standpoint than a loan. Mr. Gibson did not want the operating expenses to appear as a loss on the June 30 financial statements without it being addressed in some way. He advised that is why he recommended that the money be treated as a transfer initially and as the funds become available, it will be returned as it is a loan.
Mr. Sturing added that the day to day operation and management of the ice arena is not a function of the Building Authority.
Mr. Czekaj added they are still trying to figure out how Community Clubs, the Hockey Association and Council work in terms of the ice arena’s organization.
Councilman Schmid asked who is responsible for the management of the ice arena? Mr. Davis replied that Center Ice is the management company employed by the city to operate the ice arena. He added that the Community Clubs is the advisory board that oversees the operation.
Councilman Schmid asked what is the function of the Building Authority? Mr. Czekaj replied that the Building Authority is the entity that built and owns the facility, and they have a long term lease for the facility with the City of Novi.
Mr. Neiman added that unless Council chose to give the Building Authority supervisory control, the Building Authority is the lessor and the city is the lessee. Mr. Bendzinski noted that the Building Authority was established to provide for the financing alternatives.
Mr. Czekaj advised that the Building Authority has a corporate guaranty in the form of the City of Novi so that if Center Ice Management fails to make their payment, they would come to the city looking for payment. Mr. Neiman believes it would be more likely that the bond holder would look for payment from the city.
Councilman Schmid asked how can the Building Authority issue revenue bonds? Mr. Neiman replied that Building Authority’s cannot issue revenue bonds; they issue what is known as Building Authority bonds that uses the general fund as additional security.
Mr. Czekaj understands that Council is ultimately responsible for Center Ice Management.
Mr. Neiman advised the city enters a lease with the Building Authority who agrees to issue the bonds and construct the facility with Council’s approval; once it is constructed, they will turn it over to the city. Mr. Neiman noted that the city chose to enter a contract with a management company to operate the facility.
Mayor McLallen understands that Council can anticipate the return of the money in the termination of the 1998-99 budget year. Mr. Davis replied that is his goal.
Mayor McLallen asked who is paying for the wall. Mr. Davis advised they are still discussing that issue. Mr. Sturing added that they have not yet paid the contractor (5% or $363,000.00).
Councilwoman Mutch asked who would have paid that cost if the city did not? Mr. Davis advised that it was a city responsibility because cost of the staff was a part of the operation costs.
Councilwoman Mutch asked whether the city is ahead for transferring that money? Mr. Davis believes they needed some lead time to open the facility in July.
Councilwoman Mutch asked whether a Building Authority can purchase an existing facility? Mr. Bendzinski advised that they can.
Mr. Sturing believes the roles of the Building Authority and Community Clubs in regard to the ice arena raises the question of whether the Building Authority for the senior citizen project is going to have some of the management operation responsibility.
Mr. Klaver reported that notice of intents for the senior housing project and the police bond are planned to be on Council’s December 7, 1998 agenda.
Mayor McLallen asked whether there are any other issues? Seeing none, the Mayor adjourned the meeting.
There being no further business before City Council, the meeting was adjourned at 10:15 p.m.
Mayor City Clerk
Date Approved: November 23, 1998