City Council Study Session Agenda and Packet 2015 04 14

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CITY COUNCIL COMMUNICATION SUBJECT: DISCUSSION – LIBRARY BOND RETIREMENT OPTIONS DATE: APRIL 14, 2015 PAGE 2 OF 4 Background In 2003, Louisville voters approved a $7,405,000 general obligation bond issue to finance construction of the new library facility and an increase of up to 1.581 mills in the City’s mill levy to pay for debt service (principal and interest) on the bonds. On January 21, 2004, the City issued Limited Tax General Obligation Bonds, Series 2004, in the amount of $7,405,000, at 2.0% - 4.25%. The initial debt service mill levy was set in 2004 at 1.526 mills and has remained at that level since. Standard & Poor’s Rating Services originally rated these bonds at AA-. Standard & Poor’s affirmed this rating on December 12, 2007 and then, on March 23, 2011, raised its rating by one notch to AA. On March 25, 2014, Standard & Poor’s again raised its rating by one notch to AA+. Rating agencies analyze numerous factors when setting and reassessing municipal bond ratings. During telephone interviews immediately preceding the two rating increases, Standard & Poor’s representatives noted the positive reserve balances in the City’s General Fund and Debt Service Fund. The Debt Service Fund was established to account for the revenue from the debt service levy and for the payment of principal and interest on the bonds. The Debt Service Fund has carried a reserve balance of at least one year’s debt service since 2009. Since 2005, annual revenue has exceeded annual expenditures in the Debt Service Fund due to the increase in the City’s assessed valuation, the constant levy of 1.526 mills, and the relatively level annual debt service requirements. This resulted in the steady growth of Debt Service reserves. In 2009, the reserves exceeded the annual debt service on the bonds, and in 2010, the reserves exceeded the annual fund revenue. These events were important factors in Standard & Poor’s rating upgrades. However, future increases in fund balance were deemed unnecessary and, in 2011, staff began conversations with the Finance Committee regarding the following three options: 1. Begin lowering the debt service mill levy so revenue and expenditures are roughly equivalent and reserves are maintained at approximately one year’s annual debt service. 2. Maintain the 1.526 mill levy but, beginning with the 2013 call date, start making advanced calls on the remaining bonds. In other words, on an annual basis, pay down as much principal as possible and pay off the bonds as early as possible without increasing the levy beyond 1.526 mills. 3. Maintain the total 1.526 mill levy and current maturity schedule, but ask the voters to split the levy between debt service (around 1.200 mills) and library operations (the remaining 0.326 mills). 3