Fiscal Note
This resolution authorizes the issuance of up to $107,860,000 $108,005,000 in general obligation promissory notes and an irrevocable property tax sufficient for the purpose of paying principal and interest on the notes. These notes will be used to finance current year projects and programs authorized in the 2024 adopted capital budget. A description of the specific expenditure purposes is included in the resolution. The total amount includes cost of issuance.
The notes will be structured with a tax-exempt series of 10 and 20 year amortization periods that total approximately $82 million, a "green" note tax-exempt series of 10 and 20 year amortization periods that total approximately $18 million, and an affordable housing / tax increment financing series of $6.3 million, that may be either issued as taxable or tax-exempt debt . "Green" notes have become attractive to certain investors that are interested in supporting projects that have a benefit to the environment.
This year's borrowing is utilizing a recent change to state law that authorizes municipalities to issue promissory notes with a maturity of up to 20 years. The previous maximum allowable maturity for promissory notes was 10 years; borrowing with a longer maturity was considered to be bonds under prior state law. Issuing the debt as promissory notes allows municipalities to forego the initial resolution and other requirements associated with issuing bonds.
The resolution establishes parameters for maximum amount issued (described above) and a maximum true interest cost (interest rate) of 5.0 percent for tax-exempt debt and 6.25 percent for taxable debt. Under the resolution, the Finance Director is authorized to certify that the qualifying low bid based on the parameters. The Mayor and City Clerk are authorized to approve the sale as certified by the Finance Director. It is expected that the sale will occur prior to September 30, 2024.
Interest on the $108 million is estimated to total $33 million over the repayment period of the notes. Annual principal and interest payments (debt service) on the notes are estimated to be $15.5 million in 2025 and gradually decline to $11 million by the last year of repayment in 2034 for the 10 year portion of the borrowing. The remaining 10 years on the 20 year notes will have annual debt service payments of approximately $1.2 million. The city repays debt on a level principal basis (equal principal amounts each year). This approach reduces the overall interest cost compared with a level debt service basis (equal principal and interest costs each year).
The final sale is expected to include a reoffering premium. In recent years, the final purchasers of the city’s debt have been willing to pay cash upfront in order to receive higher interest payments from the city in future years. Reoffering premiums reflect purchasers’ interest in hedging against a low interest rate investment if interest rates rise in the future. The city has placed parameters on bids in recent years in order to limit the amount of premium received to approximately 5% to 10% of the par value of the debt and avoid associated higher coupon interest rates.
The premium from the amounts for capital projects in the two promissory note series, net of issuance costs and underwriter’s discount, are estimated to be approximately $7 million to $8 million. The premium represents approximately 7% of the par value of the tax-exempt debt and compares favorably to the ratio of premium to par values in prior years:
2023 - 7%
2022 - 9%
2021 - 8%
2020 - 8%
2019 - 5%
2018 - 5%
2017 - 7%
2016 - 5%
2015 - 6%
2014 - 9%
2013 - 7%
2012 - 11%
The estimated net premium received will be used to pay debt service, as required under Wisconsin Statutes.
The resolution also amends the adopted 2024 capital budget for the Water Utility to change the funding source for a number of projects from GO borrowing to Water Utility reserves. The funding source for the $7.3 million Unit Well 19 Iron and Manganese Filter project will be shifted from revenue bonds to GO borrowing. There is no net change in total funding or projects from this amendment. The Unit Well 19 project will be included in the "green" notes series with a 20 year maturity.
Title
SUBSTITUTE: Authorizing the Issuance and Establishing the Parameters for the Sale of Not to Exceed $108,005,000 General Obligation Promissory Notes, of the City of Madison, Wisconsin, and Directing the Final Approval of the Terms Thereof and an Amendment to the 2024 Water Utility Capital Budget
Body
Please see Legistar File No. 84360 Body in Attachments.