8.2. SR 12-19-2005
Item # 8.2.
MEMORANDUM
TO: Mayor and City Council
FROM: Lori Johnson, Finance and Administrative Services Director/Interim
City Administrator
DATE: December 19,2005
SUBJECT: Request from Elk River Utilities to Adopt Resolution Giving
Preliminary Approval to a Project Undertaken by Utilities
The Elk River Municipal Utilities is undertaking capital improvement projects and needs to issue
$3.5 million in electric revenue bonds. The Utility Commission does not have authority to issue
bonds. Therefore ERMU must request that the city issue on its behalf. All bonds issued for ERMU
are treated the same as all other city debt and remain on the city's books and are included along with
all of the city's debt for coverage calculations and reporting requirements.
The city has issued bonds several times for ERMU. The normal process is that ERMU informs the
city of the amount of bonds it needs to issue and the [mance staff does all of the work and
preparation in issuing the bonds. The city's bond counsel and [mancial advisor prepare the legal and
fiscal documents for the issuance.
Recendy, the Minnesota Municipal Utilities Association established a bond pool to assist electric
utilities in issuing debt. At the November 9, 2005, Elk River Municipal Utilities Commission
meeting, this issue was brought to the Commission along with information on the advantages of
issuing with the pool. After reviewing the information, it was determined that it was more expensive
to issue fixed rate debt with the pool than to issue standalone debt through the city. There is a very
slight advantage to the pool if enough of the debt is issued as variable rate debt. However, the
issuance of variable rate debt is very unusual for cities and carries a risk of increased interest costs. It
also requires much more administrative time for monitoring and reporting.
The Utility Commission approved a motion to issue $3.5 million of bonds through the MCMU pool
with 72% issued at a fixed rate and 28% at a variable rate. John Dietz voted against the motion
stating that he would request that the City Council not approve the Utility's request to issue variable
debt through the pool.
Mayor and City Council
Elk River Municipal Utilities Bonds
Page 2 of2
I agree with Councilmember Dietz's position. There are several concerns with issuing variable rate
debt a few of which I already mentioned. Normally, variable rate debt would be issued in a time of
high interest rates where there is some assumption that rates will be decreasing; however, we are in a
low interest rate market where interest rates remain historically low and it is much more likely that
rates would increase substantially than decrease substantially. Since they are already very low, the risk
of increased cost for variable rate debt does not, in my opinion, outweigh the slight savings that
ERMU is estimating at this time. Additionally, this variable rate debt will need to be monitored
carefully. The payments for this debt are made monthly and Utility staff will need to analyze the
information monthly to ensure that they are being charged the correct rates and will need to provide
information to the city at least annually so that we may properly report on all of the debt. This will
increase the staff time from ERMU and the city fInance department to monitor and report on the
debt. Further, in speaking with other government fmancial professionals, most do not issue variable
debt. The only city that I am aware of that may issue variable debt is the City of Minneapolis where
there are signifIcant reserves available to pre-pay the debt if the interest rates increase. I do not
believe that ERMU has cash revenues available for prepayment. In speaking with representatives
from Sprinsted Financial Advisors, who are the ones working with the bond pool, variable debt is
typically issued by private colleges and most government entities do not issue variable rate debt.
Finally, it is the recommendation of Councilmember Dietz and myself that the City Council not
approve the authorization to issue variable rate debt through the MCMU pool because the cost to
issue debt through the MCMU pool does not offer enough savings to offset the risk. A stand alone
issue is recommended.
Action Requested
The City Council is asked to consider the Elk River Municipal Utilities request to issue debt by
requiring that the Elk River Municipal Utilities issue fIxed rate debt through the city as a stand alone
Issue.
S:\Council\Lori\200S\Urility Bonds 12 19 OS.doc
Page 3
Regular meeting of the Elk River Municipal Utilities Commission
November 9,2005
~ 5.6 2006 Bond Proposal
At previous commission meetings the options of bonds were discussed. The Stand-Alone
Bond Issue versus the MCMU Bond Pool was discussed. Staff recommends utilizing MCMU
bond pool with 72% fixed rate and 28% variable rate.
Motion by James Tralle to authorize $3,500,000 bond through MCMU with 72% fixed rate
and 28% variable rate. Jerry Takle seconded the motion. John Dietz voting nae adding he
will be recommending to not approve when taken to the City Council as the City is ultimately
responsible and he feels there is a 1isk involved with this. Motion carried 2-1.
6.1 Review Outsourcing Bill Stuffing & Mailing
Theresa Slominski discussed the benefits associated with outsourcing the bill p1inting. At
a recent Power Managers User Group (PMUG) meeting there was a presentation on BillFlash.
BillFlash is a business that prints and mails bills for organizations. PMUG has formed a
partnership with BillFlash which entails customizing the software to create a print file that
could be sent to BillFlash for the actual printing and mailing function. This would allow an
added person to review and analyze the bills prior to printing for more accurate billing and
fewer adjustments. The machine we currently have will need to be upgraded due to volume
and age at a cost of approximately $20,000. Comparisons of the BillFlash cost versus utilities
costwas reviewed. James Tralle was concerned about the security issues, and John Dietz
questioned how the cost comparison was anived at, staff responded. Jerry Takle asked if there
was a contract involved or if we could cancel, staff replied we were not bound by any contract
and could cancel at any time.
Motion by James Tralle to utilize BillFlash for mailing out the customers monthly bills. John
Dietz seconded the motion. Motion carried 3-0.
Other Business
There was no other business.
The next regularly scheduled meeting of the Elk River Municipal Utilities Commission
will be Tuesday, December 13,2005.
President Jerry Takle adjourned the regular meeting of the Elk River Municipal Utilities
Commission at 4:55 p.m.
Judy McSpa en
Recording Clerk
Elk River ~
Municipal Utilities
13069 Orono Parkway
Elk River, MN 55330
phone: 763.441.2020
Fax: 763.441.8099
December 6, 2005
To: Mayor and City Council
From: Bryan Adams
Subject: 2006 Elk River Municipal Utility Revenue Bonds
The Elk River Municipal Utilities continues to experience large electric growth in our
~:ervice territory. The 2006 ERMU electric capital budget is approximately $5,000,000 of
which $3,500,000 is to be financed through revenue bonds. The projects to be funded
with bonds are as follows:
I) Expansion of West substation (next to street dept garages) vvith a larger
transformer. $430,000
2) Construct new substation in Otsego. $380,000
3) Construct new substation at station 14 (by (iRE). $800,000
4) Construct feeder to serve Target. $825.000
5) Construct 3 feeders in Otsego. $400.000
6) Continue construction of new feeder to Elk Path business Parle $200.000
7) Other feeder construction or relocation. $465,000
There are two sources of bonding available to us. There is the conventional bonding
utilized by the city of either revenue bonds or general obligation. The other option is to
utilize Minnesota Municipal Utilities Association (MMUA) bond pool which is titled
Midwest Consortium of Municipal Utilities (MCMlJ) which utilizes either fixed rate or
variable rate financing with revenue pledge. MCMLJ recently secured $50,000,000 of
funds available as drawclown bonds. Attached is a proposed 'resolution allowing the
ERMU to utilize the MCMU funding.
The Elk Rjver IVlunicipal Utilities ('ollllnission I~; recommending the iVICMU financing
pooL althouEh not a unanimous decision. {iJr the 1'o]lowlnlI reasons:
. 'n. _
!) The il1ltial issuance costs are less expensive and process of securing funds is
eaSIer.
2) The ongoing interest cost are projected to be less expensive depending on
amount of variable rate to fixed rate funding one desires. See the attached
sheets. The higher percentage of variable rate financing, the more of a
projected savings can be achieved, but also more of a risk. If 100% fixed rate
MCMU financing is compared to conventional funding, MCMU would be
slightly more expensive.
ERMU is recommending $1,000,000 of variable rate and $2,500,000 offixed
rate financing. Utility Commissioner & City Councilman Dietz is
uncomfortable with any variable rate financing.
3) The electric utility industry continues to be in the midst of change. Due to Elk
River's lack of equity in ORE's generation or transmission system, our
wholesale electric rate is vulnerable to market forces and wi 11 continue to rise.
The way to medicate this for Elk River is to invest in the transmission system
if and when possible. This investment will take large sums of money. MCMU
provides an alternate source of bonding that may \:ie less expensive. This
proposed bonding is a way to try an MCMU fixed and variable rate method.
Due to only $1,000,000 being of variable rate, the risk for potential gain or
loss would be small.
4) We would be supporting our state organization MMUA.
RESOLUTION NO.
RESOLUTION GIVING PRELIMINARY APPROVAL
TO A PROJECT TO BE UNDERTAKEN BY THE ELK RIVER
MUNICIPAL UTILITIES COMMISSION
BE IT RESOLVED by the City Council (the "Council") of the City of Elk River,
Minnesota (the "City"), as follows:
1. Recitals:
(a) The Elk River Municipal Utilities Commission (the "Commission") has made a
preliminary determination that it is necessary and appropriate for the Commission to undertake
certain additions and improvements to the City's electric utility distribution system, including
but not limited to acquisition and construction of a substation and related feeder system (the
"Proj ect").
(b) In order to provide financing for the Project, the Commission intends to
participate in the Minnesota Municipal Utilities Association Financing Program through a
combination of a fixed interest rate and variable interest rate borrowing from the Midwest
Consortium of Municipal Utilities ("MCMU") of which the Commission is a member, and in
furtherance thereof the Commission expects to consider for approval one or more resolutions
which will provide for the issuance by the Commission to MCMU of a fixed rate electric revenue
note and a variable rate electric revenue note together with execution and delivery of related
documents including fixed and variable rate project loan agreements. The total expected
borrowing by the Commission for the cost of the Project is expected not to exceed $3,500,000
plus required reserves, costs of issuance and other transaction expenses. As of the date hereof it
is expected that approximately 72% of the financing will be at a fixed rate and approximately
28% at a variable rate.
(c) The notes shall be secured by the net revenues of the Commission. The full faith
and credit of the City will not be pledged as security for the notes or the financing of the Project.
(d) This Council expects that it will be requested by the Commission at an
appropriate future date to approve a resolution or resolutions concurring in such financing.
2. Consent and Approval. This Council hereby preliminarily approves the Project and the
financing thereof through MCMU as described above as may be carried out pursuant to further
actions of the Commission, and hereby authorizes the staff of the City to cooperate with the
Commission as may be necessary or appropriate to assist the Commission in carrying out the
Project and undertaking the financing arrangements described above.
Adopted by the City Council of the City of Elk River, Minnesota, this _ day of
December, 2005.
Its:
Attest:
Its:
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