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Page 3 of 5 <br />the proceeds of tax-exempt obligations, in accordance with United States Income Tax <br />Regulations Section 1.150-2. <br /> <br />Adopting this resolution will preserve the City's ability to reimburse itself, from future tax- <br />exempt bond proceeds, for eligible costs incurred in connection with the Water System capital <br />improvement projects before such proceeds are available. The resolution does not commit the <br />City to incurring any debt at this time. When the time comes to issue debt for the Water <br />System, staff will return to the City Council with additional analysis and financing documents <br />for approval. <br /> <br />DISCUSSION <br />Financing Options <br />Finance staff worked with the City’s financial advisor, PFM, to evaluate the feasibility of <br />financing the City’s proposed capital expenditures through various financing methods and <br />structures. PFM reviewed the cost of capital for a public sale versus a bank loan (private <br />placement). In this scenario, staff reviewed annual debt service payments for a structure with <br />20-year level debt service. The total debt service for a public sale is estimated to be $1.16 <br />million less than the total debt service of a bank loan. The true interest cost is estimated at <br />3.96 percent for a public sale and 4.61 percent for a bank loan, as shown in the table below. <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br />In a 30-year term <br />scenario for the proposed 2026 Water Revenue Bonds, the average annual debt service is <br />approximately $916K. There are limited capital market options for 30-year bank loans. <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br /> <br />A public offering is currently the least expensive option. To reduce the annual debt service <br />payment, keep potential rate increases to a minimum, and retain capacity for future debt <br />issuances, the initial recommendation is to structure the 2026 bonds with a 30-year term. The <br />cost of issuance is estimated at $280,000 (underwriter’s discount, financing team, rating <br />agency, and other). The true interest cost – with interest rate cushion - is estimated at 4.48 <br />percent. For a bank loan, the fee is estimated at $130,000, not including bank loan origination <br />fees. <br /> <br />Table 1 Scenarios <br /> Public Sale Bank Loan <br />Project Fund $15,000,000 $15,000,000 <br />Repayment Term 20 Years 20 Years <br />Debt Service Level Level <br />Average Annual Debt <br />Service <br />$1,097,813 $1,155,724 <br />Total Debt Service $21,956,250 $23,114,500 <br />Table 2 Scenario <br /> Public Sale <br />Repayment Term 30 Years <br />Debt Service Level <br />Average Annual Debt Service $915,805 <br />Total Debt Service $27,474,125 <br />Page 225 of 373