There’s good news for all those pining for a new $3 million state-of-the-art Emergency Operations Center “(EOC”) to built at the corner of Buena Vista and Grand.
A year after voters failed to pass a measure to increase the sales tax rate to pay for a new EOC and new fire station at that location (and to provide other goodies as well), City Council finally has come up with a plan to finance construction of the new EOC: The City is going to borrow the money and pay back the loan out of the General Fund!
It takes a little reading between the lines, but that’s the decision Council made Tuesday night when it unanimously voted to “Provide Direction on Potential Refunding of 2002 City Hall Project Certificates of Participation and 2003 General Obligation Bonds.” (We kid you not; that’s how the agenda item read).
Let’s connect the dots.
You remember, of course, that a new state-of-the-art EOC was one of the items City Manager John Russo and four members of the former Council, strongly supported by former IAFF Local 689 president and current fire chief Mike D’Orazi, proposed raising the sales tax rate to pay for as part of Measure C last year. The facility would “have sufficient space for staff to work effectively together, as well as to break into smaller workgroups in separate areas to establish critical priorities and develop action actions.” What’s more, it would be stocked with “up-to-date communications, computer and data handling systems” and even provide connections for staff’s own laptops.
At the time Measure C was proposed last March, then-Councilman Doug deHaan objected to, among other things, the combined $5.6 million cost of the new EOC and new fire station. Decrying the “dramatic amount of misinformation” being “circulated about the measure,” City Manager Russo publicly rebuked deHaan and assured Council that the new facilities together would cost only $4.5 million. And that was the figure the City published to voters. Measure C failed to pass, but staff went ahead with its planning efforts anyway. By last October, the cost estimate had jumped to $6.8 million. Tuesday night, Mr. Russo told Council the latest figures are $2.8-2.9 million just for the new EOC and $6.5-7 million for the new fire station.
Several times after the failure of Measure C, Mr. Russo informed Council that staff was brainstorming ideas for financing the two new facilities so that firefighters no longer would be forced to work out of the basement of City Hall or the three-bedroom house next door to the existing fire station. Tuesday night, City Finance Director Fred Marsh reported that staff had succeeded in its mission, at least for the EOC.
As it happens, back in 2002 the City issued Certificates of Participation (“COPs”; we’ll call ‘em the “2002 bonds”) in the principal amount of $11.37 million. These bonds re-financed an earlier bond issue that paid for the seismic upgrade and renovation of City Hall “and certain fire stations.” The City has been making semi-annual payments of principal and interest on these bonds out of the General Fund ever since. The outstanding principal balance currently is $7.395 million. The bonds mature – i.e., the last payment is due – in 2025.
Staff now proposes that the City float a new bond issue in a principal amount greater than the balance due on the 2002 bonds, pay off those bonds, and use the excess proceeds to pay for building the new EOC. The staff report didn’t provide any details, but, in response to the Merry-Go-Round’s request, Finance Director Marsh was kind enough to provide preliminary numbers (which, he cautioned, needed to be verified by the City’s financial advisors). Here’s the deal:
| Principal amount of new bonds: | $10,245,000 |
| Less: Underwriting discount (i.e., fee) | ($81,960) |
| Less: Cost of issuance (e.g., attorneys’ and financial advisors’ fees) | ($150,000) |
| Net proceeds | $10,013,040 |
| Less: repayment of outstanding principal balance on 2002 bonds | ($7,395,000) |
| Excess net proceeds available for use by City | $2,618,040 |
In addition, the City intends to clean out a trust established to hold reserves for re-paying the 2002 bonds. This will add another $382,000 to the pot.
The re-financing will neither reduce nor increase the annual General Fund deficit (which is estimated to reach $4.9 million by fiscal year 2017-8) in the short run, since the City intends to continue making semi-annual payments on the new bonds in the same amounts it is paying now on the 2002 bonds. But the new bonds will not mature until 2032, rather than in 2025 as the 2002 bonds do, so seven additional years of payments from the General Fund will be required to retire the new bonds.
(This paragraph is just for financial types: According to the staff report, the 2002 bonds pay interest at rates between 4% and 4.75%; the “true interest cost” – similar to the APR on a mortgage – on the new bonds will be 4.31%. Given the narrowness of the spread, one suspects that the deal only works – i.e., generates enough cash to pay for the EOC – if the City continues to make the existing semi-annual payment for seven years beyond the original maturity date).
According to the staff report, the proposal for re-financing the 2002 bonds in this way resulted from staff’s effort to identify outstanding long-term City debt that could be re-financed at a lower interest rate. But re-financing doesn’t require taking out cash and spending it on something else. Imagine the City as a homeowner looking to re-finance her mortgage when interest rates drop. She has a number of options available:
- Get a new mortgage with the same principal and maturity as the original one and benefit from the lower monthly payments;
- Borrow more than the balance due on the old mortgage, pay off the old mortgage and take out a new one with the same monthly payment at a lower interest rate, and stick the difference in a savings account;
- Same as (2), but, instead of saving the difference, use it to buy the new Mercedes she’s always wanted but couldn’t afford.
We suspect that most financial advisors would tell a client to take option (1) unless they were sure she would earn higher interest on the savings account than she was paying on the mortgage. (Fat chance). They might even tell horror stories of people took option (3) and found themselves in hot water. But none of these financial advisors works for the City of Alameda. And the politicians and unions really want that Mercedes – er, EOC.
Tuesday night, Council unanimously directed staff to proceed apace with the re-financing plan. Only Councilmen Tony Daysog and Stewart Chen asked any questions. Mr. Daysog inquired whether the proposal paid for building the new fire station as well as the new EOC. (Staff confirmed it did not). Mr. Chen wanted to know whether the City had any other bonds outstanding, and learning that it did, wondered whether any of them also could be re-financed. (Staff said it had done all it could). It was all over in a couple of minutes.
Unremarked by any Councilmember – we guess it was late – was the irony of this item immediately following the lengthy discussion about how to fund the City’s $86.4 million liability for Other Post-Employment Benefits (“OPEB”). As Michele Ellson succinctly described it in The Alamedan, “Members of the City Council said they want to set up a trust fund to help cover the city’s $86.4 million retiree health care liability. They just need to find money to put into it.”
Hey, we’ve got a suggestion! If re-financing the 2002 bonds truly is a good idea, how about going ahead with the plan but, instead of using the excess funds to build a new EOC, put them into a trust where they can be invested and used to pay down the OPEB liability? We’ll betcha nobody thought of that. Several times Tuesday night, Vice Mayor Marilyn Ezzy Ashcraft wistfully wished for a “windfall” to use as seed money for the OPEB trust. (Mayor Gilmore and Councilwoman Tam stayed on message and expressed confidence that Obamacare would reduce the City’s OPEB liabilities). Maybe the excess proceeds from re-financing the 2002 bonds would be just the ticket.
Sources:
March 7, 2012 staff report re Measure C: 2012-03-07 staff report re Measure C
July 23, 2013 staff report re bond re-financing: 2013-07-23 staff report re financing EOC
2012 City CAFR: 2012 CAFR
Alameda Merry-Go-Round 