02-14-2024 Council Packet - Laserfiche WebLink

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STAFF REPORT TO: Mayor Fischer and Members of City Council FROM: Sam Magureanu, Finance Director DATE: February 14, 2024 RE: Conduit Debt Policy BACKGROUND INFORMATION Unlike almost all other bonds, “conduit bonds” are initiated by and issued for the benefit of private entities. Under the state statutes that authorize these bonds, the city first issues the bonds and then loans proceeds to the private entity. That private entity repays the loan in an amount sufficient to pay principal and interest on the bonds. As a practical matter, the loan is handled entirely by a separate bond trustee (usually the trust division of a bank). Conduit bonds are a financing vehicle used by non-profit developers to help reduce the costs of borrowing by having a government entity issue bonds for capital financing that may qualify for tax-exempt status. Although the local government entity issues the bonds, the government entity has no obligation for the debt and almost no role in payment or administration of the bonds. The three most common conduit bonds in Minnesota are: • Qualified 501I (3) bonds, where the user of bond proceeds is a nonprofit 501(c)(3) entity. Typical examples include nonprofits that own nursing homes, hospitals, senior and other affordable housing, and schools (from K-12 to college). • Housing revenue bonds (exempt facilities), where the user of bond proceeds is a private for-profit entity that builds housing intended for occupancy by persons or families who meet specified low-income guidelines. • Small issue manufacturing bonds, where the user of the proceeds is a manufacturing business that constructs manufacturing facilities that meet certain federal requirements. In Minnesota, most conduit bonds are issued under Minnesota Statutes, Chapter 462C, as amended (the “Housing Act”), or Minnesota Statutes, Sections 469.152-469.165 (the “Development Act”). According to Statute, municipalities can issue up to $10 million bonds under the “bank qualified” provision tax-exempt in a calendar year. Conduit bonds issued by a city typically count against the city’s own $10 million annual limit with a few exceptions. Issuing conduit debt is not new to Little Canada. Over the years the City has issued this type of financing, most recently for the New Harmony Project in 2021 and the Twin Lake Boulevard Housing Projects in 2022 and 2023. The City of Little Canada’s Finance Policy does not include specific language related to conduit debt and refers to historic guidance from 1994.