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<br />WS – Item 4 <br />SPECIAL WORK SESSION STAFF REPORT <br />Work Session Item No. 4 <br /> <br /> <br />Date: October 10, 2016 <br /> <br />To: City Council <br /> <br />From: Jeff Karlson & Sarah Cotton <br /> <br />Re: Funding Capital Equipment <br /> <br /> <br />Background <br /> <br />In August the City Council adopted a resolution establishing an annual capital budget <br />expenditure of $100,000 for the Public Safety Fire Division. This amount would be added to a <br />dedicated reserve fund for the replacement of fire apparatus. A question was brought up as to <br />whether these dollars should be levied or bonded for. <br /> <br />There are generally two options to consider when financing capital projects: (1) pay-as-you-go <br />financing; and (2) pay-as-you-use financing. Pay-as-you-go financing involves using available <br />cash to pay for capital projects or equipment from revenues derived from taxes and fees, capital <br />reserves, and other fund balances. Pay-as-you-go financing avoids the cost of borrowing (i.e. <br />interest costs, bond issuance costs, rating fees), reduces the debt burden, and maintains flexibility <br />to issue debt. <br /> <br />With pay-as-you-use financing, the municipality will issue debt (bond financing & low interest <br />loans) and then pay debt service over time with a tax levy, user fees and charges, or other <br />designated sources of repayment. <br /> <br />It is important to point out that the Council can utilize a mix of the two financing options. Staff <br />recommends paying for assets with a shorter useful life (e.g. police cars, fire trucks, equipment) <br />with cash on hand, and borrowing for fire apparatus with a longer useful life (e.g. new ladder <br />truck). <br /> <br />Regarding the levy versus bonding question, the City cannot issue debt without identifying what <br />project or asset the City is bonding for. The best approach is to ensure the City has adequate <br />cash reserves to fund its capital equipment plan and only bond for projects and assets where the <br />debt can be distributed over current and future generations of taxpayers who will derive a benefit <br />in future years. <br /> <br />Requested Council Direction <br /> <br />No action required. <br /> <br />Attachments <br /> <br />Resolution No. 16-85