#11 - Conduit Bonding Discussion

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CITY OF OAKDALE REQUEST FOR COUNCIL ACTION Meeting Date: October 11, 2022 Advisory Board/Commission Requester: JZ Award of Bid CA Approval: CV Consensus Motions C Department: Title: Policy Adoption: FR-023 -Conduit Debt BACKGROUND □ Open Forum □ □ Other: □ 181 Public Hearing □ □ At the June 28, 2022 City Council Workshop, representatives from MWF Properties presented a concept plan for a four story multi-family development consisting of 155 to 165 units on parcel 2902921330012, which is a vacant parcel north of Hy-Vee and The Waters of Oakdale. As part of the plan review, MWF Properties also requested support from the City to obtain bond financing for this project through the Minnesota Department of Management and Budget (MMB). For the City to support the applicant's request through MMB, the City Council would need to provide a resolution indicating that the City will serve as the conduit bond issuer. Doing so would enable the MWF to be placed in the queue for future financing through the State. During the concept plan discussion, it was identified that the city lacked a formal conduit debt policy. Based on the request from MWF for the development project, and the potential requests of other developers, staff was directed to begin the process of drafting a policy for Council's consideration. At the September 27, 2022 council work session, staff presented a proposed draft policy on conduit debt for council's review and feedback. A conduit bond, often referred to as a Private Activity Bond (PAB) or Tax-Exempt financing, is a debt financing mechanism whereby private entities can raise capital at lower costs. A conduit bond may be taxable or tax-exempt. The taxable status of a bond directly affects the cost of borrowing, since a tax- exempt bond often has a lower interest rate resulting in a lower cost for the bond buyer. Tax-exempt conduit bonds are attractive to bond buyers because the interest received over the term of the bond is exempt from federal, state, and local income taxes. A municipality may issue tax-exempt obligations that are designated by the city as "bank qualified," which gives banks certain favorable tax treatment for governmental bonds and bonds issued for the benefit of 501(c)(3) organizations. A city may designate up to $10 million of such bonds as bank qualified in each calendar year. Bank qualified obligations tend to have lower interest rates than non- bank qualified bonds, so they are preferable to the borrower when they can be used. There are generally no legal risks or financial obligations to the City of Oakdale associated with this type of financing. 1