HomeMy WebLinkAbout2004.0302.TCPHM.Minutes TOWN OF FOUNTAIN HILLS
PUBLIC HEARING FOR
FOUNTAIN HILLS TOWN COUNCIL
MARCH 2,2004
Mayor Wally Nichols convened the Public Hearing at 6:30 p.m.
ROLL CALL — Present for the roll call were the following members of the Fountain Hills Town Council:
Mayor Wally Nichols; Vice Mayor Rick Melendez; Councilmembers Michael Archambault, John Kavanagh,
Kathleen Nicola, Susan Ralphe, and Leesa Stevens.
ALSO PRESENT: Andrew McGuire, Town Attorney; Tim Pickering, Town Manager; Julie Ghetti,
Accounting Supervisor;Jim Sterling,Peacock Hislop Stanley &Given; and Bev Bender,Town Clerk.
Mayor Nichols led the Pledge of Allegiance and advised that the purpose of the hearing was to receive public
comments on funding sources to be used for the Civic Center Phase II project. He asked that participants discuss
only the funding sources themselves as opposed to alternatives. The agenda item was listed as, "What funding
source could be used?"
Mayor Nichols turned the meeting over to Town Manager Tim Pickering who introduced Julie Ghetti,
Accounting Supervisor, who presented an overview of the financing choices to date.
Ms. Ghetti briefly reviewed the background and referred to the Five-Year Financial Plan, indicating that the
results of the Five-Year Projection of Revenues and Expenditures showed that there was sufficient revenue for
operating expenditures, with a yearly surplus of $1 million. That $1 million, she indicated, was available for
capital projects; part of the Five-Year Projection of Revenues and Expenditures incorporated a capital
improvement plan, which included $21 million in capital projects. Through available resources such as
kw development fees and surplus general fund revenues, all of the capital projects had been funded over that five-
year period, with the exception of $5 million in streets. She pointed out that the Civic Center Phase II was
included in the Five-Year Capital Improvement Plan with a construction start date during the next fiscal year.
Ms. Ghetti continued with a PowerPoint presentation(a copy is on file in the Town Clerk's office)as follows:
Lease Versus Build—15-Year Estimate
Currently the lease, utilities, and maintenance of a new building are projected at a cost of approximately $13.1
million(adjusted for inflation). Over$1 million of this amount would be in the area of maintenance and utilities.
The estimated cost alone of the new building would be approximately $4.5 million (not including maintenance,
financing, utilities, or architectural fees). The utilities for the new building would be significantly less, and over
15 years the utilities and maintenance would add approximately $500,000 to the $4.5 million figure, still a
savings in the area of$8.6 million. She indicated that in the projection, $600,000 savings for not paying rent had
been included as available for capital funding over the next five years.
Building Now Versus Later
Ms. Ghetti indicated that the decision to build "now" versus "later" was an economic decision that was included
in the Five-Year Improvement Plan. The cost for rent and taxes would be anticipated to increase at 4% annually
as it has in the past five years. The fact that Town currently pays for 40% more space than needed is on a month-
to-month basis with an unsigned lease drove the decision to build "now" as opposed to waiting until the
expiration of the unsigned lease on June 30, 2005.
Financing Options
The available grants and sale of assets options held unknown factors. Bond issues, internal borrowing, and
paying cash, had been researched.
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Town Debt Policy
In making their recommendation (and given the current time restraints), staff used the adopted financial policy
(May 2003) that "Pay-As-You-Go" would be given the highest priority. Currently, Ms. Ghetti noted, debt
service costs were not a problem, as there was not a high amount of debt. She quoted the policy as stating that
"the debt repayment schedule should be no more than fifteen(15) years", and suggested that the Town should be
able to maintain their"Aa3"rating, a good rating but also carried higher expectations. Of particular importance,
the policy states that if the Town considers debt, specifically non-voter approved debt, there should be a
dedicated revenue source identified to pay debt service expenses.
Option 1: 100% Cash
Ms. Ghetti advised that the first funding option in this project was "paying cash",and Town Center Phase II was
included in the Five-Year Capital Improvement Project and included as "paying in cash". She noted the current
$1 million fund balance reserved for capital projects, and added that in the financial policies there is also a fund
balance policy which stated that the Town would maintain the fund balance at 30% of the average revenues over
the past five years. That 30% was broken down into three different revenue segments: 20% were unavailable for
appropriation and could not be used for any reason other than a declared emergency; 10% could be used for
capital projects, and $1 million was to be used for cash reserves and capital projects. She added that an
additional $1 million would be received in revenue from development fees and law enforcement, as well as the
recently enacted revenue enhancements passed in January. She anticipated that $600,000 would be raised from
those two revenues within the next fiscal year and suggested that the savings gained from making the sacrifice
now would provide resources for future capital projects.
Cash Resources
Ms. Ghetti noted that$400,000 of the current fiscal year savings of$552,400 was expenditures budgeted for but
which would not be used. $150,000 was miscellaneous revenue not anticipated and not included in the budget.
The figure of$552,400 was not included in the Five-Year CIP, so it could therefore be used for capital projects. skj
Additionally, anticipated fees in the amount of$392,700 from general government and law enforcement could
also be used for capital.
The recently enacted revenue enhancements of $601,700, as well as the fund balance reserved for capital of
$1,093,000(10% for capital projects), would also be available for capital project funding. Twenty percent(20%)
of the fund balance would still be maintained (as well as the 30 days), so the Town would not go below $4
million in its fund balance. It was, however, included to use as outlined in the financial policies for the
expenditure.
Ms. Ghetti anticipated a surplus of $1,071,500 in F/Y 2004-2005 in the General Fund available for capital
projects,and$21,700 would be available from sale of assets.
Total cash available therefore would be $3,733,000, and $1,696,000 would be available for borrowing from
ourselves for a total of$5,429,000. This total was in excess of what was needed for the project.
Option 2: Cash and Borrowing
In researching this option, Ms. Ghetti referred again to the Town's financial policies for guidance. The policies
required that if debt was considered, trends must be analyzed: debt outstanding as percent of legal debt limit,
bonded debt per capita, debt service as percent of assessed value, fund balance trend, expenditure trend, and
debt ratio (debt service/total revenues). She noted that all trends, with the exception of the fund balance trend,
should show a downward trend. However, the trend has been upward which led staff to the decision to
recommend the "Pay-As-You-Go" option. Additionally, Ms. Ghetti noted that the fund balance trend should
have shown an upward trend; however,it showed a downward trend.
Summary of 3/1/04 Teleconference with Moody's Investors Service
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In that teleconference Moody's reiterated that if bonding were considered, a dedicated revenue source for
repayment must be identified; they also indicated that the fund balance should be restored to historic levels.
Moody's bond rating committee will review the Town of Fountain Hills' "negative outlook"rating by the end of
the week.
Debt Payment and Local Tax Rate for Retirement
Ms. Ghetti explained that if $3.1 million were financed, the annual debt payment would be approximately
$320,000 over a period of 15 years. One of the options regarding a dedicated revenue source would be the local
sales tax. If$300,000 were needed per year,that would require a .10% of the local sales tax. If$1.6 million were
to be financed, the annual payment would be $165,000 or .05% of local tax. She reiterated that the bond
financing would require a dedicated revenue source. She continued by advising that the maximum borrowing
capacity using the excess mountain sales tax of$350,000 would be$3.1 million.
Cost Comparison (15 Years)
Estimated construction costs of the project would be$4 million; architect fees would be$400,000; and furniture,
fixtures, equipment (N"r'h) fees would be $500,000 (plus a contingency included at $400,000). The cost of
issuance for borrowing would be $130,000 ($3.1 million) or $120,000 ($1.6 million). Interest costs would be
$1.5 million ($3.1 million) or $800,000 ($1.6 million). The "Pay-As-You-Go" option would cost an estimated
$5.3 million; borrowing the $3.1 million would cost an estimated $6.93 million; and borrowing the $1.6 million
would cost an estimated $6.22 million. Ms. Ghetti indicated that the chart shown in her presentation had been
taken from the Five-Year Capital Project Plan and noted that Plan would continue to fund all the plans identified
therein. Town Center Phase II was estimated as a $1.5 million expenditure during the next fiscal year, and $3
million the following year.
Ms. Ghetti counseled that as the current unsigned month-to-month lease continued, concern grew that the Town
may not be able to remain in the current building for another year; therefore,the project had been accelerated for
completion during the next fiscal year.
Summary
Ms. Ghetti indicated that if Moody's removes the "negative outlook" rating, staff would then be comfortable in
making the recommendation for funding the Civic Center Phase II with a combination of cash and up to
approximately$3 million in bonds.
Ms. Ghetti then concluded the presentation and asked for questions.
Mr. Pickering reviewed the discussion with Moody's, indicating that Moody's had been very complimentary
regarding the Town's raising its fund balance to a level that they (Moody's) felt was acceptable with the current
bond rating. Moody's indicated that they would possibly remove the "negative outlook"at the end of the week.
Staffs original concern was that with Moody's "negative outlook", the Town would receive a negative review,
which would cause problems in selling bonds. Mr. Pickering advised, however, that Moody's focuses on fund
balance as opposed to borrowing capacity;therefore, more than one option was available at this time.
Mr. Pickering stressed to the Council that if the Town were to go to a partial funding with bonds, investors must
be told from where the money would be repaid and suggested that, in that scenario, the Council earmark certain
funds for that repayment.
Another option,Mr. Pickering added, would be to dedicate a portion of the sales tax; however, that action would
cause a deficit in the capital funding. He explained that the bottom line of the deficit each year in capital projects
over five years equals $5.4 million, and if the Town were to use existing sales tax from the General Fund, it
would cause that deficit to increase. If the Town were to borrow funds, as opposed to paying cash as forecasted
in the Five-Year Capital Plan, the deficit would go up $1.6 million, making it a $1.7 million deficit. He added
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that there were, however, excess revenues available from the mountain excise tax fund that could be used for
repayment of those bonds.
Mayor Nichols then asked to hear comments and questions from the general public prior to hearing those of the
Council.
Roy Kinsey did not wish to speak at the hearing, but he asked the question, "What is the "bonding limit"for the
Town?Does this make any difference?"
,John McNeil appeared before the Council and asked that the Town provide another opportunity for public
input with advance notice prior to the final decision. Mr. McNeill had submitted a lengthy paper regarding his
opinions and asked that it be made part of the public record. Also distributed was a two-page outline regarding
the funding alternatives for the project. He proceeded:
1. What is the cost? Mr. McNeill asked for a more thorough explanation of how the costs had changed
since last June when it was discussed as a $3 million project. In January, he noted that it was discussed
as a$3.5 million project, and at the February Council meeting it was discussed as a $4.5 million project
(if paying as you go), or a$5.3 million project(if funded by bonding).
2. Staff Proposal — "Pay As You Go" — Is it in accordance with Council policy? Mr. McNeill's research
showed a "Debt Policy" of May 1, 2003 (amended on August 21, 2003)to pay for some capital projects
on a "Pay-As-You-Go" basis. However, he noted, the minutes also reflected that the Town should still
have "Bonding Alternatives for 'Big Ticket' Items" and should be "building up and maintaining fund
balances". He felt that the project was a"Big Ticket"item.
3. Moody's —Mr. McNeill felt that Moody's primary concern was that the Town's cash fund balances be
increased; yet the "Pay-As-You-Go" option would decrease the cash available to the Town, as
compared to borrowing a substantial portion of the cost. He felt that would cause more concern to
Moody's than borrowing and added that Moody's rating of the Town's credit didn't actually reflect the
rating of the bonds issued by the town, all of which were rated Aaa/AAA, as they were insured bonds.
4. Why borrow and how much? Mr. McNeil felt that long-term borrowing for the town hall would spread
the cost to future users, not just people who pay sales taxes over the next two years. He added that if
property taxes were used, it would help diversify the town's tax base, and that even a sales tax-based
bond would spread the cost and reduce cash flows. He reiterated that the town should use all available
cash from development fees, as they would be lost after six years. He also suggested that the Town also
use certain "windfall" funds from a sales tax rebate that would not be required now, as well as several
smaller sources, totaling nearly $600,000. He noted, however, that at today's historic low interest rates,
it might be best to borrow all the remaining money after using the development fees.
5. Example of Borrowing and Costs: Mr. McNeil urged the Council to take advantage of the low interest
rates.
Nancy Land appeared before the Council stating that she felt that with the revised Moody outlook, it would be
wise to borrow a substantial amount from bonds(while keeping the General Fund at an acceptable level)and use
development fees or other similar fees. She noted that the "safety net" was important to maintain and
encouraged Council to consider a partial bond issue - not using funds from the mountain preserve. She
suggested that by borrowing$3 million,the Town would have more than the$5.4 million for the project.
Sandy Zinn appeared before the Council and expressed her disappointment in the scheduling of the meeting.
She indicated that Council had been given specific directions to gather public input over the next 30 days, and
that scheduling a meeting the Friday before a Tuesday meeting with no public announcement did not seem
conducive to public involvement. Ms. Zinn added that neither the newspaper or radio station had been notified
of the meeting and asked why a public meeting would be scheduled after last week's newspaper was distributed
and before the current week's newspaper was published.
Mayor Nichols suggested that Ms. Zinn confine her comments to funding options as stated at the
commencement of the meeting and invited her to bring forth the meeting concerns during the "Call to the
Public"at the next Council meeting.
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Ms. Zinn then noted her support of a new Town Hall at some point, but indicated that the financial situation of
the Town was still too uncertain to do so (fire district funds, unresolved lawsuit) at the present time. She stated
that while she was not a fan of the manner in which the preservation measure was handled, she did feel that
ILmoney designated for that use should not be used to borrow from ourselves for the Town Hall. She noted that
the Council was currently dealing with trust issues with the general public and felt that the Town Hall project
funded with mountain preserve funds would further erode trust and respect.
John Turner appeared before the Council asked that another meeting be held on the subject due to the
unreasonable amount of time given for public input. He then suggested that the Town Hall project be bonded
with a secondary property tax, which would give the citizens an opportunity to vote on the issue itself. He added
that a bond base with a secondary property tax would not affect Moody's and suggested that the project be
deferred for one year. Another of Mr. Turner's concerns was that if the Town Hall project were commenced at
this time and problems were encountered, there would be no funds available to resolve them. He also was
financially concerned as to whether or not the insurance company would cover the Town in the event that they
(the Town)lost the currently unresolved lawsuit.
Bob Deppe appeared before the Council indicating that he had appeared before the Council in October
regarding the State Trust Land Preservation issue asking for funds. His request at that time was rejected due to
the fact that the Town was "broke". He stated that citizens were wondering how the Town had $5.4 million in
cash three and a half months later. He then suggested that the Town was proposing to essentially take all cash
available and apply it to one building, asking what the Council would do in times of emergency? He added that
the Council would be taking a risk by making the Town "cash poor", but that the proposal of borrowing $3.1
million sounded appropriate with the low interest rates available. He added that he supported the other speakers
and the building of a new Town Hall,but not the funding proposed.
Pamela DiSalvo did not wish to speak but indicated that she was against using mountain preservation funds for
Phase II funding for a partial bond issue.
400, Lori Noss appeared before the Council noting that she was speaking for all the people who would have been
present had they known it was to be held. She advised the Council that she was in favor of borrowing the funds
for the Town Hall, and that she would like to see the Town use the financial responsibility used in her home.
(She would not rob her children's college fund to purchase a larger home.) She felt that the Town should not rob
money from the Mountain Preserve to pay for a new Town Hall.
There were no further requests to speak at the hearing.
Mayor Nichols advised the Council that he had been present during the telephone conversation with Moody's,
and that Moody's had indicated that the Town had been placed on the "watch list"for two reasons: 1)The Town
of Fountain Hills had at that time no policies (debt policy/financial policy) and no financial plan. 2) The Town
of Fountain Hills' fund balance was at that time considerably below the historical levels, and it was also
considerably below the neighboring communities fund balance levels. Moody's indicated that as of the date of
the teleconference, they were very pleased with Fountain Hills, because the Town had instituted policies (debt
policy/financial policy)and had adopted a Five-Year Financial Plan. That fact satisfied the first reason the Town
was placed on the "watch list". They also indicated that they are pleased that the Town's 30% fund balance had
been established. Thirty percent would indicate that the fund balance should be at $4.7 million, and the fund
balance is now at$5 million.
When Moody's was asked about the Town's using funds earmarked for capital projects for the Town Hall, they
replied that the Town's policy indicated a 30% fund balance; anything under 30% would be unfavorable to
Moody's.
Mr. Pickering then solicited questions and comments from Council.
Councilman Kavanagh asked Mr. Pickering if it was accurate that the final staff recommendation was:
1. If the town were taken off the "Watch List", a combination of"Cash on Hand" and bonding would be
the recommendation.
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2. If the Town were not taken off the"Watch List", staff would suggest funding with cash only.
Mr. Pickering provided an affirmative response.
Councilman Kavanagh also asked why Moody's didn't really care about bonding, and Mr. Pickering responded
that Moody's would prefer a higher fund balance than a responsible amount of bonds. Mr. Pickering explained
that it would be important to investors if the town were to go into the financial market with a "negative outlook"
and added that if the Town were not removed from the "Watch List", he would not recommend pursuing the
bond market. Councilman Kavanagh then asked if it was due to the higher interest rate, and Mr. Pickering
responded that the town would still have the bonds insured, so the interest rate wouldn't be affected-. only the
salability of those bonds. Councilman Kavanagh asked if the Town might not be able to sell the bonds in the
event that they were not removed from the"Watch List",and Mr. Pickering agreed that it might be a problem.
Mayor Nichols reiterated that Moody's felt that the Town's debt capacity was very strong, with a great deal of
borrowing capacity. Staff's recommendation would again be open for debate at decision-making time.
Councilwoman Ralphe asked how the cost of bonds was affected by insurance. She indicated that some bonds
were property tax-based, some had a dedicated sales tax component, while others did not have a dedicated fund
connected to them. Mr. Pickering noted that insurance did not affect the ability to pay, that the ability to pay
back the bonds was the bottom line.
Jim Strickland, Peacock Hislop, addressed the Council and applauded the staff for their excellent job in working
with Moody's and the Council to establish the policies to place themselves in the position of being able to have
the "negative outlook" removed. He noted that in addition to the other aspects commented upon, there was
originally a financial uncertainty with regard to the community, but Moody's had now commented that the
uncertainty had been removed and that the Town was performing very well due to the conservative nature of
management.
Mr. Strickland responded to Councilwoman Ralphe's question, indicating that there were different focuses in the
bond market-one of which was (a)the ability to repay, and (b)being fiscally conservative. With respect to the No)
investors, each insured issue has an underlying rating, and each investor looks through the insurance to the
rating itself. A higher rating influences the investor more than a lower rating. The highest possible rating
receives the lowest borrowing cost and influences the cost of the insurance. The more fiscally conservative you
are, the stronger you are financially, and the cheaper the insurance premium would be to have your bonds be
AAA insured. You want to get insurance at an attractive price, and the investors will look at the underlying
ratings.
Councilwoman Ralphe asked if there was a connection between insurance and a dedicated source of revenue in
the eyes of the investors. Mr. Strickland added that it was also an evaluation criterion that would influence the
cost and the underlying rating. He noted that Fountain Hills had established conservative fiscal policies that
require a dedicated revenue source for the repayment. If those policies are established and not followed,
credibility would be lost. For communities that do not have a dedicated revenue source, the cost of the
insurance, as well as the underlying rating, would not be as good as if there were a dedicated revenue source.
Councilman Kavanagh asked why investors care about these issues if they are insured. Mr. Strickland responded
that most municipal bond buyers (especially insured municipal bonds) are institutional investors. He noted that
these investors have analysts who look through the underlying ratings and security prior to investing in those
bonds. The underlying rating is what differentiates one bond issue from another, and that is important to the
institutional investors. Mayor Nichols commented that it would be embarrassing to not have a bond issue picked
up.
Councilman Archambault asked what purpose insurance held if there was a dedicated revenue source. Mr.
Strickland offered that the purpose of insurance was to obtain a lower cost of borrowing. That cost of borrowing
would be a combination of dedicated revenue source, underlying rating, and insurance. He explained that a cost-
benefit analysis is done of the bids, and the lowest bid is obtained from the various insurance companies. An
analysis is then done of the stand-alone rating established and what the interest rates would be on that borrowing
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versus the AAA-insured rating with that underlying rating. Then they confirm that the savings are more than
enough to pay for the cost of the insurance premium.
Vice Mayor Melendez asked for an example of the insurance cost if borrowing $3.1 million. Mr. Strickland
responded that it would cost approximately 25 to 30 basis points per $100 of debt service. There is a minimum
of$15,000 or 35 basis points. The previous larger issue cost approximately 28 basis points.
Councilwoman Stevens asked how long Mr. Strickland's firm had been representing the Town of Fountain
Hills, and Mr. Strickland responded that they had represented Fountain Hills since its inception. She then asked
if he knew how difficult it was to sell bonds for the community center and mountains. Mr. Strickland responded
that although there had been an identified source on the latest issue, on previous issues there had been a
"pledge" of excise tax revenues for the issues. Each issue would always have a different identified source of
revenue, and bonds could be sold that are not backed by a direct revenue pledge of a particular kind. Those
bonds are more expensive, and in the Town of Fountain Hills it would be inconsistent with the debt policy that it
has adopted, so it would not be recommended.
Councilwoman Stevens asked if the Town could identify the current lease payment as something that could be
used toward the bond payment. Mr. Strickland responded that investors want to look at a"pledge of revenue", as
opposed an alternative use of General Fund revenues. A pledge of revenue would be pledging excise tax revenue
or some other source of revenue that could be measured, identified, and followed over time. Ratios would be
calculated based upon previous bond issues, outstanding indebtedness, covenants made at the time the bonds
were sold, and coverage of the debt service. He added that an "alternative use of revenue in a budget" is not the
same as having a dedicated revenue pledge.
Councilman Archambault asked if it would be appropriate for Council to take .01% of the general revenue fund
and dedicated that to a bond issue. Mr. Pickering responded that bond markets look at certain "pledges", not
"plans" to pay from the general revenue fund. He added that doing that would violate the Town's financial
policies and increase the deficit in capital spending. He added that the whole premise of the discussion was that
the proposed Town Hall would be a cost-saver and would make the deficit in the capital budget lower, not
higher.
Councilman Archambault then asked if 20% of the fund balance policy was to go into the reserve. Mr. Pickering
responded in the affirmative. Councilman Archambault then added that the other 10% was set aside for capital
projects, and Mr. Pickering agreed. Councilman Archambault then noted that the Mayor indicated that Moody's
was more agreeable that the Town put the 30% aside for the reserve fund and asked if that policy was going
against the policy set in May that the Town set aside four capital projects. Mr. Pickering responded that the town
would be within its policy by using that 10% (or $1,000,000) for the capital project as originally discussed, but
Moody's would not look upon it as favorably. He noted that staff had thought originally that Moody's would
prefer the Town use that portion of the fund balance as opposed to being in the bond market due to the"negative
outlook". In reality, the response was that Moody's preferred the fund balance; however, it is not Moody's
policy to recommend options.
Councilman Archambault clarified to the audience that the Council would not be using all available cash—that
even more capital projects had been budgeted for. Mr. Pickering agreed that the fund balance would only be
lowered by approximately $1 million in the "Pay-As-You-Go"option, and $4 million would remain. If bonding,
$5 million would remain in that fund. Other capital projects would be budgeted for, and the Town would
continue to have a positive flow when comparing revenues and operating expenditures. Another source of
revenue, Mr. Pickering added, would be the sales tax of.01%, which is how the mountain bonds and downtown
were done.
Vice Mayor Melendez asked when a consultant would explore development fees. Mr. Pickering clarified that
the development fee amount shown in the presentation did not take into consideration that the Town might
increase the development fees. He added that the development fee process was very involved, and an ordinance
probably could not be brought to the Council for at least a year, so an increase could not be "assumed". It also
could not be "assumed" that the fees would pass a public vote. He also added that the Council should be aware
of the fact that only the portion of the facilities that is attributable to growth (from 22,000 population to 30,000
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or 32,000 population) can be used to pay development fees with, as it is all based on growth. If bonds were
implemented and outstanding, there would be only a small percentage of those development fees that could be
used toward the total bond debt.
Vice Mayor Melendez then asked for an explanation to the term "Internal Cash Borrowing". Mr. Pickering *4011)
noted that approximately $1.7 million was money known to exist in the mountain sales tax fund that is above
and beyond any amount needed for the payment of bonds for the mountains. The Town collects approximately
$350,000 extra each year in that fund, and it can be used to pay off the bonds in 2011 or 2012 (whenever they
are callable);that is additional revenue obtained from bond payments.
Mayor Nichols noted that his position had changed from a feeling that "Pay-As-You-Go" should be used to
avoid charging citizens of Fountain Hills interest. Once he spoke with Moody's, he felt that it would be
appropriate to use a combination of "Pay-As-You-Go"and bonds but questioned the amount to bond.
Councilwoman Ralphe asked Mr. Strickland if the Town could set aside the amount of money currently paid for
rent in an acceptable manner to dedicate it to the project. Mr. Strickland responded that each time something
different or unique is used; it becomes more of a complex issue. If financing is to be done, the lowest cost is a
general obligation bond. If an excise or sales tax-backed financing is used, the amount of revenue often exceeds
the debt service, which gives high ratings and lower cost of borrowing. To use an"annual appropriation"type of
borrowing, it would be the most expensive in terms of interest rates, and that type of borrowing would be
inconsistent with the conservative policies adopted, which is to look to a dedicated revenue stream. The General
Fund revenues come from a source, and if you are asking to use the revenue source "above the line" where the
revenues are coming from, you are back to an excise tax-backed financing. Mr. Strickland added that many
communities may borrow general obligation bonds because that is the cheapest alternative borrowing, but when
it comes to internal accounting, they pay it back from their utilities system or some other source of revenue. He
noted that his company is focused on what is consistent with the policies of the Town of Fountain Hills and
added that this focus is the relationship with the rating agencies, insurance company, and financial community.
He explained to Councilwoman Ralph that the current policy is to have a dedicated source of revenue, and that
is fiscally conservative with a high rating. His company does not recommend deviation from that policy.
Councilwoman Ralphe reviewed alternatives: increase in sales tax, use of general obligation bonds, "raiding" a
dedicated fund, or removing the funds from the general fund. (She noted that did not want to lose the
opportunity to pay back the mountain bonds early, which would save funds.) She then asked Mr. Strickland if
there was an ethics which spoke to what was most appropriate, raiding a dedicated fund or finding new sources.
Mr. Strickland suggested that his company looks to revenue streams from internal accounting and a practical
standpoint. When one enters the market, oftentimes you obtain a broad pledge of revenues, and as a practical
matter you generate an additional amount, which is what you could do with the .01% sales tax increase.
However, it you went into the market, you would be making a sales tax pledge, and the market wouldn't be
looking just to that .01%, and it wouldn't be in your financial interest to pledge the .01%. It would be in your
financial interest to pledge all of your sales taxes, and that is how you generate the incremental amount to make
the payment. So it becomes clear to the investor, as they are looking at all your revenues, because if something
went wrong and the revenues were going down, and that .01% wasn't sufficient to make the payment, they
wouldn't want to just be dependent upon that .01%. They would want all of your revenues available, and that's
what makes it a strong bond.
Councilman Kavanagh disagreed with the characterization that taking the unnecessary .03% of the mountain
preservation, which was no longer needed to fund the mountains, as "raiding" a dedicated fund. He added that
the Council was not discussing removing money necessary to pay for the mountains, that they were discussing
taking money over and above what is needed. He suggested that using these funds would actually be a prudent
redirection of the money to where it would be needed. He felt that the suggestion of raising the sales tax .01% to
take care of the Town Hall, while continuing to take .01% for an untouchable fund, would be unacceptable to
the taxpayers.
Councilwoman Stevens indicated that she was not in favor of.raising the sales tax or using the extra mountain
funds and asked if it was possible to have a dedicated fee such as an extra business license fee that could be
dedicated toward this project. Mr. Strickland responded that when doing a financing with a given revenue
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source, it is likely that you could borrow; however, if the revenue source is unusual and non-recurring or non-
historic type of revenue stream, it would be a very expensive type of borrowing. Creative ways of doing things
have been done, but that type of borrowing would cost approximately twice as much as other types of
traditional, conservative borrowing. Councilwoman Stevens clarified that she was not suggesting that type of
option, as it wouldn't be any more beneficial than having an undesignated source. Mr. Strickland agreed that
there would not be a historic amount of revenues to investigate the amount that is needed to make the payments.
He added that municipal bond buyers buy steady streams of revenue, without interruptions to that stream. The
revenue sources could cover five to ten times the amount of the payment, and you could spend the excess after
the revenues are paid under debt service for other things such as operations of the community, but with respect
to a pledge, that pledge could have the first right or claim on those revenues. When there are large revenue
pledges,there are AA ratings.
Attorney Andrew McGuire asked the Council to keep in mind that under State law, fees are cost recovery,
whereas taxes are revenue generating. If a fee were imposed that was not cost recovery, it would actually be a
tax as opposed to a fee.
Councilman Archambault asked if the revenue source generated more than what was needed for the original
bond issue (for the purpose of making those funds available during a bad year), wouldn't that be reason to not
use that .03% revenue source to fund a new bond issue. Mr. Strickland indicated that at the time the bonds are
sold,pledges and covenants are made with the investors and rating agencies, and coverage requirements must be
met. As long as those are all met, you could issue a borrowing on parity or with an equal claim to the revenues
from the investor's perspective as long as you don't fall under the established coverage at the time of the
borrowing. Councilman Archambault indicated that for security purposes he would not want a company to use a
portion of that revenue source to bond another project. Mr. Strickland replied that at the time the money was
loaned, promises were made that you would not exceed certain borrowing amounts. You would then have to
meet or exceed those amounts if you were to go to borrow; you may issue parity debt as long as those coverage
requirements are met. Councilman Archambault asked if it would change the rating of the bonds if you fell
below those requirements, and Mr. Strickland indicated that it would, but you wouldn't be able to issue the
bonds. The existing indebtedness plus the new indebtedness must be covered at least one and one-quarter times,
so there would be a one-quarter and a reserve fund established for their protection.
Councilwoman Ralphe asked the difference in cost between general obligation bonds and bonds backed by sales
tax. Mr. Strickland indicated that general obligation bonds would be a higher investment grade, and that there
would be restrictions on how much could be borrowed. The difficulty in answering the question, he explained,is
timing. It would take a greater amount of time to do a general obligation bond issue, i.e., having an election and
getting into the market. If, however, an excise tax-backed option were taken, it would be done much quicker,
and you could take advantage of market rates today versus the uncertainty of market rates in the future. He
indicated that he could not actually say at this time whether one would be cheaper than the other.
Mayor Nichols asked if staff had sufficient direction in order to proceed with exhibits, i.e., a combination
between "Pay As You Go" and debt bonds. Mr. Pickering indicated that they did have direction from which to
prepare the information and indicated that they had contacted a financial advisor to assist with the Council
report for the March 18 Council meeting.
Councilman Kavanagh indicated that the March 18 Council meeting would be an excellent opportunity for
public input and asked that the issue be the first on the agenda after the Consent Agenda. He further requested
that the agenda be free from too many other agenda items in order to devote considerable time to the public.
Vice Mayor Melendez felt that two significant points had been made by the letter received by Moody's: 1) As
long as the adopted guidelines are upheld and sustained, going into the bond market would not be viewed
negatively by Moody's. 2) Construction of Town Hall facilities would be a major project and outside their
concern. Vice Mayor Melendez added that no points would be assessed for going forward with the project;
however, if financing were considered,the rating would be stronger with a dedicated revenue source.
Councilwoman Nicola expressed her appreciation to the colleagues who supported tabling this measure for 30
days for input from staff, advisors,and general public.
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Councilman Archambault asked if there should be another public meeting between now and March 18.
Councilman Kavanagh suggested that as long as the public is heard prior to the vote, another meeting would not
be necessary. Mayor Nichols indicated that he would like to obtain public reaction regarding this issue at the
"Call to the Public" at Thursday's Council meeting.
Councilwoman Stevens MOVED to adjourn the meeting. The motion was SECONDED by Councilman
Kavanagh and PASSED unanimously. The meeting was adjourned at 8:0'0 p.m.
TOWN N 'AIN HILLS
By:
.J. N' ho s,
ATTEST AND
PREPARED BY:
Bevelyn J. nd Town Clerk
CERTIFICATION:
I hereby certify that the foregoing minutes are a true and correct copy of the minutes of the Public Hearing held
by the Town Council of Fountain Hills on the 2nd day of March 2004. I further certify that the meeting was duly
called and that a quorum was present.
DATED this 18th day of March,2004.
By: �>
Bevelyn J. ldend ,Town Clerk
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