In March, the council had discussed staff’s plan for debt financing directly with a bank, with the final proposal coming back this week.
In just a month, some of the city’s financial assumptions for the plan have been impacted by changes to interest rates as the government makes adjustments to address inflation, Finance Director Kelcey Young explained.
“Since the time that we spoke initially, rates have risen considerably,” Young said.
Initially, Young had presented a plan that anticipated a 2.75% interest rate on $15 million over a 15-year financing period.
However, as of Thursday night, Young said the interest rate had risen to 3.3%. She said that within the last hour before her presentation, she heard that the rate may have rolled back to 3.2%.
The lowest and best offer for financing is a loan amount of about $14.6 million with annual debt service of $1.5 million over 12, not 15, years, she said.
Young said there were other options, including borrowing a smaller amount, setting up a shorter loan period or doing a second debt financing program if interest rates go back down.
Even though the interest rate was up, it’s lower than the city has had previously, Young said. “We still think that there’s a lot of value to this.”
She added, “We are trying so hard to change the image of Clearlake.”
Young said the city has the opportunity to pave a considerable amount of its residential roads.
Eric Scriven of NHA Advisors, a firm that’s consulting the city on the process, said the financing plan has always been based on Measure V — the city’s one-cent sales tax that generates about $2.5 million annually — and what the city can conservatively afford to finance.
“It’s been a very robust process,” he said, explaining that they’ve gone out to banks to bid on the financing project. He acknowledged that rates “have increased significantly.”
Scriven explained the situation, noting that the Federal Reserve has become very hawkish due to inflation numbers and attempted to take strong action by raising short-term interest rates. Taxable bonds and tax exempt rates have increased anyway from 0.87 to 1%.
He said he’s heard that the Federal Reserve will increase rates another half a percentage point in May.
The business decision for the council was not as attractive due to rates going up, with Scriven adding that they don’t know where interest rates are going in the future. He said 3.3 or 3.2% for a 12-year loan seems to be the best option.
A lot of banks are becoming very picky due to getting a lot of opportunities put before them. Scriven said many have lent a lot of money in the last two months, as banks have become more attractive since interest rates have risen in the investor market.
The timeline for pursuing the plan included forwarding the council’s approval to the winning bank this week, and executing the legal documents in early to mid June, the same month the funding becomes available.
Councilman Russ Cremer asked about how the interest rate increase would impact the number of miles of roadwork the city can complete with the financing.
“We haven’t finalized the plan. It’ll cut back a little bit on what we can do, obviously,” said City Manager Alan Flora, adding he still thinks they will be able to accomplish work in the range of about 20 miles.
Cremer asked if there is a plan in place for streets that don’t make it into the final plan. Flora said they would try to attack those streets on a pay-as-you-go basis.
“The reality is, it may push back some of those projects a year or two while we implement this,” said Flora.
Councilwoman Joyce Overton asked if they would be locking in the rate before the documents are completed in June.
Scriven explained that if they approved the plan and executed the term sheet, it would become effective on Friday and be locked in for 60 days.
Flora also explained that due to some of the language in Measure V, two actions were recommended by the bond counsel.
First, staff gave a presentation on the plan last week to the bond oversight committee. Flora said the committee unanimously approved it and sent a letter of support for the plan to the council.
A second action related to the spending plan included as an exhibit in Measure V. Flora said there was language in that expenditure plan that gives the council authority to make adjustments to it. However, it’s silent on spending the money on interest.
Flora said the recommendation was that the council take action to include language that says the debt financing is an approved expenditure for Measure V. That proposed wording was included in one of the two resolutions presented to the council.
Councilman David Claffey asked about the possibility of refinancing in the future if rates dropped again. Scriven said opportunities to refinance usually begin around year five of a debt financing agreement. There’s typically a 2% penalty which reduces each year, with no penalty after seven years. Scriven added that they would have to revisit it.
Flora also suggested they could choose to move forward with a smaller project if the council thought it was a high point for interest rates and jump back in when rates are lower.
While he said they were disappointed with the movement in rates, they still felt it made sense to move forward with the larger group of projects.
Mayor Dirk Slooten said he thinks interest rates are going to go up for the time being. Citing historical trends, Slooten said it could be up to seven years before things start moving down again.
Community members voiced support for the plan. They included Terry Stewart, a longtime city resident who also is a member of the Clearlake Planning Commission.
Stewart reminded the council that while rates have gone up slightly, it’s not like how rates have been traditionally. He recalled how home mortgage rates were about 20% in the late 1970s and early 1980s.
He encouraged them to move forward immediately, lock in the best rate and contract a large amount of road work at the current rates, which Stewart said will probably save even more money than anticipated.
The council unanimously approved two resolutions, one to authorize the documents and official actions relating to the Measure V financing and the second to authorize the execution and delivery of an installment sale agreement and assignment agreement to finance the road improvements.
The council on Thursday also approved the first reading of the Clearlake Police Department’s military equipment policy ordinance and set a second reading and adoption for the May 5 meeting, and heard a presentation from a Local Initiative Support Corp. representative regarding the Distressed Cities Technical Assistance Program regarding Clearlake projects.