GILROY
– The city has decided to issue bonds to build a package of new
capital projects, but officials expect the move will actually save
Gilroy money in the long run – in part because officials have
tucked away money over the years and in the process garnered some
of the highest bond ratings in the st
ate.
GILROY – The city has decided to issue bonds to build a package of new capital projects, but officials expect the move will actually save Gilroy money in the long run – in part because officials have tucked away money over the years and in the process garnered some of the highest bond ratings in the state.
The City Council approved the issuance of up to $47 million in bonds Monday that will help finance the city’s new police and fire stations, sports park, library and corporation yard, most of which are expected to start rising in the next couple of years.
Issuing the bonds means the city will have to pay off debt service over time for borrowing the money. But in this case, Gilroy officials believe the move could actually net the city savings of more than $350,000 a year compared to the internal funding scheme that is the alternative.
“To use an old adage, ‘You have to have money to make money,’ ” City Administrator Jay Baksa said. “That’s what this situation is.”
The city has been accumulating enough money from special development impact fees – collected to keep services such as fire and police on par with population growth – that it can pay for the projects without going into outside debt. The fees are collected from developers and can only be used for capital projects or certain kinds of new equipment.
But right now those funds are invested in the city’s overall investment portfolio, which is collecting roughly 3 percent interest.
However, the city’s high bond ratings allow the city to pursue a special short-term, variable-rate bond financing – called “auction rate” notes – instead of the more common long-term, fixed-rate standard financing.
The auction rate notes are reset every week or 30 days and auctioned off every week to the bond market, where people bid on the bonds and that’s the rate the city receives for that week.
If issued next week, the city would pay an estimated 1.1 percent on those bonds.
“You’re borrowing low and investing high,” Baksa said.
The difference is the gravy for the city. If there’s an average 1 percent spread between the bond interest paid and the interest collected on the funds in the city portfolio, it could save the city roughly $9 million over 25 years, officials said, or at least $360,000 a year.
If the difference is 2 percent – which officials admit is probably unrealistic – the overall long-term savings could be up to $25 million.
The city has earned an AA-minus bond rating from Standard and Poor’s and an A-plus rating from Fitch Ratings – marks that city officials said are usually only earned by large cities with large reserves. AAA is the best, with AA the next tier down.
“That’s the highest ratings that any city in California has,” said Michael Dorn, the city’s treasurer and administrative services director. “Small cities rarely get these kinds of ratings. We did very well in the ratings.”
There are several factors contributing to the high marks, said Craig Hill of Northcross, Hill and Ach, the city’s bond consultant.
Gilroy has healthy cash balances and has not really delved into the trouble of overspending, Hill told the City Council at a study session earlier this year. There’s also stable management, with top officials such as City Administrator Jay Baksa on board for 20 years. Gilroy’s high sales tax revenues are a good offset to other base revenues such as property taxes, he said.
“We spend a lot of time down here working on the finances,” Baksa said of the ratings. “It shouldn’t come as a great surprise that these are the kind of results we get.
“There’s a lot of time and effort from the staff and the City Council giving us direction to be where we’re at.”
With its high bond ratings, officials said the city will not pay to secure a letter of credit from a bank and will rely on the city’s own credit-worthiness.
And meanwhile, city officials say there’s little risk in pursuing the auction notes.
If the gap between the interest paid and interest earned becomes too narrow, officials say they can pull out, pay off the bonds and return to the city’s previous financing plans with little or no adverse financial impact.
“It’s taking one more step, getting outside of the traditional financing box and doing something a little innovative at basically no risk,” Baksa said. “If the market goes nuts, we just close it off. Because it’s a short-term borrowing nature, we pay it off and go back to an internal loan program (between funds).”
Councilmembers were pleased at the high ratings.
“We have alternatives,” Mayor Tom Springer said. “We’ll do what gets us the best return for our money. If it goes (bad), we change options.
“We’re not risking the taxpayers’ money like Orange County did.”
