Five Things You Should Know About City Borrowing

When budget season arrives, most of the spotlight inevitably shines on the city’s tax revenues. Yet borrowing is also a vital—and costly—part of running . It pays for new roads, new buildings and new equipment.

Stacie Kvilvang, a financial advisor with Ehlers Inc., offered city officials and residents a course in borrowing basics at Tuesday’s council meeting. Here are five things you should know about city borrowing.

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1. State law governs city borrowing: The law dictates the types of debt, how it can be used, how much of it there can be and how certain types of debt must be repaid. Kvilvang listed more than a half-dozen types of borrowing spelled out in state law—each with a different mix of rules and procedures.

2. There are two main ways that cities offer security for bonds:

• General obligation bonds: These pledge the “full faith and credit” of the city’s tax base to the repayment of the bonds. In other words, bondholders can force the city to raise property taxes to repay the debt.
• Revenue bonds: Unlike a general obligation bond, a city could conceivably walk away from these types of bonds—although the city would lose control of the facility that these funded and have its bond rating lowered. This limits the city’s liability, but these bonds are more expensive than general obligation bonds because of the added risk to investors.

3. Voters don’t always get a direct say in whether bonding should happen: Many types of bonds only require a council vote—although the necessary council approval can be anything from a simple majority to unanimous consent, depending on the variety of bond. Certain types of municipal bonding does have to go before voters, while other types allow for a “reverse referendum” in which residents can petition the city after the council’s vote to put the bonds up for a vote. If the petition has enough signatures, voters must approve the bond proposal.

4. Borrowing for a project must be sufficient to cover three categories:

• Project costs: This is what many people think of when they consider borrowing—costs such as design, land acquisition and construction.
• Issuance costs: These are the fees for putting together the bonding package. The city must pay the:
  • Bond attorney for legal opinions on the project,
  • Rating agency, such as Moody’s, for a summary of the city’s finances
  • Paying agent or trustee,
  • Underwriter or bank that purchases the bonds and resells them and
  • The financial adviser, such as Ehlers Inc., that puts together the borrowing package.
  • Capitalized interest: This pays interests for the first few payments until other money becomes available.

5. Hopkins has $25.7 million in general obligation debt: “That’s not a very high debt per capita,” Kvilvang said. Hopkins pays off about 77 percent of its debt within 10 years.

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Kvilvang also explained the basics of tax increment financing. to find out five things you should know about tax increment financing.