HomeMy WebLinkAbout2006-0511 Study Session Packet
CITY OF
ASHLAND
CITY COUNCIL STUDY SESSION
AGENDA
Thursday, May 11, 2006 at 5: 15 p.m.
Council Chambers, 1175 East Main Street
1. AFN Debt Services Alternatives for the City
In compliance with the Americans with Disabilities Act, if you need special assistance to participate in
this meeting, please contact the City Administrator's office at (541) 488-6002 (FTY phone number
1-800-735-2900). Notification 72 hours prior to the meeting will enable the City to make reasonable
arrangements to ensure accessibility to the meeting (28 CFR 35.102-35.104 ADA Title I).
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CITY OF
ASHLAND
Council Communication
Study Session - AFN Debt Service Alternatives for the City
Meeting Date: May 11, 2006
Department: Administrative Services
Contributing Departments: . A~
Approval: Lee Tuneberg /TU U
Primary Staff Contact: Lee Tuneberg
E-mail: tuneberl@ashland.or.us
Secondary Staff Contact:
E-mail:
Estimated Time: 60 Minutes
Statement:
At their May 2, 2006, Council asked for this subject to come back in a study session to provide more time to consider the
information available.
Background:
Attached is the Council Communication from May 2nd that provided basic information on the history and some alternatives
for paying the debt. At the meeting, Council accepted the concept of separating the debt service payments from AFN
operations for two reasons. It will be quite some time before AFN operations can fully fund the full faith and credit annual
debt service and connecting taxes or charges on customers as part of an available service whether the customer subscribes
to the service from Ashland or a competitor is likely to be in violation of federal laws and result in law suits the city probably
would not win.
Council asked for more information regarding some of the alternatives and updated information is provided. In order for
Council to decide on the direction for paying debt service, at least in the short term of one or two years, the Budget
Committee meeting scheduled for May 3rd was postponed to May 18th.
Attached is a table with examples of scenarios of a surcharge calculation using a percentage, a flat fee or a cap. As
discussed at the Council meeting, a penny of property tax approximates $17,000 in revenue so a $.20 tax rate increase is
about $340,000. A combination of revenue streams may be the best solution and should be the basis for our discussion.
Staff may have more information to distribute at the meeting.
Long term direction for paying debt service such as any refinancing or determining other resources for paying the debt may
need to be deferred while additional information is garnered from legal and financial advisors.
Related City Policies:
None
Council Options:
Ask staff to bring back additional information or an action item based upon Council discussion.
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Staff Recommendation:
Council indicate what alternatives seem most acceptable and ask the appropriate action be presented May 16.
Potential Motions:
None. This is a study session
Attachments:
Council Communication Dated May 2, 2006 on AFN Debt Alternatives
Updated Alternatives
Utility Bill Surcharge calculation
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CITY OF
ASHLAND
Council Communication
AFN Debt Service Alternatives for the City
Meeting Date: May 2, 2006
Department: Administrative Services
Contributing Departments:
Approval: Gino Grimaldi
Primary Staff Contact: Lee Tuneberg
E-mail: tunebert@ashland.or.us
Secondary Staff Contact:
E-mail:
Estimated Time: 45 Minutes
Statement:
This communication provides Council with information on potential resources for paying the City's debt obligations relating to
Ashland Fiber Network.
Background:
The City has $15.5 million outstanding in full faith and credit revenue bonds for the construction and operation of the fiber
network to date. A "full faith and credit" obligation makes it an obligation ofthe City, not just the utility, and gives maximum
flexibility on the revenue streams used to pay the debt. In this case, we look first to AFN revenues but can utilize any other
legal sources necessary.
The approximate distribution of this debt is $9.0 million in capital costs and $6.5 million in operating losses. Debt service on
these bonds is interest only in the first few years with the first principal payment occurring in July 2007. FY 2006-07
semiannual payments will total $866,000, then $1,056,000 and $1,299,000 in the following two years. Annual payments will
level off at about $1.43 million in FY 2009-10.
Recently, AFN has been able to generate enough revenue to cover operational expenses but not meet debt service
requirements. Depreciation and capital refresh costs are also largely under-funded. To this point, internal borrowing or
subsidies have provided the additional funds needed to meet AFN shortfalls. Without significant changes in revenue
streams and/or costs for AFN it is unlikely that rate increases for existing services can make up the shortfall.
In early FY 2005-06, Council approved and then repealed a $7.50 per account per month surcharge that would have
generated approximately $900,000 per year to meet short-term debt service needs of AFN. A surcharge would need to
grow to $12.00 per account per month to pay annual debt service when it levels off, and possibly more if other expenses are
to be subsidized or if some accounts are exempted from paying a part of the surcharge.
The surcharge was repealed in that it presented problems in fairness of application and collection. Council asked for
alternatives to the surcharge and this report provides some other ways the City could meet this obligation. Many of these
alternate ways have been discussed before and may include conflicts with other City goals or programs that are being
discussed. The December 6, 2005, Council Communication provided some of the requested information and applicable
data has been sumrnarized here.
Below is a list of other ways to meet the fiscal requirements besides using the surcharge on electric accounts:
a. Annually transfer operational subsidies from other funds, in turn, minimizing fund balances and resulting in other
increases such as utility charges.
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b. Divert part, or all, of the existing BPA surcharge from the Electric Fund to the Telecommunications Fund or the
Food & Beverage tax from Parks and Wastewater funds. The BPA Surcharoe revenue source currently represents
approximately $1.1 million in FY 2006 proiections to end of year. The FY 2006-07 Proposed Budaet includes the
surcharoe beina eliminated in favor of a 10% electric rate increase with a net affect on the customer of a 2%
increase. This change still includes many of the same issues as the proposed AFN surcharge.
c. Changing the allocation of the Food & Beverage Tax revenue has been suggested. Approximately $1.5 million will
be generated in FY 2006 for paying the debt on the wastewater treatment plant and $375,000 for open space.
Diverting this tax will greatly impact the Open Space program and/or sewer rates. Sewer rates could increase 50%
if the tax revenue was totally eliminated. Wastewater SDC charges could be adjusted to somewhat minimize the
impact to the utility bill.
d. Severely reduce or eliminate the $450,000 to $500,000 lntemal Service Fund charge to the Telecommunications
Fund freeing monies to go toward debt service. The intemal service costs are shared among end user funds,
allocated based upon a set of criteria that attempts to fairly prorate intemal expenses. AFN is a smaller fund and
pays less than all the other utilities. An "incremental" approach to intemal charges (attempting to only recover the
additional costs attributable to the newest service) could be the basis for justifying a much smaller charge to AFN,
resulting in a reduced amount of costs to be covered by rates. All things being equal, this would result in other
funds paying more for intemal services or a potential shortfall in the Central Service Fund and possible cutbacks in
services city-wide.
e. Cutting specific programs or projects from other departmental budgets to transfer funds to AFN. The amount to be
generated through savings is limited by the cuts employed. The fiscal impact varies depending on what is cut and
could only be determined by the managing department. For example:
· In the other funds, identify open positions to be eliminated generating a subsidy transfer to AFN.
· Identify AFN as an economic tool and award grant monies from the Transient Occupancy Tax (TOT)
revenue to the Telecommunications Fund. Of the estimated $1.5 million revenue in the FY 2006-07
Proposed Budget, a minimum of $215,456 must be spent on tourism and the rest (approximately
$290,000) has been allocated per resolution 2004-32. The remaining two thirds of the revenue (about
$1,000,000) is general tax revenue to the General Fund. Any variation would require a change in
resolution(s) and will either deprive other economic or cultural groups of grant money or impact the
balancing of the General Fund Budget if the other 2/3 portion of the TOT revenue is directed to AFN.
f. Limiting overall expenses in other departments and funds to generate an intemal subsidy via operational transfer.
An example is limiting Material & Services Budget growth to 2% rather than 3% and shifting the difference to fund
transfers which could generate up to $297,000 but will have the same impact as transferring fund balances from
"healthy funds' and may still result in added rate and fee increases in other funds.
g. Cap revenue growth (resources) in other funds and provide the increased revenue amount (related to increased
activities rather than rate increases) as a subsidy to AFN. Like other subsidies or transfers, this will eventually
result in a reduction in other services, lower fund balances or possible increases in other rates or fees to balance
other funds. The assumption here is that other funds can provide needed services at acceptable levels with less
revenue or less operational expenses.
h. Selling idle properties that are considered surplus and using the money for AFN debt service. This is limited by the
value of the properties the City is willing to sell. Each sale is a one-time infusion of cash. In 2004 Council reviewed
an inventory of unused land and some of them could be sold with the proceeds being used to payoff bonds or
reserved for debt service. This removes the "positive" impact sales revenue would have on another recipient fund.
i. Property taxes increase. Currently, the City leaves nearly $0.57 (over $960,000 in revenue) in taxing authority un-
levied each year. Property taxes could be used to pay part of the debt service on the full faith and credit bonds or
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to fund AFN operations. Doing so will remove or reduce the "reserve" of monies between the existing tax levies
and the maximum authority. The amount to be paid by taxes as opposed to fees or a surcharge may require a
policy on how the money is to be generated based upon how the annual debt service amount is to be split.
One perspective is to establish a surcharge at a small amount (average of $2 - $4 per utility bill with commercial
utility accounts paying more) and the remainder coming from property tax and other fees to meet total debt service.
Another way is to equate property tax to the portion of the debt service relating to the construction cost of the asset
or to the operating losses included in the debt.
Example: Use property taxes to pay for past AFN operating losses. The estimated operating loss portion of AFN's
debt service is 42% ($6.5 million/$15.5 million). Forty-two percent of the "level" annual debt service ($1.43 million *
42%) is $600,600 and that would require an additional levy of $.355/$1000. This would leave $.215/$1000 or
approximately $363,000 in tax revenue for other purposes or un-levied. In FY 2006-07, 42% of the $866,000 debt
service is $364,000 and that also equates to about $.215/$1000 of assessed value as an increase in the tax rate
reducing the $.57/$1000 of assessed value available to $.355 unused. The amount of other revenue needed from
fees and charges would be 58% or $502,000. That equates to a $4.20 surcharge per utility bill per month. A
comparison is attached with these perspectives and a comparison of the debt impact of the options considered by
the committee,
j. Employ other revenue streams to meet requirements. These alternatives will require considerable work, public
input and possibly participation through a vote. Potential new revenues include:
· Gas tax - Other agencies are implementing this tax because visitors help pay.
· Sales Tax - Ashland has this on prepared food but a new one could be broader based.
· Income Tax - Being considered throughout the state for various purposes.
· Entertainment Tax - A ticket tax has been considered many times but not implemented in Ashland.
The net result for most of the items above is a direct or indirect subsidy to AFN. New revenues that are paid by visitors may
be more palatable to citizens but there is no intuitive correlation between a new gas or sales tax to a fiber optic network and
related services like there is between the TOT or F&B taxes and tourism, Parks and Wastewater Treatment.
There are other, more lengthy steps that could be taken to reduce the impact of AFN's debt on the City. Foundations to
raise contributions, intergovernmental agreements to share costs, outsourcing or expanding operations, etc. may be
possible in the long run but cannot be developed as part of the annual budget process or without direction from Council.
An attachment of altemative revenue sources is attached.
In summary, there is little chance that a change in AFN operations will completely resolve debt service requirements. The
alternatives provided should be evaluated in a context recognizing that all or a significant part of the debt service will need to
paid for by other sources than those generated through AFN operations.
If AFN operations can pay for everything but debt service, then the amount needed in FY 2006-07 is the $866,000.
However, cash must be available July 15, 2006, to pay the interest amount of approximately $433,000. By June 30, 2006,
Council may need to transfer funds to assure adequate balances to make the cash payment early the next month.
A comparison of the original options is attached to show how a combination of revenue sources could be (would need to be)
employed depending on the chosen path.
Related City Policies:
None
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Council Options:
Direct staff on the action desired based upon Council discussion.
Staff Recommendation:
Council identify which revenue streams staff should work on to ensure the debt service payments are made.
Potential Motions:
Council moves to direct staff to incorporate
pay the AFN debt service.
alternate revenue streams in the FY 2006-07 budget to
Attachments:
AFN Debt Service Alternatives
AFN Dept Payment Options -Impact to Pay Debt & AFN Options Scenarios
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AFN Debt Service Alternatives
May 11, 2006
. Item
Potential
Comment
a
Ad hoc Operating Transfers
To be determined Amount will fluctuate and is unreliable year to year
b
Divert other revenue streams
$1,100,000 BPA Surcharge revenue is currently 10% of Electric rate revenue
$1,800,000 Food & Beverage Tax: 1 % = $360,000
c Reduce Internal Charges to AFN $500,000 Requires other funds to pay more or reduce services/staff
d Eliminate programs in other funds To be determined Parks activities, band, grants, etc.
May negatively impact other services being provided
e Limit expenses $297,000 1 % of City's total Materials & Services for FY 2005-06
May negatively impact other services being provided
f Cap revenue growth To be determined Similar to tax increment financing
May negatively impact other services being provided
g Sell property $1,500,000 Strawberry Lane parcels partially committed
$2,000,000 900 Acres across 1-5
To be determined Other miscellaneous lands
h Raise property taxes $900,000
Create other local revenues:
1) Gas tax
2) Sales tax
3) Income tax
4) Entertainment tax
$340,000
Will reduce ability to use these funds to balance the budget
$.01/$1000 valuation generates nearly $17,000 in tax revenue
Requires further study for better estimates to be made
Other agencies are implementing
Staff still researching
In addition to existing prepared food tax.
Staff still researching
Being considered by other agencies
Staff still researching
$1/ticket - Live performances; could extend to movies & videos
On OSF alone
Other live performances, movies or video rentals?
Please note that each item in category "i" would require a considerable public process to implement and would
also need to generate sufficient funds to pay for the accounting, collection and enforcement aspects to manage.
Utility Bill Surcharge Calculation
On Electric Rate Code
By Percentage and/or Flat Fee with Cap
FY 2005-06 Revenue Revenue Monthly
Rate Customer Average Average Max per Percentage Charge Revenue
Code Count Revenue/Month Average % Charge Acct Basis Basis w/Cap
R01 9,284 $ 472.065.00 $ 50.85 5.00% $ 2.54 $ 3.00 $ 23.603.25 $ 27.852.00 $ 23.603.25
R04 84 $ 3,743.00 $ 44.56 5.00"1. $ 2.23 $ 3.00 $ 187.15 $ 252.00 $ 187.15
C01 1.050 $ 182.473.00 $ 173.78 5.00'/0 $ 8.69 $ 10.00 $ 9.123.65 $ 10,500.00 $ 9.123.65
C03 206 $ 108.578.00 $ 527.08 5.00% $ 26.35 $ 25.00 $ 5,428.90 $ 5,150.00 $ 5.150.00
G01 76 $ 17,404.00 $ 229.00 5.00"1. $ 11.45 $ 15.00 $ 870.20 $ 1.140.00 $ 870.20
G03 16 $ 10,778.00 $ 673.63 5.00% $ 33.68 $ 25.00 $ 538.90 $ 400.00 $ 400.00
G50 1 $ 42.091.00 $42.091.00 5.00% $ 2,104.55 $100.00 $ 2,104.55 $ 100.00 $ 100.00
M01 50 $ 5,027.00 $ 100.54 5.00"/. $ 5.03 $ 5.00 $ 251.35 $ 250.00 $ 250.00
M03 15 $ 22,059.00 $ 1,470.60 5.00% $ 73.53 $ 50.00 $ 1.102.95 $ 750.00 $ 750.00
$ 43,210.90 $ 46,394.00 $ 40,434.25
Annualized $ 518,530.80 $ 556,728.00 $485,211.00
FY 2005-06 Revenue Revenue Monthly
Rate Customer Average Average Max per Percentage Charge Revenue
Code Count Revenue/Month Average % Charge Acct Basis Basis w/Cap
R01 9.284 $ 472,065.00 $ 50.85 3.00% $ 1.53 $ 3.00 $ 14.161.95 $ 27,852.00 $ 14.161.95
R04 84 $ 3.743.00 $ 44.56 3.00"/. $ 1.34 $ 3.00 $ 112.29 $ 252.00 $ 112.29
C01 1,050 $ 182,473.00 $ 173.78 3.00"1. $ 5.21 $ 10.00 $ 5,474.19 $ 10,500.00 $ 5,474.19
C03 206 $ 108,578.00 $ 527.08 3.00"/. $ 15.81 $ 25.00 $ 3.257.34 $ 5,150.00 $ 3,257.34
G01 76 $ 17,404.00 $ 229.00 3.00% $ 6.87 $ 15.00 $ 522.12 $ 1.140.00 $ 522.12
G03 16 $ 10.778.00 $ 673.63 3.00"/. $ 20.21 $ 25.00 $ 323.34 $ 400.00 $ 323.34
G50 1 $ 42,091.00 $ 42,091.00 3.00% $ 1.262.73 $100.00 $ 1,262.73 $ 100.00 $ 100.00
M01 50 $ 5.027.00 $ 100.54 3.00% $ 3.02 $ 5.00 $ 150.81 $ 250.00 $ 150.81
M03 15 $ 22,059.00 $ 1,470.60 3.00"1. $ 44.12 $ 50.00 $ 661.77 $ 750.00 $ 661.77
$ 25,926.54 $ 46,394.00 $ 24,763.81
Annualized $ 311,118.48 $ 556,728.00 $297,165.72
FY 2005-06 Revenue Revenue Monthly
Rate Customer Average Average Max per Percentage Charge Revenue
Code Count Revenue/Month Average "/. Charge Acct Basis Basis w/Cap
R01 9,284 $ 472,065.00 $ 50.85 10.00% $ 5.08 $ 4.00 $ 47.206.50 $ 37,136.00 $ 37,136.00
R04 84 $ 3.743.00 $ 44.56 10.00% $ 4.46 $ 4.00 $ 374.30 $ 336.00 $ 336.00
C01 1,050 $ 182,473.00 $ 173.78 10.00"/. $ 17.38 $ 15.00 $ 18.247.30 $ 15,750.00 $ 15.750.00
C03 206 $ 108,578.00 $ 527.08 10.00% $ 52.71 $ 40.00 $ 10,857.80 $ 8.240.00 $ 8,240.00
G01 76 $ 17,404.00 $ 229.00 10.00% $ 22.90 $ 25.00 $ 1.740.40 $ 1,900.00 $ 1.740.40
G03 16 $ 10,778.00 $ 673.63 10.00% $ 67.36 $ 50.00 $ 1.077.80 $ 800.00 $ 800.00
G50 1 $ 42,091.00 $ 42,091.00 10.00% $ 4.209.10 $100.00 $ 4,209.10 $ 100.00 $ 100.00
M01 50 $ 5,027.00 $ 100.54 10.00% $ 10.05 $ 10.00 $ 502.70 $ 500.00 $ 500.00
M03 15 $ 22.059.00 $ 1,470.60 10.00"/. $ 147.06 $ 50.00 $ 2.205.90 $ 750.00 $ 750.00
$ 86,421.80 $ 65,512.00 $ 65,352.40
Annualized $ 1,037,061.60 $ 786,144.00 $ 784,228.80
FY 2004-05
Rate Customer Average
Code Count Revenue/Month
Average
Average Max per
"/. Charge Acct
Revenue
Percentage
Basis
Revenue
Charge
Basis
Monthly
Revenue
w/Cap
Annualized
$ 461,359.21 $ 1,179,540.00
$440,299.87
DOCUMENTS SUBMITTED AT THE
MAY 11,2006
STUDY SESSION
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CITY OF
ASHLAND
Memo
DATE:
May 11,2006
TO:
Mayor & Council
FROM:
Lee Tuneberg, Interim City Administrator/Administrative Services/Finance Director
RE:
Alternate solution for a Full Faith & Credit debt service charge
Another solution to paying the AFN bonds that has not been specifically discussed is a total charge on
the utility bill, excluding the existing Electric Utility User tax. In order to pay the Full Faith & Credit
bonds (general obligation of the city) a 4.5% fee could be calculated on each utility bill prepared to
generate approximately $900,000 per year.
This approach could provide relief to low income and senior bills and still meet the obligation for FY
2006-07. I would suggest that the amount collected be deposited to the city's Debt Service Fund and
also change the proposed budget to transfer the bond obligations there. Any excess amounts collected
would be carried forward for the next year's debt or serve to reduce the charge in the coming year.
This solution could be employed as long as necessary and could be modified in following years to
ensure adequate amounts are generated or reduced when AFN data services begin contributing to debt
payments or other solutions are developed.
Attached is an example of how this fee would be calculated.
FINANCE DEPARTMENT
D.l. Tuneberg, Director
20 East Main Street
Ashland, Oregon 97520
www.ashland.or.us
Tel: 541-488-5300
Fax: 541-488-5311
TTY: 800-735-2900
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AFN Alternative debt
City of Ashland
Alternative for AFN Debt
Services
Strom Drain Fee
Transporation Fee
Water
Wastewater
Electric
AFN
Total Sales
Less:
Senior and Low income discount
Sub Total
Full Faith Debt. 4.5%
Note: Excludes User Tax
5/1112006,4:45 PM
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2006 Estimated Sales
$ 317,000
950,000
3,940,164
2,694,450
11,000,000
2,000,000
$ 20,901,614
(104,508)
20,797,106
$
935,870