Del Mar to apply for $18M loan for civic center project
Just two weeks after approving permits for the construction of a new civic center complex, the Del Mar City Council on Feb. 1 voted unanimously to borrow $18 million for the project.
The council previously directed city staff during the Nov. 16 meeting to submit a loan application to I-Bank for the estimated $17.8 million cost of the project. The council also requested a recommendation from the city’s Finance Committee on the amount of cash and debt that should be used to finance the project.
During its Jan. 5 meeting, the Finance Committee recommended that Del Mar only borrow $16 million.
The committee assessed the city’s debt capacity in early 2014. Working with staff, the committee developed a long-term forecast of revenues, expenditures and capital improvement projects to project cash flows, explained Finance Committee Chair Tom McGreal.
The Finance Department then developed set assumptions for the growth of revenues and expenditures, and included annual costs from the 10-year Capital Improvement Plan.
“We reported to council in April of 2014, and our recommendation was that the city should make long-term borrowing decisions based upon projected free cash flow, using this long-term forecast,” McGreal said. “We said that debt should be limited so that no more than 50 percent of projected net cash flows would be committee to debt service. In effect, what that means is that you would be adopting a metric that says the debt service to cash flow ratio would be 1-to-1.”
Following the council’s direction at the Nov. 16 meeting, staff submitted an application to I-Bank for a 30-year loan for the total project budget of $17.845 million plus a 1 percent financing fee for a total request of $18.024 million. The stated interest cost is 3.24 percent plus a .3 percent fee on the outstanding balance.
“The annual cost and gross cost of the financings were considered at terms of 20, 25 and 30 years,” McGreal explained. “The way the I-Bank works and the way the market’s working, there really wasn’t an opportunity to get an improved rate for a shorter term, so we decided that a 30-year term in this low-rate environment was the best way to go.”
Along with city staff, the Finance Committee concluded that an I-Bank loan was the most cost effective and flexible option for the project. The Finance Committee, however, recommended the city borrow $16 million and use $2 million in cash for the project.
“The Finance Committee feels very confident that the recommendation to borrow up to $16 million is reasonable and prudent,” McGreal said. “Any additional funding requirements, we believe, should be paid with cash so that we can limit our bond and our debt service, and keep control over our long-term financing.”
Still, staff suggested the loan stay at $18 million and downsized, if needed, once the city receives construction bids or when construction is complete.
City Manager Mark Delin explained that the city will incur about $161,570 in net increased costs in the first two years to borrow the full project amount rather than use $2 million in cash reserves. Staff maintained, however, that financing the total cost of the project at the outset is the most flexible option for the city.
The city could later reduce the loan. Borrowing the full amount would also allow the city to retain a larger cash balance that could be used for future capital projects.
“We can possibly make the best decision once we know the final cost,” Delin said.
“It is an excellent time to borrow money,” he added. “Money is cheap, in terms of liability and asset-matching.”
Although Councilman Dwight Worden said both the Finance Committee and staff’s recommendations were good options, he sided with the committee’s suggestion, believing it would enforce financial discipline.
“I don’t see there being a wrong choice,” Worden said. “It’s a judgment call. I’m excited that they’re both good.”
Deputy Mayor Terry Sinnott suggested following the committee’s recommendation, but still allow staff to move forward with the full loan.
“I think that gives us the maximum flexibility — takes advantage of the interest rates, but subjects us to a strong discipline that is prudent,” he said.
With a stated goal to follow the committee’s suggestion, council members ultimately agreed to borrow $18 million for the project. In his motion, Councilman Don Mosier said the financing budget target is $16 million.
“I hope we have financial discipline,” Mosier said. “We don’t need to take a smaller loan to enforce financial discipline.”
Mosier said staff and subcommittee members are working on ways to potentially save money on the project. Construction costs, however, are going up.
“I want to preserve the flexibility and try to grab the money at the best interest rate while we can,” he said.
The I-Bank loan is a lease revenue bond, Delin explained. It is the most common type of municipal financing. In fact, the city used such financing to refinance Shores Park.
The civic center project will be used as the primary leased asset for the loan. To avoid capitalized interest, staff suggested using the Powerhouse Community Center as the leased asset during construction. Because it is valued at more than the loan amount, the city will only be leasing about half, Delin said.
The council agreed to staff’s suggestions, as long as the community is in agreement. Residents helped raise funds for the community center. At the direction of the council, staff will outreach to the community.
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