Municipal financing in trying times

By Dave Druker

Mayor of Del Mar

The current financial markets are not only posing problems for businesses and individual investors, but are impacting states and local governments across the nation.

The tightening of credit increased borrowing costs and volatility both on the short and long end of the market are causing problems for local governments seeking to borrow for their capital programs. The city of Del Mar has had an opportunity to witness this volatility first hand as the city is seeking to secure interim financing to pay off the promissory note for the Del Mar Shores property - about $3.7 million including accrued interest and financing costs - prior to the first payment due Nov. 15.

Since March of this year, the city has been looking into financing options for three capital projects - the interim financing of the Del Mar Shores promissory note, the 21st Street sewer lift station, and the Beach Safety Center. Through this process, the City has contracted with a financial advisor and bond counsel. The city has considered a variety of financial instruments for these projects, including commercial paper, variable rate demand obligations, long-term fixed rate obligations and other bank products. The uncertain financial conditions, however, have necessitated a new course of action: the city, along with its financial advisor and bond counsel, has determined that the safest course of action is to avoid public capital markets altogether and seek private financing through a bank line of credit. We are currently seeking proposals from highly rated and secure financial institutions to seek interim financing at the lowest cost to the city. The Shores promissory note carries an interest rate of 5 percent with a maturity date of May 2009. The city will seek to obtain a financing structure with no pre-payment penalty so that this obligation can be retired as the fundraising efforts of the Friends of the Del Mar Parks campaign continues and at a lower interest rate. The City Council held a public workshop on Oct. 2 to examine current capital markets and capital financing issues in detail.

As discussed in this workshop, the city does have a must-do capital project in the next year to replace its aging 35-year old sewer lift station. We have already applied for low-cost State Revolving Fund (SRF) monies from the State Water Resources Control Board to finance this project. SRF funding is not guaranteed so the city must closely monitor any changes in the availability of these funds, should alternate financing be required. Staff recommended to council that the Beach Safety Center, although a critical project in the current Capital Improvement Program, may need to be considered once the financial markets settle down. Proceeding cautiously in these uncertain times is the most prudent approach.

The city has been careful in its approach to managing its finances as seen in its current lack of exposure to the volatile debt markets. We have $2,640,000 outstanding in fixed-rate sewer bonds payable through 2015 by the Sewer Fund, and $930,000 in Wildfire Protection general obligation bonds payable through 2014. In September of this year, we retired the last of its outstanding water bonds, and we will retire the last of our capital leases for the Powerhouse and library in early 2009.

The city’s investments continue to be safe with the majority of cash invested in the state’s Local Agency Investment Fund (LAIF). LAIF is not subject to state seizure, and has had a history of prudent investments, with no exposure to Merrill, Lehman, Washington Mutual, or AIG. The majority of the remainder of the city’s investments is in AAA and AA-rated federal agency notes.