06-12-19 Personnel and Finance - Laserfiche WebLink

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CITY OF SOUTH BEND OFFICE OF THE CLERK Committeemember Voorde stated, I think it was about the first term of the current Administration they used to do tax anticipation notes all the time. Mr. Parker replied,Yeah, and again,with the reserves we have,we just don't need to. We can save the interest costs from there. It's a good point then, because the next question is why do we issue debt?What are we supposed to be doing with this debt?And really to that point,we are not funding operations with debt. We don't do that, really ever. Our City policy on debt, which is brought before the Board of Finance, actually says the City will not use full-term borrowing to finance operating needs, except in the case of extreme financial emergency. So,we do not fund operations with debt. We do not issue tax anticipation notes or bond anticipation notes trying to fund operations. Committeemember Jo M. Broden arrived at the meeting at 5:36 p.m. He continued, What we do issue debt for is capital projects. There are two (2)reasons why we use debt to finance capital projects. The first(1St)is if the project is just too big and it would be a really big reduction in our reserves and it's just not prudent, financially, to finance that project with our reserves. The best examples of this are sewer projects. Sewer projects are really expensive. Generally,the reserve, even the level of reserve that you saw,waste water,won't be able to finance a $15, $20, $30 million sewer project. Lots of times we have to issue debt to try and supplement the reserves that we have. So, that's the first (1St) reason that we would issue debt for a capital project. Committeemember Voorde asked, What would be the advantage of the lease purchase over this borrowing otherwise? Mr. Parker replied, That's a great question. So, the lease purchase is the short-term, the five (5) year lease purchases really get to the second (2nd)reason. There would be two (2) advantages, but they really get to the second (2nd) reason. One (1) advantage would be if we could get an interest rate that would be below what we could earn in interest on our cash. So, let's say we could get an interest rate of one-point five percent(1.5%), and if we put our cash and our investments, we earn an interest rate of two percent (2%). Now, instead of spending that money out, we're actually earning a point-five percent (0.5%) build up because we have our cash-on-hand, we're earning interest in and we're spending out one-point five percent(1.5%). That would be one(1) reason. He continued, The other reason would be the second(211d)bullet on here(referencing a slide in the presentation), which is called Interperiod Equity. This is kind of a foundation of government finance and government accounting, this concept of Interperiod Equity. What that means is that taxpayers should fund the benefits that they receive in the year that they receive them. So, we shouldn't expect current taxpayers to pay for future benefits, and we shouldn't expect future taxpayers to pay for current benefits. So, the way that we do that with capital projects that we're building something that will last a long time, and benefit people for years in the future, if we use debt to finance that capital project, then we ensure that every year taxpayers are paying for the benefits that they receive in that year. So, your matching the benefits that you're providing to taxpayers with the tax revenue that comes in. That's really one (1) of the primary reasons, if not the primary reason that it's great to use debt to finance capital projects because it matches the debt. And the same holds true for capital leases. So, if we purchase a vehicle that we expect to use over EXCELLENCE ACCOUNTABILITY INNOVATION INCLUSION EMPOWERMENT 455 County-City Building 227 W.Jefferson Bvld South Bend,Indiana 46601 p 574.235.9221 f574.235.9173 TTD 574.235.5567 www.southbendin.gov 11