More funding options outlined for Red Oak infrastructure

The City of Red Oak heard an update on financing for potential infrastructure projects.
At a special meeting May 30, the council heard a presentation from Chip Schultz with Northland Securities. Schultz shared a breakdown of the principal and interest on outstanding city bond issues, consisting of general obligation debt only. Bonds had been issued in 2012, 2015, 2018, and 2019.
“The city’s annual debt service per year has been roughly in the $930,000 to $1 million range. In fiscal year 2024-25 it drops to $661,675, and drops down materially in 2025-26 to $523,725. Looking five years out, in 2027-28, your annual debt service existing, general obligation debt only, is $463,900, and drops down accordingly after that,” Schultz said.
In the last five years, for general obligation bonds only, Schultz said the city has paid off $3,830,000 in principal. In the last seven years, the total principal paid off has been $4,870,000, and over 10 years, the paid off principal is $6,530,000. Schultz said the takeaway is that more debt has been paid off than has been issued.
“If you look into the future, it reflects a hypothetical future debt payment of $925,000 beginning the next fiscal year. The debt service payments would be lower than what the city has had historically, and its an opportunity to fund new projects without increasing the city’s annual debt service,” commented Schultz. “The city has a pretty decent debt service fund balance, and there’s a little bit of room I’ve worked with in using a portion of that balance. That element combined with a lower annual future debt service payment after fiscal year 2024-25 gives the city room to fund new projects in the context of also having a lower debt service tax levy each year.”
Schultz added essential corporate purpose projects are considered to be streets, water, sanitary sewer, sidewalks, and fire department equipment.
“The city would simply need to hold a public hearing to proceed with the financing for these types of projects, and it wouldn’t require a public referendum. This is the same process the city has followed for many financings in the past. With a general obligation bond issue, you can fund whichever housing projects you decide to proceed with. It doesn’t require a public referendum and gives the city a clear path forward for funding those projects,” advised Schultz.
Another project under consideration was renovations to the fire station. Schutlz explained that while the project was under urban renewal authority as essential corporate purpose, funding it with a general obligation bond was subject to reverse referendum, in which 10% of the electors who voted in the most recent city-wide election would be able to petition the project to be taken to referendum. There would be no dollar limit. The approach required an urban renewal plan amendment, a public hearing on an urban renewal plan amendment, and all proceedings prepared by Dorsey & Whitney, the city’s bond counsel. The city used the same authority for the 2019 general obligation bonds for the Red Oak Municipal Pool project.
Schultz then outlined five potential general obligation bond scenarios the city could pursue.
• A bond issue of $2.3 million with $1.3 million for North Housing public infrastructure for the proposed townhome development, and $1 million for the purchase of a new fire truck. The payment structure would be for 13 years. The debt service levy per $1,000 valuation would be $3.50766 for the 2024-25 budget, falling to $2.80. Beginning in 2026-27, the debt levy would fall to $2.10.
• A bond issue of $3.5 million, with $1.3 million for North Housing public infrastructure for the proposed townhome development, $1 million for the purchase of a new fire truck, and $1.2 million for additional housing project infrastructure. The payment structure would be for 14 years. The debt service levy per $1,000 valuation would be $3.50766 for the 2024-25 budget, falling to $3.10. Beginning in 2026-27, the debt levy would fall to $2.60.
• A bond issue of $3.9 million, with $1.3 million for North Housing public infrastructure for the proposed townhome development, $1 million for the purchase of a new fire truck, and $1.6 million for renovations to the fire station. The payment structure would be for 14 years. The debt service levy per $1,000 valuation would be $3.50766 for the 2024-25 budget, falling to $3.25. Beginning in 2026-27, the debt levy would fall to $2.80.
• A bond issue of $5.1 million, with $1.3 million for North Housing public infrastructure for the proposed townhome development, $1 million for the purchase of a new fire truck, $1.6 million for renovations to the fire station, and $1.2 million for additional housing project infrastructure. The payment structure would be for 16 years. The debt service levy per $1,000 valuation would be $3.50766 for the 2024-25 budget, falling to $3.40. Beginning in 2026-27, the debt levy would fall to $2.90.
• A bond issue of $5.1 million, with $1.3 million for North Housing public infrastructure for the proposed townhome development, $1 million for the purchase of a new fire truck, $1.6 million for renovations to the fire station, and $1.2 million for additional housing project infrastructure. The plan factors in $500,000 from city funds or grant dollars assumed. The payment structure would be for 15 years. The debt service levy per $1,000 valuation would be $3.50766 for the 2024-25 budget, falling to $3.35. Beginning in 2026-27, the debt levy would fall to $2.90.
If the city went with the highest bonding capacity, Schultz said the city’s peak debt service levy, beginning in fiscal year 2025 and after is $3.40, 10 cents lower than the $3.50766 budgeted for 2023-24.
“Given the debt the city has paid off, and the lower debt service payments in the future, you have the ability to fund these projects while having a debt service levy in 2026-27 that’s 50 cents lower than your debt service levy next year,” Schultz stated. “No other projects are assumed, just this financing, but this accomplishes a lot for the city and would perhaps be the only financing the city needs for a year or two.”
Schultz said the information gave the council as decision-makers, as well as the public, information on how the city might proceed and contemplate what the projects would do to the city’s taxes.
“It’s all very preliminary, but I think as you evaluate projects, you would want to have this information in front of you so you can make a better informed decision,” Schultz commented.
Schultz also laid out the city’s legal debt capacity, based on the broadest project scope of $5.1 million.
“In 2023-24, the city’s legal debt limit is $14,070,629. The principal balance, including that financing, would be $9,760,000 in principal outstanding if the $5.1 million in projects were bonded for, and the city would be at roughly 69.1% of its available legal debt limit for one year,” explained Schultz. “The following year, once the debt was paid down, the city would be at 62.9% after the first year. The reason I mention that is because in fiscal year 2019-20, the city was also at 62% of its legal debt limit. There would be one year where the city is above that threshold, but after it’s paid down, it will fall back down. Some cities have a self-imposed debt limit where they only go to 80% or 85% of their legal debt limit, and the city would be well below that. In 2026-27, the city is back down to under 50% of its legal debt limit.”
Schultz also said the city’s revenues from the housing property, per year, would be roughly $65,345, and the payoff point would be around 20 years, when the total revenue generated would be $1,306,897.
The council also discussed a letter of engagement for Northland securities as underwriter for the City of Red Oak. Schults said the letter was non-binding, and if the city decided not to proceed with any of the projects discussed under the potential general obligation bonds, there would be no cost to the city.
The council approved a letter of engagement for Northland Securities. The council also expressed its appreciation for Schultz’ efforts in outlining funding options available to the city for funding the proposed projects.