Bond Financing Highlights

On May 13, in order to proceed with construction of the secondary irrigation system, the City Council adopted a resolution authorizing the issuance and sale of approximately $37 ,690,000, aggregate principal amount, of its general obligation bonds.

Kudos to Dale Gunther of the City Council, John Schiess of Horrocks Engineering, Dustin Matsumori of George K. Baum & Company, and to Andy Spencer and the pressurized irrigation team for keeping the project on schedule and on budget. This hasn't been easy, and careful financing strategies have been key to the overall success of the project.

For those interested in fiduciary accountability, I reprint below the bond financing highlights as they were reported to the City Council prior to its vote.

Enjoy.

For years, the City and its finance team have worked to make a secondary water / pressurized irrigation system a reality for the citizens of American Fork. While the majority of people will determine the success of the system based upon project construction and ultimate delivery of services, there are many significant and noteworthy accomplishments that were achieved throughout the financing process that contribute to the overall "success" of the project.

Turning Market Opportunities into Interest Rate Savings

• In November 2007, based on the recommendation of the finance team, the City sold the first series of bonds as "bank qualified" securities. By doing so, the City's bonds were priced at lower interest rates (4.42%) than comparably structured "non-bank-qualified" bonds (4.67%). Any interest rate savings on the bonds translate into direct savings for the City's citizens.
• Notwithstanding historic market volatility in late 2007 and continued volatility in 2008, fueled by the sub-prime mortgage crisis and concerns over inflation, the finance team's negotiated sales delivered a combined true interest cost for the Series 2007 and Series 2008 bonds of 4.61%.

Generating Additional Construction Proceeds

• Prior to the election in 2006, project engineers estimated the cost of the system to be $40.6 million. Due to sharp increases in the cost of materials, this figure escalated to approximately $43.2 million after the election. The finance team carefully structured the City's two series of bonds to generate additional bond proceeds (i.e. premium), totalling $1,037,115. The flexibility of a negotiated bond sale maximized the additional premium. These additional funds will help to off-set increases in construction costs.

Maintaining the City's Underlying Credit Rating

• The combined bond issuance for the project increased the City's currently outstanding general obligation debt by nearly 300%. Such significant changes in a municipality's debt profile frequently trigger a ratings downgrade. However, due to the finance team's preparation in educating the ratings analysts about the City's diligence in building up and maintaining general fund reserves, and recent adjustments to the water system's rate structure, the City maintained its "A2" underlying rating with Moody's Investors Service. This strong underlying rating assisted in successfully marketing the City's bonds.

Responding Quickly to Changing Needs

• In the Spring of 2008, the City directed the finance team to expedite the bonding process in order to accelerate construction on the project. Despite longer required response times from both the ratings agencies and bond insurers, the finance team successfully sold the bonds in time to meet the City's construction needs.