Supervisors discuss TIF options for Merrill’s Fifth Street Project

Posted April 16, 2013 at 2:53 pm

By Julie Ann Madden

At their March 26 meeting, Plymouth County Supervisors sought legal counsel on borrowing $2.2 million for Merrill’s Fifth Street Project.

County officials plan to widen the road, adding turning lanes as necessary to increase traffic safety by the Plymouth Energy ethanol plant. This road project begins at the northern edge of Merrill and goes north on County Road K-42, which is known as Fifth Street in Merrill, to its intersection with County Road C-38.

Supervisors plan to use Tax Incremental Financing (TIF) District revenues from the Urban Renewal Area in and near Merrill rather than a long-term General Obligation bond to pay for the project, and they are interested in using local financial institutions to finance it.

Attorney John Danos of Dorsey & Whitney of Des Moines asked if the board was planning to do a “Pure TIF Revenue Deal,” where they would use only this TIF District’s revenues to secure this debt.

With this option, “the lender is taking the risk that revenues are going to keep flowing at the anticipated level and nothing’s going to interfere with the property taxes,” said Danos, adding there is a little more risk to the lender; therefore, it usually means a higher interest rate on the debt and the lender requires a “reserve fund” to help hedge against some of that risk. “They may require some restrictions on your ability to issue additional debt payable from that same source.”

“Pure TIF bonds can be issued through local banks or taken out to the bond markets,” said Danos, adding TIF bonds can be issued with just a public hearing by the supervisors.

With a General Obligation bond, security/collateral is not limited to just TIF District revenues — General Obligation debt is a full blown debt of the county, explained Danos, and the county can use TIF revenues and/or use other sources such as Road Use Tax (RUT), Local Option Sales Tax (LOST) or Debt Service levies to make payments.

“General Obligation debt provides you with a number of options from year to year on a discretionary basis to determine how to repay it,” said Danos, adding it takes more than just a public hearing to issue General Obligation bonds. “Counties, unlike cities, typically have to go through some heightened level of procedural mechanism in order to be able to authorize General Obligation debt for roads and bridges.”

He noted the county would probably have to go through a “Reverse Referendum Petition” process.

Just as with TIF bonds, General Obligation bonds can be obtained through local financial institutions or bond markets, said Danos.

Local banks are advantageous in that they understand the borrowers and local projects better. More often than not, local banks do not subject counties to prepayment restrictions. On the other hand, bond markets have remarkably low interest rates.

“Bond markets, even after netting out costs, tend to have the lowest yields,” said Danos. However, they do penalize for early prepayment.

“We’re looking to be able to do this with the least cost,” said Supervisor Jack Guenthner, asking Danos to calculate the costs of both options.

Danos responded he could give supervisors his costs but recommended they contact a financial advisor or investment banker to calculate the cost differences between the two bond types and using local banks versus bond markets.

The legislature adopted an amendment to Urban Renewal law last year that now requires entities to amend their Urban Renewal Plan to specifically declare and approve each project that will use TIF revenues, said Danos.

Plymouth County Auditor Stacey Feldman said the projects were listed with cost estimates when county officials originally adopted their plan but it didn’t include bid amounts. Danos agreed to review this to see if it met the requirement.

The supervisors favored using the Pure TIF Revenue Deal.

“What happens if something does interfere with TIF revenues — a rollback at the legislative level or a shut down of the ethanol plant and you don’t have someone out there to pay taxes at that level?” asked Danos. “Are you looking at this really being a limited obligation of the county where you’d look at the lender and say, ‘I’m sorry the TIF is gone. We’re not legally obligated to pay you.’ or would you be looking at this as a moral general obligation of the county where we’re going to find some way — no matter what — to pay this?”

If it was the latter, Danos suggested going with the General Obligation bond.

The supervisors took this all under advisement, not taking any action on the options.

“This has nothing to do with the hospital (renovation project),” said Plymouth County Attorney Darin Raymond after the meeting. “Since Desert Storm, road construction costs have gone up (sharply vertical while revenue sales tax has stayed on about the same horizontal level).”

“We’re in a position every year when (County Engineer Tom Rohe) comes in, we don’t have the money,” he said. “In a 50-year plan with 670 bridge structures, you should be doing about a dozen or more a year.”

“Last year we did two (just east of this Fifth Street Project on County Road C-38),” said Raymond, “and it was the county’s entire bridge budget.”

“The board has said there is nothing on the horizon the governor or anyone else is going to raise the fuel tax,” he said. “There is no money.”

“Last year we embargoed bridges,” said Raymond. “We closed one for a year. We’ve been trying to take as many roads out of service that we don’t need — where someone owns the property on both sides.”

“Right now, we’re generating $800,000 to $1 million a year to pay for the jail,” he said. “In Tom Rohe’s budget, that is a bridge.”

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