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HomeMy WebLinkAbout11/12/2002 Minutes - Special MeetingMINUTES OF THE CITY COUNCIL SPECIAL MEETING OF THE CITY OF DIAMOND BAR NOVEMBER 12, 2002 CLOSED SESSION: 11:00 a.m. — Government Code Section 54956.%c): Initiation of Litigation —1 Case 1. CALL TO ORDER: Mayor Chang called the special meeting toder at 11:30 a.m. in Room CC -8 of the South Coast Air Quality Management Diitrr ict, 21865 E. Copley Drive, Diamond Bar, CA. PLEDGE OF ALLEGIANCE: Mayor Chang ROLL CALL: Council Members Herrera, Huff, Zirbes, May Pro Tem O'Connor, Mayor Chang Also present were: Linda Lowry, City Manager; Mike Jenkins, City Attorney; James DeStefano, Deputy City Manager; David Doyle, Deputy City Manager; David Liu, Public Works Director; Bob Rose, Community Seices Director; Linda Magnuson, Finance Director and Lynda Burgess, City Clerk. CA/Jenkins reported that during Closed Session, Council discussed the initiati n of one possible case of litigation. This is the same matter that the City Co ncil discussed at its last meeting on November 5. Fallowing that closed session, he reported that the Council had directed the filing of a lawsuit against the Mountains Recreation Conservation Authority pertaining to various Brown Act viola ions committed by that agency. That was the subject of today's Closed Sess on. However, no reportable action was taken by Council today in its Closed Ses on. 2. COUNCIL CONSIDERATION: 2.1 DISCUSSION REGARDING LEASE REVENUE BONDS — Presentation by Larry Kosmont, Kosmont Partners, and Eric Scrivens, U.S. Bancorp. Mr. Kosmont explained that, due to a recent .5% rate drop by Chairman Greenspan, D.B. could not be in a better borrowing position than it is a this time. He reminded Council that this is a dynamic marketplace and sometimes that is positive and sometimes it is negative. In this case, i is a positive effect on the market. The total amount that D.B. could affo d to borrow under conservative circumstances would depend on whethe the Council chose a fixed or variable rate program. He identified a lease rev nue bond structure as the most appropriate transaction structure for the City On November 5, Council authorized two things: 1) establishment f a reimbursement date for any costs related to the Community/Senior C nter and 2) approval of the financing team to continue working on this m tter. Today, the most important issue is to figure out how best to issue the bc nds. If the City moves forward, it is important to know whether the bonds are c oing to be fixed or variable bonds. This would be no different from maki ig a decision about a home mortgage. The banks and the document change depending on which rate structure is selected. The other important declsion NOVEMBER 12, 2002 PAGE 2 CITY COUNCIL for the Council today is to decide how much to raise in the lease revenue bond financing. MPT/O'Connor repeated her question about the legality of financing parkland CA/Jenkins responded that the parties to the lease transactions would be public agencies - the Redevelopment Agency, the JPFA and the City. The use would continue to be devoted to public purposes. Therefore, there would be no legal issue. There would, however, be a problem if the land were being leased for private purpose. Mr. Scrivens explained that when the team gets into doing the transaction and performing due diligence and underwriting, title reports and any other documents attached to the property would be scrutinized. CA/Jenkins stated that in addition, the finance team's legal counsel has to write an opinion that says there are no legal complications or problems associated with the transaction. Mr. Kosmont said that in looking at the City's free and clear cash flow from the general fund, his team was certain that a $15 million financing program is very, very affordable under any conservative circumstance. Prior to deciding the type of loan, Council should look at how much of a mortgage the City can afford based on its take-home pay. The annual positive cash flow for D.B. is about $2.35 million a year. Assuming an established placeholder cost of $800,000 for ongoing operation and maintenance of the Community/Senior Center, the net to D.B. would be $1.55 million. In order to plan for unforeseen expenses, the City would hold back an additional $500,000, netting $1.35 million. Based on this scenario, at today's rates, the City could borrow $15 million. He recommended that the $15 million is a very good number to use and cited the following comparison: The cost of $13 per sq. ft. to maintain his upscale one million square foot high-rise office building that has 33 on-site elevators, a 2417 security force, eight floors of underground parking with ventilation and utility costs in downtown L.A., as compared to a $40 per sq. ft. cost for the projected operation and maintenance cost of $800,000 per year for the D.B. Community/Senior Center. Using this example, there is likely another $400,000 that could be added to the net figure for borrowing purposes. Using $15 million as an example for borrowing purposes, he compared fixed-rate and variable-rate programs (Pages 7 and 8 of the handout). He recommended that the City borrow $15,000,000 at a variable rate with a five-year cap. In response to C/Herrera, Mr. Kosmont stated that the variable rate loan could be paid off at any time with no penalty. C/Huff said that if one were comparing this loan to a home mortgage loan, you would assume pay increases over the years plus bonuses, and at this time in the market, sales are down and you could take a hit upon the sale of NOVEMBER 12, 2002 PAGE 3 CITY COUNCIL your property. Historically, interest rates are at an all time low and the probability of rates increasing is higher than the probability of rates going lower. Based on these assumptions, he believed it would be a good opportunity to go with a fixed rate. Additionally, the state's budget sh rtfall would, by necessity, fall on the backs of cities in some way. Revenues that D.B. currently depend on could go away. For the first seven years that D.B. was incorporated, it received higher- than -normal subventions from the state as part of the formula for newly incorporated cities. Then Assembly ME mber Gary Miller was successful in getting the subventions extended to 10 ears. D.B. counted on receiving about a million dollars per year ($600,000 i i gas tax and $300,000 or so in other funds.) He wondered how that would iffect this program. It is difficult to compare apples to apples because the am unts could change at some point during this loan period. Because of ihese factors, he was uneasy about moving forward with the loan program in spite of the fact that loan proceeds could be used for economic development purposes that would ultimately result in additional income to the City. Mr. Kosmont repeated his conservative assumptions. He under tood C/Huff's point about preferring the fixed-rate program. He was comfo able that a variable rate would allow the City to reduce the cost of borrowin and maintain flexibility without paying for the flexibility up front. His teari had enough ongoing experience with variables overtime to be comfortable that even if the interest rate goes up, the cap puts a limit on the rate that is known up front. He pointed out that a variable rate program could include a swap feature at a one-time cost so that the loan could be converted to a fixe rate loan at any time. C/Zirbes agreed with C/Huff's comments regarding a fixed rate. He also agreed with Mr. Kosmont on the five-year call period. The City has the money to build the Community/Senior Center but is using its reserves I o do so. In taking advantage of this program, it frees up money to do econ mic development. What this Counsel does not know is whether any o the properties coming into play on their own would need any assistance fror 1 the City. For that reason, he liked the idea of getting out of the program ir five years. Also, the possibility of 10% interest rates on money could e a possibility within 10 to 12 years. At that point, if the City sat on its mone , the interest would make the payment on the loan. He was more focused op the payment than the total loan amount. He felt that he would be more comfortable with the payment on a $10 million fixed-rate note over 30 years as a method of providing more security for the community. Not knowing how state budget cuts would affect D.B. lends to uncertainty. Mr. Kosmont said that a fixed-rate payment with a five-year call on a $10 million note would be $680,000. C/Zirbes thought it would be a lot easier to contemplate a $680,000 payment than a $1 million payment. NOVEMBER 12, 2002 PAGE 4 CITY COUNCIL C/Herrera liked the variable rate program with the five-year cap because the state is chipping away at the money passed along to the City and the City could get out of the loan after five years. C/Zirbes responded that if the City tied up its capital in economic development, it would then have to come up with the money to pay off the loan at the end of five years. C/Herrera thought the whole idea of borrowing was for the City to keep its reserves and wisely leverage the borrowed money. C/Huff said that in the event the City wanted to continue with the loan beyond the five-year cap period, the variable rate at that point could be higher than the fixed rate. C/Zirbes pointed out that the benefit and comfort to having a fixed rate loan was the dependability of a set monthly payment. Once that decision is made, it is up to Council to determine what amount would be comfortable for the City to remove from its general fund reserves. C/Huff said that if the City used the money to invest in income producing economic development, it would know its monthly fixed cost payment with a fixed-rate loan. The City has to balance the budget every year. It does not have the luxury of balancing the budget over a 5 or 10 -year period. C/Zirbes said the fixed-rate loan makes a lot more sense than the variable- rate loan. The only problem with the fixed-rate loan is that there is more up- front cost built in. Mr. Kosmont said it is the perfect time to opt for the fixed-rate loan. And there is a great deal of built-in comfort with the fixed-rate loan. C/Zirbes said that if the City took the 30 -year fixed with a five year call and a payment of $680,000, invested the $10 million at 2.5%, that's $250,000 in interest back to the City. Assuming inflation kicks in and interest rates increase at a significant rate and at that point the City could get 10% on its money or $1 million. The City could use that money to meet the $680,000 and pocket $320,000. C/Herrera thought the same scenario would work if the City borrowed $15 million instead of $10 million. She was concerned that the $10 million would not be enough to accomplish potential projects involving economic development. C/Zirbes pointed out that there has been a significant amount of inactivity on projects that Mr. Kosmont studied just a few months ago. Now all of those developers are interest in moving forward because of the low cost of money. Development is profit generated and it costs money to do the projects. NOVEMBER 12, 2002 PAGE 5 CITY COUNCIL_ Because the cost of money is so cheap at this time, the City may not need to participate in economic development. His primary concern is the City's ability to leverage the money and meet the payback over time in light of shrinking revenues. C/Herrera said that in the event of C/Zirbes' scenario, that would be thtime to pay off the loan. C2irbes explained that because money is so cheap, the City could afford to borrow $10 million and plan to pay it back over 30 years. Even if the $10 million was never invested, it may end up costing virtually nothing to b rrow the money. MPT/O'Connor liked the 5 -year variable. C/Herrera said she also lik�d the 5 -year variable. M/Chang said there is no certainty in the market. The City is looking toward the future of a significant project, the Community/Senior Center and on oing operating and maintenance costs of $800,000 per year. Because cf this project, the City needs a tool for economic development. The variable rate loan would save the City $1.5 million over a 10 -yr. period. Ordinaril , he would be conservative and select a fixed-rate program. However, the current market offers a rare opportunity which the City could tap into to take advantage of a significant dollar saving. He felt the 10 -year variable rate program with a 10 -year cap offered the City a sufficient amount of se urity. C/Zirbes pointed out that M/Chang's scenario would fix the cap for 10 y A fixed-rate loan would fix the currently low rate for the entire 30 -year F and with the uncertainty of what the economic position would be in 10 y in his opinion, it would be safer for the City to go with the low 30 -year rate. Mr. Kosmont encouraged the Council not to box itself in by assuminc that there was no long-term market for economic development. Council -might want to focus on filling all of the best of its arguments by locking in a to rate on the maximum loan amount. C/Zirbes said he could go to $12.5 million on a fixed-rate program. In response to C/Huff, Mr. Kosmont explained that the payment would about $850,000, depending on the rate at which the loan could be loc C/Huff and C2irbes said that if the Council approved a fixed-rate insh they would compromise at $12.5 million. C/Huff was still concerned 1 City might not be accurately reflecting its 10 -year state subventions. MPT/O'Connor asked for staff's recommendation. at the NOVEMBER 12, 2002 PAGE 6 CITY COUNCIL CM/Lowry explained why she preferred a fixed-rate loan of $10 million. FD/Magnuson agreed with the City Manager. C/Herrera wanted to know the point of limiting the loan amount to cover only the cost of the Community/Senior Center and be locked in for 30 years that would leave no money for economic development. C/Zirbes explained that a $12.5 million loan would give the City $12.5 million for economic development because the general fund money would remain in the general fund and not be used to build the Community/Senior Center. That money could be tapped for other investment opportunities or for economic development. C/Huff pointed out that the by borrowing, the City would have the money to use in turnover projects such as land purchase. If general fund monies were used to fund the Community/Senior Center, the City would not have a nest egg with which to participate in economic development. Borrowing preserves the City's options. In response to M/Chang, Mr. Kosmont explained that this is a loan of the entire amount and not a line of credit to borrow against. M/Chang felt that $15 million was not too much of a stretch for the City. He would, however, be okay with $12.5 million as a more conservative approach. C/Zirbes felt that even at a lesser amount of $10 million, the City would have more financial opportunities/tools available. $10 million is a comfortable amount to pay off without squeezing the budget. $12.5 or $15 million may stretch the budget, depending on what occurs in the future. C/Zirbes pointed out that the consultant, City Manager and Finance Director preferred the fixed-rate options. C/Huff stated that the City has an opportunity to fix the loan for 30 years at a rate that may look higher than the variable, but in reality, it is an extremely low rate. Five or ten years down the road, the money could remain in an interest bearing account. The City would never be able to get that kind of low rate with a variable because the rate will increase over time. M/Chang said that a 10 -yr. cap on a variable-rate loan would save the City $1.5 million. At the end of 10 years, the City could buy another cap. C/Zirbes said the next cap could be at 8.5 or 10%. And with the higher rate of interest that the City would then have to pay, the payment would be much higher. He said that the City also has the option not to borrow any money at all and just pay for the Community/Senior Center and Mr. Kosmont's team. 1 1 NOVEMBER 12, 2002 PAGE 7 CITY COUNCIL C/Herrera thought the Council had decided on a variable-rate loan three Council Members favored variables. MPT/O'Connor said she did not hear the consultants recommend a loan. Mr. Kosmont said that based upon the marketplace, he believed the City could hedge their bet and be reasonably secure and do the best With a variable. However, when Council Members are making investments in the community and use monies for entrepreneurial activities — eco omic development — he would not like to see Council move forward until th re is a 5-0 view on how they want to finance these investments. As a professional, he would lean toward the variable. He believed, however, that the fixed-rate loan would do everything the City would need to do. This issue will be insignificant due to the fact that the City leveraged its cash i the smartest way possible. Council would not sacrifice much at all to go With a fixed rate in this wonderful environment. Let the finance committee sho that with the flexibility of a five-year call. Additionally, If the City is going tc take advantage of this interest rate economy, then inch up a little bit and u the low cost money to endeavor the economic development. That's w y he would lean more toward the $12.5 million than the $10 million. In response to C/Huff, CM/Lowry said that other city managers who been through long-term use of community funds felt that a conser approach was an easier sell. C/Zirbes stated that he is always conservative and if Council is going i the City in debt, he would like to do it in as conservative manner as po; and to be able to know 5, 10 and 15 years from now that that's the pays It's a comfortable payment today and it would be more than a comfor payment 15 years from now. Initially, variables are attractive but invai those rates will spike. C/Zirbes moved, C/Huff seconded, to approve a $12.5 million fixed-rate with a five-year call period. AYES: COUNCIL MEMBERS - Huff, Zirbes NOES: COUNCIL MEMBERS - Herrera, M/Chang ABSTAIN: COUNCIL MEMBERS - MPT/O'Connor ABSENT: COUNCIL MEMBERS - None Motion failed. put le loan C/Herrera moved, M/Chang seconded, to approve a $12.5 million vari ble- rate loan with a 10 -year cap. NOVEMBER 12, 2002 PAGE 8 CITY COUNCIL MPT/O'Connor asked Mr. Kosmont what he felt the rate might be in five years, based on the market. Mr. Kosmont said that based on history, chances are the interest rates will go up and they could go up north of 5%. There is no reason to believe they would not. C/Zirbes said that assuming five years from now, a variable could be purchased at 8% --what would the remaining principal be on the $12.5 million loan. Mr. Kosmont estimated that at the end of five years, there would be about $11.2 million of balance to refinance. Mr. Scrivens said that the payment on the $11.2 million at 7% fixed would be $986,000. for the remaining 25 years. Mr. Kosmont said that Council would be way ahead if the interest rates stayed low and wanted to buy out the loan early. If Council wants full term staying power, a locked in low rate would be the answer. The real win for the City is collaborating on a financial investment that moves the City to make the right investments through economic development. In response to MPT/O'Connor, Mr. Kosmont explained that on the day the City buys, the interest rate is that rate for the life of the loan. The five-year cap insures that at the end of the first five-year period, the City could pay off the loan without penalty/premium. MPT/O'Connor agreed it would be good if all five Council Members could agree. She said she was flexible to go either way. C/Zirbes again stated he was still looking at taking the City from a cash reserve and debt free status to encumbering the City with a multi-million dollar loan and wouldn't you like to know exactly what the payments are going to be by taking a very conservative approach to this. Five percent is amazing money. We might be able to buy it cheaper, but there is a risk at doing so. For instance, if eight years from now prime is 12% and variables are at 14%. That interest rate would put a burden on the City. At this point in history, money is available for less than half that price. C/Herrera felt that the Council could get the same certainty for the community with a 5 or 10 year capped variable. Further, she believed that residents would not want the City to be making payments over a 30 -year period of time. Mr. Kosmont explained to C/Herrera that if the loan was split between two loan programs — one fixed, one variable — that the cost would virtually double. NOVEMBER 12, 2002 PAGE 9 CITY COUNCIL M/Chang agreed with C/Herrera that the members of the community would not want to drag the loan out for 30 years. Therefore, it would be better to save as much cost as possible and go with the variable with a 1 0 -yea r cap. Mr. Kosmont pointed out that the City could protect itself internally with a Council policy action against variable rate increases by saying it wan led to have a sinking fund to allocate the resources that would get the City back to a fixed-rate tradeoff status. C/Herrera said it could be pointed out that all five Council Members want the best investment for the City. It is just a matter of how that end g al is achieved. She explained that she wants to pay the loan off in 10 years and the money will have been used to benefit the City. C/Huff said that to C/Zirbes' point, at the end of 10 years, there would a no need to pay off the loan if the money is paying its own way gene ating revenue. With a variable rate, the City's costs are not fixed. With a fixe -rate loan, the costs are fixed so that when interest rates go up, the City h is an increase in revenue while the actual cost of the money has stayed at th low rate. C/Zirbes said that in ten years with rates possible at 8%, the City could eave that money in savings and earn 10% and have an income stream for the City. The City would still have the option of paying off the loan; however, if th City decided to hold on to the money, it would be paying at the higher rate v fith a variable program. Mr. Kosmont heard the Council Members disagreeing on whether thi was a long or short-term commitment. Economic development activity is a ong- term activity. One advantage locking in a fixed rate and having fixed ng - term financing would give the City the opportunity to continue ph ased developments over a longer period of time. if this discussion is about ng - term versus short-term, he would lean toward long-term because he believed economic development was a long-term game. M/Chang said that when interest rates go up, income goes up. The City should use this money to create an income stream so that it would no to ger be necessary to use borrowed funds. He would prefer to save the loan osts up front and take the risk. MPT/O'Connor called for the question. Motion carried by the following Roll Call vote: AYES: COUNCIL MEMBERS - Herrera, MPT/O'Connor, NOES: COUNCIL MEMBERS - Huff, Zirbes ABSENT: COUNCIL MEMBERS - None NOVEMBER 12, 2002 PAGE 10 CITY COUNCIL MPT/O'Connor exited the meeting at 1:50 p.m. C/Herrera exited the meeting at 2:00 p.m. 2.2 Community/Senior Center Change Order Options. C/Zirbes felt that the building should be funded as proposed. DCM/Doyle said that if Council wanted to stay with its original design specification, staff would go through the changes and make changes that would not be material to the building and undetectable. C/Zirbes was okay with Change Items 2, 4, 9, 11, 12,13 and 15. The items that would not significantly change the quality, appearance or attributes of the building, he could agree to. In his opinion, items that affect the building should stay in. Council concurred to the following: Item 1 - no change Item 2 - change Item 3 - change Item 4 - change Item 5 — no change Item 6 — option of architect Item 7 — change Item 8 — change Item 9 — change Item 10 —change Item 11 — change Item 12 — option of architect Item 13 — option of architect Item 14 — change Item 15 — no change Council authorized DCM/Doyle to use his judgement about changing out light fixtures. DCM/Doyle said he would not recommend changes 16 through 20. Council concurred. ADJOURNED TO CLOSED SESSION: 2:20 p.m. Government Code Section 54957: Public Employee Performance Evaluation: City Manager NOVEMBER 12, 2002 PAGE 11 CITY COUNCIL RECONVENED REGULAR MEETING M/Chang reconvened the Regular Meeting at 2:35 p.m. 10. ADJOURNMENT: There being no further business to conduct, MIC ang adjourned the Special meeting at 2:35 p.m. ATTEST: WEN CHANG, 1 1 LYNDA BURGESS, City Clerk