HomeMy WebLinkAboutIR 6904 INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 6904
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u To the Mayor and Members of the City Council January 1 , 1 Subject: BOND FUND FINANCING
IS 79
On September 27, 1983 (M&C G-5761) , the City Council approved bond fund
allotments for fiscal year 1983-84. The M&C was modified by the Council
to state that all future bond fund expenditures are to approved in accor-
dance with the relevant provisions of the City Charter and the State
Constitution. In his memorandum of September 27, 1983 to Councilman
Russell Lancaster, the City Attorney outlined those sections of the
Charter and State Constitution that apply to bond fund financing and
indicated that some of the City's practices with regard to bond fund
financing should be changed. Because the suggested changes would have
a fiscal impact and would alter long-standing procedures, the City
Manager's Office requested that the City Attorney review specific City
practices in view of the legal requirements he had cited.
After several weeks of study and analysis on this matter, the City
Attorney has affirmed his previous opinion and made additional
recommendations for changes in procedures. The City Manager is in
agreement with these findings and believes that the indicated procedural
changes should be implemented. A summary of the City Attorney's findings
and recommendations is presented below.
!; It is the City Attorney's opinion that the City Charter prohibits the
City from entering into contracts for construction of bond projects
unless funds to pay such contracts are available in the City treasury.
Relatedly, the City Attorney has said that bonds sufficient to cover total
project costs must be sold in advance of entering into contracts for
those projects that extend over more than one year. Failure to conform
to this procedure is a violation of the Texas Constitution.
However, the Council may consider as "available" bond funds from prior
sales which have not been expended or encumbered on other projects of
the same general purpose. The Council , therefore, may approve contracts
for capital improvement projects when adequate funds exist at the cate-
gorical level , i .e. Streets, Park and Recreation, Public Safety, etc.
The most significant impact of this interpretation would be on bond fund
categories which are composed of only one or two projects. Where an
individual project essentially equals the category, all bonds must be
sold in advance of contracting for its design and construction. For
example, following this new procedure, all $18 million of the estimated
project cost for the Amon G. Carter, Jr. Exhibit Building should have
been sold prior to its contract approval . Instead, only $9 million in
bonds, or the estimated first year cash requirement was sold in 1982.
As far as staff can determine, for at least the past ten years, bond
sales have been made on the basis of estimated cash requirements , not
estimated total project costs. In the past, when projects extended
beyond one year, only enough bonds to meet cash requirements in the
first year were sold initially, with the balance sold subsequenity. It
�- has been the position of City finance personnel that sizing bond sales
to meet cash requirements was the most prudent way of limiting increases
ISSUED BY THE CITY MANAGER -- FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 6904 - p• 2
NrP if R(O
EcoRr,� To the Mayor and Members of the City Council January 10, 198
V-4
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''ExAy Subject: BOND FUND FINANCING
in debt and effectively managing the City's cash resources. No legal or
financial problems have been encountered in the use of this approach.
The Finance Department recently has surveyed the bond financing practices
in eight other major Texas cities. Five of the cities reported that they,
much like the City of Fort Worth, base the size and schedule of their
bond sales on cash flow needs. Three others indicated that they base
their bond sales on estimated project costs, and sell all the bonds
projected to be needed for a project before it is begun.
The City Attorney's determination of proper bond financing procedures will
require the City to make a larger bond sale than earlier projected at its
next General Obligation offering, is the current and projected pace of
the capital improvement program is to be maintained. The change in pro-
cedures essentially will mean selling more bonds sooner than previously
would have been the case. However, future sales should be smaller than
was originally projected using the cash flow method.
In researching the subject of bond fund financing, the City Attorney also
reached the conclusion that the City's current practice of reflecting the
interest earnings of the General Debt Service Fund as a General Fund
operating revenue source does not meet legal requirements. Based on
discussions with the City's outside auditors, the City Manager concurs and
believes that it would be prudent financial policy for interest earnings
with this finding from the Debt Service Fund to remain in that fund so
that its fund balance can be increased to a more favorable level . It is
proposed this procedural change be made effective with the 1984-85 budget.
In summary, the City Attorney's review of the City bond fund financing
practices indicates certain changes are in order. The City Manager concurs
with these changes. The following points summarize the significant aspects
of the needed changes:
1) Availability of funds at least at the categorial level is
required before contracts for capital projects can be approved;
2) The City's next General Obligation bond sale must be large
enough to ensure the adequacy of funding for capital projects
during the next year;
3) The interest earnings from the General Debt Service Fund should
be credited to that fund commencing with the 1984-85 budget.
It is requested that the City Council endorse these changes in bond finan-
cing policy. Additional information will be furnished upon request.
Robert L. Herchert �-�-
RLH:kc City Manager
ISSUED BY THE CITY MANAGER — FORT WORTH, TEXAS