Thursday, Aug. 07, 2008

Modesto City Council approves bond refinancing

Action anticipates rise in interest rates, involves up to $75M

The Modesto City Council agreed Wednesday to refinance up to $75 million worth of bonds to avoid a dramatic increase in interest rates.

The bonds paid for a variety of city projects, from the construction of Tenth Street Place to improvements to John Thurman Field and the Police Department Headquarters. The bonds, currently at 3.7 percent interest, are scheduled to convert to a variable rate Sept. 1 -- and because the company insuring the bonds has run into credit problems, the new rate could be as high as 12 percent, according to city Finance Director Wayne Padilla.

That could cost the city an extra $125,000 per week, according to Padilla.

The council voted 5-1 to issue variable rate demand bonds, with a letter of credit from Bank of America instead of bond insurance.

Councilman Will O'Bryant cast the dissenting vote, and Councilwoman Janice Keating did not attend the meeting. After the meeting, O'Bryant said he doesn't have any confidence in the financial information he gets from the city staff. "In the past, they have a history of being way off on finance. Every time they suggest something, we end up with a huge deficit. There's got to be a better way to do it," O'Bryant said.

The bond insurance would have cost the city $1 million to $1.5 million, according to Padilla. Councilman Brad Hawn said the bond insurance is a guarantee that the city will make the bond payments, and the letter of credit accomplishes the same thing at less expense.

O'Bryant also challenged a proposal to rent space on the first floor of Tenth Street Place for transportation services, and a proposal to charge new businesses a $50 fee to apply for a business license.

The space rental was approved on a 4-1 vote after Mayor Jim Ridenour left the meeting, and the business license application fee was defeated when it failed to get four votes. Kristin Olsen joined O'Bryant in voting against the fee, and without Ridenour or Keating, the vote was 3-2 in favor, one vote short.

The rental space would be for about nine employees of the transportation services department, and the five year lease with Civic Partners Modesto Inc. would cost $64,500 plus a one-time tenant improvement cost of $105,000, for 2,300 square feet of office space.

O'Bryant said the space was high-end retail and cost a lot of money when the city was faced with a several-million-dollar deficit. He suggested the city could find cheaper space elsewhere.

Fred Cavanah of the public works department said the transportation workers share services with other workers in Tenth Street Place, and moving them farther away would require hiring more support staff.

The $50 license application fee was to cover the city's cost of processing the business license applications, according to Padilla. The fee would generate about $120,000 a year.

O'Bryant commented that the businesses already pay an annual license fee, which should cover the cost of the application.

"For us to arbitrarily put another fee for someone to open up a business in town is ludicrous," he said. "One of the reasons for our financial problems is that business is slowing down ... we are adding more burden to businesses."

Olsen agreed. "In this market, we should do everything we can to encourage business," she said.

Hawn said the one-time fee would cover the costs the city incurs when people apply for business licenses and then don't follow through and purchase a license.

Vice Mayor Garrad Marsh added that a $50 fee isn't big enough to discourage a business from coming to the city.

The remaining council members did agree, on a 5-0 vote, to give 450 members of the Modesto City Employees Association a 3 percent raise and a boost in health benefits.

The association went last year without a contract, and didn't get any increase in salary or health benefits for the 2007-2008 fiscal year.

MCEA President Tom McCarthy told the council the boost brings financial relief to hard-working and dedicated employees.

McCarthy praised the council for the change in policy that granted the raises, and said it would be remembered by employees. "It's a very good start to negotiations," he said.

Bee staff writer Tim Moran can be reached at tmoran@modbee.com or 578-2349.