Kevin Valine

Modesto News: City may be able to add $7 million to budget reserves

Modesto has a meager $3 million set aside for emergencies in its roughly $115 million general fund budget, which pays for public safety and other basics.

In ideal circumstances, the city would have about $18 million socked away for rainy days. But the city may be able to add $7 million to its emergency reserves, boosting it to $10 million.

This involves some very complicated finances, so I’ll try to keep it simple. There also is a coincidence, which I’ll get to at the bottom at the column.

The city is required to set aside and not touch the $7 million as part of its agreement with Bank of America for a letter of credit that backs the city’s 2008 refinancing of debt it issued to build city facilities, such as its share of Tenth Street Place, the city-county administration center. Refinancing the debt again would cost the city about $13 million because of the complicated way it was structured.

The letter of credit is for the amount of the outstanding debt, which is roughly $57 million and will be paid off in 2033. Each month, the bank pays the bondholders and the city reimburses the bank. The payments to the bondholders totaled nearly $4.2 million last year. The $7 million is there in case Modesto cannot come up with other money to reimburse the bank, but that’s never happened.

Bank of the West contacted the city in recent months about providing a letter of credit and made a presentation to the city staff Feb. 24. It would not require the city to set aside the $7 million. The city then approached Bank of America and it matched Bank of the West’s offer.

Representatives from both banks made presentations at Monday’s meeting of the City Council’s Effective Government Committee. City Council members Mani Grewal, Kristi Ah You and Bill Zoslocki serve on the committee and voted to forward the proposal to the council for consideration. The council could take this up at its May 10 meeting.

There’s more good news. Bank of America charges Modesto a 1.1 percent annual fee based on the outstanding debt for the letter of the credit. The new letters of credit would cut that fee to 0.60 percent, saving the city about $800,000 over three years, according to Peter Miller with The PFM Group, the city’s financial consultant, who was at the meeting.

There would be no restrictions on the $7 million, but bank officials and Miller said it would be prudent for the city to save it. Mayor Ted Brandvold – who was at the meeting – said it is his preference the council add that money to its $3 million rainy-day fund.

The banks’ offers are contingent upon providing Modesto with banking services, such as the city’s checking accounts, though Bank of America would offer a letter of credit at a 0.70 percent fee without the banking services. Bank of the West provided the city with banking services for about 20 years until losing the business to Bank of America about three years ago. The city pays Bank of America about $40,000 a year for the services.

Bank of America has provided Modesto with letters of credit since 2008. A city report says from 2011 to 2014, Miller approached other financial institutions about providing the city a letter of credit, but no one would. Miller said the proposed fee of 0.60 percent is very competitive with what his firm’s other, more creditworthy clients pay.

City officials will put together a comparison of the two offers when this comes to the council. The city also will have information about the legal and other costs associated with changing the letter of credit. But those costs are expected to be minimal compared with how much the city would save.

Now the coincidence.

Brandvold – who took office in late February – has formed a 100-day committee to review the city’s finances. At the committee’s first meeting on April 1, two committee members asked city officials about whether Modesto had looked into obtaining a letter of credit without the $7 million. No one from the city mentioned the Bank of the West proposal.

City Manager Jim Holgersson said Monday that going public then could have jeopardized the proposal. But he talked about it late last week at one of the committee’s subcommittee meetings because he said by then the proposal was ready for public disclosure.

Kevin Valine: 209-578-2316