July 16, 2007

City of Delano receives upgraded bond rating

New rating viewed as ‘very positive’

By Ryan Gueningsman
Managing Editor

At Tuesday’s upcoming Delano City Council meeting, the council will be accepting bids on the sale of bonds for storm water improvement projects.

As part of the process of issuing bonds, the city’s operations are thoroughly reviewed by Moody’s Investors Services in order to establish an independent rating bond companies will use when submitting their bids, according to Delano City Administrator Phil Kern.

Last week, Moody’s released its rating for the City of Delano and upgraded the city’s rating from an A3 to an A2 rating.

“It’s a statement of the city’s health,” Kern said. “A2 ratings are typically used for much larger cities with bigger operations and larger tax bases. It shows confidence from the finance world in the city’s operations and the city’s future. We view it as a very positive report.”

The report will reflect lower interest rates for the city’s borrowing, which directly reflects lower project costs for the city and its residents.

“Adjustments in bond ratings don’t happen very often, and we are very encouraged by this news,” Kern said.

“On the practical side, it saves money,” Kern added. “It may not appear to save people money, but when we’re borrowing, and we can borrow funds at lower interest rate costs, it reduces tax liability from residents.”

Moody’s Investors Service has assigned an A2 rating to the city’s $1.5 million general obligation storm water revenue bonds. Concurrently, Moody’s has upgraded to A2 from A3 the rating on the city’s outstanding general obligation debt.

The City of Delano has $29.6 million of outstanding general obligation debt, including the current issue. The bonds will finance various improvements to the city’s storm water system.

The A2 rating assignment and upgrade for Delano reflect the city’s rapid tax base growth that is driven by its proximity to the Twin Cities; satisfactory financial operations with stable reserves; and debt levels that are expected to remain manageable, according to Moody’s.

Rapid tax base growth driven by proximity to Twin Cities

Moody’s expects Delano’s rapid tax base growth to continue, due to its favorable location 30 miles west of Minneapolis.

The pace of the city’s tax base growth has exceeded state and national norms: full value increased an average of 16 percent per year between 2001 and 2006, compared to an average annual growth rate of 12 percent for Minnesota cities and 8 percent for cities nationwide.

Located in Wright County, Delano’s tax base growth has been driven by residential development, as the city is within commuting distance to employment centers in the Twin Cities, and because families with children are attracted to the area’s schools.

With the planned expansion of Highway 12, officials expect continued residential development, as well as increased commercial development once the highway improvements are completed in several years.

Mirroring tax base growth, the city’s population has significantly increased. The 2000 census population was 42 percent greater than the 1990 census population, and the 2006 estimated population of 5,050 was 32 percent greater than the 2000 population.

The city’s population is projected to reach 15,000 by 2025. The city manages the pace of growth with a comprehensive plan and with regular discussions with Delano Independent School District No. 879.

Per capita and median family income levels are 93 percent and 111 percent of the state, respectively.

Satisfactory financial operations with stable reserves

Moody’s expects the city’s financial operations to remain stable, bolstered by healthy reserves. General fund operations have been stable in recent years.

Although the general fund budget is relatively small in size, reserve levels are ample when measured on a percentage basis.

The fiscal 2005 general fund balance was $1.3 million, or 48 percent of revenues, which approximates the median of 49 percent for Minnesota cities. The fiscal 2005 general fund balance represents a slight increase from the fiscal 2003 general fund balance of $1.0 million.

Although audited financial results are not yet available, city management reports that the general fund balance decreased by $78,000 in fiscal 2006 due to a slowdown in the housing market which resulted in lower-than-expected building permit revenues.

However, with expenditure controls, officials expect balanced general fund operations in fiscal 2007.

Local Government Aid from the State of Minnesota continues to decline, but favorably, the general fund has become increasingly reliant on property taxes in recent years.

In fiscal 2005, property taxes comprised 49 percent of general fund revenues, and intergovernmental aid comprised 11 percent. In comparison, in fiscal 2003, property taxes comprised 36 percent of general fund revenues, and intergovernmental aid comprised 23 percent.

Management maintains a general fund balance policy of keeping six months’ worth of budgeted expenditures on hand for cash flow purposes.

Profits from a municipal liquor store provide additional revenues for general operations ($75,000 was transferred to the general fund in fiscal 2005), as well as for capital projects.

Debt levels expected to remain manageable

Moody’s believes the city’s debt levels will remain affordable, given expectations of sustained tax base growth and limited future borrowing plans.

At 1.3 percent and 3.1 percent, respectively, the city’s direct debt position and overall debt burden both approximate state and national medians.

The rate of principal amortization is slower than average, with 59 percent of all tax-supported debt retired in 10 years. Minnesota cities benefit from the state’s statutory requirement to levy 105 percent of the annual debt service levy for tax-backed general obligation debt, providing excess revenues to offset property tax delinquencies.

Delano city officials report minimal future borrowing plans, which is significant given the pace of the city’s growth. Officials report that the majority of the water and sewer infrastructure needed to accommodate the city’s projected growth through 2025 has been put in place in recent years.

Possible future borrowing plans include issuing approximately $2 million of debt in 2010 for street reconstruction projects.

Key Delano statistics

• 2000 census population: 3,837 (a 42 percent increase from 1990)

• 2006 estimated population: 5,050 (a 32 percent increase from 2000)

• 2006 full tax value: $503 million

• 2006 full value per capita: $99,694

• 1999 per capita income: $21,538 (93 percent of state)

• 1999 median family income: $63,011 (111 percent of state)

• Wright County unemployment rate (April 2007): 5.6 percent

• Fiscal 2005 general fund balance: $1.3 million (48 percent of general fund revenues)

• Direct debt burden: 1.3 percent

• Overall debt burden: 3.1 percent

• Post-sale general obligation debt outstanding: $29.6 million (including the current issue)

Information provided by Moody’s Investors Service.

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