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Home My WebLink About5.a. Equipment Lease / Purchase CITY OF ROSEMOUNT ' EXECUTIVE SUMMARY FQR ACTION CITY COUNCIL MEETING DATE: February 21, 1995 AGENDA ITEM: Lease/Purchase Agreement AGENDA SECTION: Old Business PREPARED BY: Jeff May, Finance Director AGENDA �CR A � � g CIVI �.� ATTACHMENTS: Faxed Copy of FBS Investment Services APPROVED BY: Proposal, Memo from Springsted i After discussion at the January 17th meeting,Council directed staff to pursue the proposed lease/purchase and to bring back proposals at the February 21st meeting. We have solicited proposals from three firms,FBS Investrnent Services,Inc.,Koch Fnancial Corporation and GE Capital Public Finance, Inc. All three firms were required to give us rates on 3-year,5-year and 10-year terms to match the various life expectancies of the items being leased and to guarantee those rates out to March 15th. All three firms did so and all three firms gave the City the option to set up an escrow for the total dollar amount of the lease that could be drawn upon as items were purchased so that we did not have to pay for the items out of our pockets prior to receiving the total funding. If you recail,that is what happened with last years lease/purchase of equipment at the Community Center. That was different though,as the total amount funded was much smaller and the items all were received and paid for in a very short period of time. This year,many of the items witl not be received unal later in the year,or in the case of the aerial truck until 1996. The low bidder for our Ieaselpurchase was FBS Investrnent Services. Their rates were as followsc 3-Year 6.01% 5-Year 6.24% 10-Year 6.37% Their rates,in comparison with the other two bidders,offer the City a savings in interest costs of approximately$18,000 to$22,000. With all other items regarding the proposais being equal,I recommend pursuing a lease/purchase agreement with FBS Invesbnent Services prior to March 15, 1995,in order to take advantage of these interest rates. ', I would like to address the issue of equipment certificates versus a lease/purchase. A concemed citizen questioned the City's decision to utilize a lease/purchase approach rather than a certificate approach. A representative from Springsted will be here this evening to speak on the technical present value benefits of the lease/purchase. But there are some important considerations that I would like to briefly discuss. First off,the certificates must be financed over a 5-year period. This would result in an approximate levy of$340,000 a year for five years. With the tease/purchase,we are looking at a levy of approximately$199,000 for the first three years,$151,000 for the next two years and$126,000 for the next five years. Granted, there is an extra five years of payments required with the lease/purchase,but the impact on the taxpayers is spread out much more proportionately in comparison to the life of the assets. It would be very difficult to bear a$340,000 levy increase for the next five years for this equipment. Also,issuing equipment certificates counts towarcls our debY limit and a lease/purchase does not. As of our last bond issues in i994,our legal debt margin was$6,266,952. That was approximately 75%of our total debt limit of$8,386,952. Our debt limit has increased somewhat because of increased values,but these numbers are sufficient for the point t am going to make. With the possible referendum for a fire station looming on the horizon,our debt margin will be reduced somewhere close to the 50%area. Bond agencies look at 50%as a comfortable figure for aties to maintain. If we were to issue certificates,that number would be reduced below the 50%figure and could have an impact on our bond rating. I do nat feei that that wouid be the case,but it is a possibility. Finally,there is the issue of interest expense. As I stated earlier,someone from Springsted wili be here to explain the present value implications of the certificates versus the leaselpurchase. Most importantly,1 believe tl�at it becomes an issue of cash flow. We certainly cannot afford to impact the taxpayers with a$1,165,000 increase in the tevy to fund all of the items through our CIP process. Also,we probably cannot afford to have a $340,000 levy increase for the next five years. There are many other upcoming issues in the City such as 160th Street,Diamond Path and other future equipment and building needs and it seems that the most logical approach to take is to purchase the equipment that we really need right now, with the smallest possible impact to the taxpayers and leave ourselves better prepared to deal with future issues. RECOMMENDED ACTION: Motion to direct staff to work with FBS Investment Services, Inc. to enter into a lease/purchase agreement to purchase equipment for the City of ROSEMOUNT. COUNCIL ACTION: ,FEB-17-1995 09�29 FBS INVESTMENT SVCS P.002i004 � F�S lnvestment ' ' Services, inc. MCmber NAS4�SIPC QO Suite 1400 . �oo s�,w 5m saeet February 15, 1�95 MinneapoGs,MN 55402 CONF1'DENT�AL Mr. Jeff Ma.y Finance Airector City of Rasemount 2875 145th Stree�t Rosemount, itilinnesota 55068 RE: Tax-Exempt Lease Purchase Bid R.equest for Capital Expenditures - I995 Dear Mr. Llay: On behatf of FBS investment Services, Inc. ("FBSYSr'), I would iik.e to tEiaak you for again giving us thc opportunity to provide �nancin� alternatives as they rel�te w capital expenditures under a tax-exempt lease purchase fina.ncing pro�am. We bet�eve that we will be able to service your needs in the most �imely and cost effective manner ava.ilabie to you in today's tax-exempt marketplace_ Following is the breakdown of recommended financing terms for the capitai expenditur�s that you provided to us earlier tast mdnth. This is our suggested caurse of financing, bu# may be altered to meet the on�oing bud�et demands af the City of Rosemaunt(the"City"). REC�OI�ll�i �NDED CAPI'TAL EXPENDITUR�S FO� THREE{3)YF�IR FINANCING TER1�I Equipment • No. # Amount PC Replacements and Network Upgrades 95-201 $ 32,000 3 Police Vehicie Replacement� 95-40I 47,000 Cornputer LJp�rade and MDT's for Squad Cars 95-402 35,000 2 Mobiie Squad�tadios 96-402 2,000 13 Portable Radios for Officer 96-443 9,000 2 Traffic Ra.dar Units 9G-f#04 3.000 Total (3 Year) $128,oao Investment producis are not FDIG insured,are not deposits ot,obligatlans of or guaranteed by FBS Investment 5enricqs,lnc.,the bAnlc�Or any af thnir�ifiilptas a»tl inv�lv�inves:ment risk�,incfuding pe��ible lass of the prinCip21 invested. FBS Investment$ervlCeS,lrtC,ts a whotiy owned subsidiary of Fu�st Sank N�ti4naF Assoclatlon. Minneapdis Offica: tOQ South Fitfl SVeet,Minneapolis,fviinnesota St Pau!Office:332 Minn�sota SO'eet,Saint Paul,Minnesota FEB-17-1995 09�30 FBS INVESTMENT SUCS P.003/004 '.' Letter to Mr.JcCf May Page 2 Febniary 13. 19�5 RECUVl1v1ENDED CAPY'TAL EXPENDITUliES FUR FIVE(5) YEAR FINANCING TERNr Eqr�iq�ment No.# Amaunt Vehicle Hoist 95-703 � $,OOQ 3/4 Ton 4x4 Pickup 95 727 20,000 1 Ton 4x4 Pickup 95-728 30,400 18' Mower(Replace 15' Mower) 95-738 38,000 Plow for Existing Tandem Dump Truck n/a 11.00� Tota.l (5 Year) $t0�,O4Q REC4?1�IlVIENDED CAPITAY.EXPENDIT�TR.ES �'OR �Y{10) YE.AR F�TA,N'CYNG TEltl'VI Equipment No. � Amount Aerial Fire Truck 95-5(}1 $60Q,4�0 Opticom (Pre-emprion/Traffc) 95-503 SO,OOQ Singie Axle pump Truck w/Plow& 5ander 95-729 ]00,40Q Load�r Replacement 95-730 t70,000 Total (10 Year) �930,000 As you requested, we are also providing current bid inforrnation for the a.bove � autlined lease purchase scenarios. As discussed, the fotlowi.ng bid inforrnation is based on the following set of assumptions: I) 'The scheduled closing date for all transactions is March 1�, }.995. If one or more af the financings does not clase on the scheduled closin? date, or the City's Councit does not take action to either accept or reject bid praposals on Tuesd�y, Fehruary 21, 1995, FBSrSI will have the opparhtnity ta rebid based on current market ca�ditions; 2) Principal and interest will be paid semi-annuaily, with the first payment dus on February 1, 199b. The lasr p�.yrrxent wiil be due on: 3 Year- August 1, 1998 S Year- Au�ust l, 200Q 10 Year- August 1, 2005; 3) A prepayment penalty wiI}be assessed if the Ciry wishe,5 tc� pr�epay any or alt of these abiigations prior to their last stated maturity; 4) A11 ihree Iease-purchase obligatians vvill be fully amortizin� capital leas�s; ,FEB-17-1995 09�30 FBS INUESTMENT SUCS P.004i004 Leucr to Mr.Jeff May Page 3 FebntarV 1 S, 1 y95 5) Our bid will include the drafting of ali necessary lease-purchase documents, exhibits, and atta,chments, with the exception af the legal opinion, preparation and filing of the UCC-1(s}, and preparation and filing of the 8038-G(s). ?he cost of these items wiU be the r�sponsibility of the City, but must be compl�ted precedent to closing; G) All fina�ncings witl be bank qualified. Based on the above assumptions, F�SISI would like to propose the fotlowin� interest rate structure �or the proposed 3, 5, and 10 year lease purchase financing scenarios: CURREI'VT BID RATES AND DEBT SER�'ICE PAY;VIENTS Interest Semi-annual Totul Term R�te Debt Service Pm� Payments 3 Year Financing fi.01°�0 $ 2�,153.30 $ 14�,919.80 5 Year Financin� 6.24% 12,949.1 I 129,091.10 10 'Year Financing 6.37% 65,067,57 1„�3Q],351.40 Total $102,129.98 $1,575,3b2.30 Again, these bids assnme a lYYarch 15, X49S closing d�tte and firm City Councii acceptance or rejection on Tuesday, February �ls� FBSISI wili, at the request of the City, deposit all funds into an escrow account at the time of closin�. It is assumed that fur�ds witl be drawn from this accot�nt throughout the course of 1995 to fund various equipmertt acquisitions as that equipment is received and placed into service. The escrow a�ent, as directed by FBSISI, will require apprapriate draw requesis from the City before funds may disbursed from that account. Funds in this account during the draw period may only b� invested in short-tcrm treasury obii�ations. Thank you again for giving us the opportunity to present you with this bid proposal. Please feel free to ca11 me wi�th any questions and/or comments yau may have regarding this informa#ion. Respectfully submitted, .1��---�- Christine K. I�augen Assistant Vzce President (612)973-I014 TOTAL P.O�� 02/17/95 09:19 FtLY 612 223 3002 SPRINGSTED INC. �J002/002 S P R I N GST�D 12o south S�Xm street • Suite 2507 PUBLIC FINANCE ADVISORS Minneapolis, MN 55402-18Q0 (b 121 333-9177 Fax: t6121 349�5230 Home Office 85 East Seventh P(ace 16655 West 8tuemound Road Sulce 100 Suite 290 Saint Paui, MN 55101•2143 Brookfield, WI 53005•5935 t61Z1 223-3000 {4I4) 782-8222 Fax: (6I2) 223-3b02 Fax: {414) 782•2904 6800 College 8oulevard Suite 600 Overiand Park, KS 66221•1533 (9I3? 3a5�8b62 Fax:f913) 345-1770 i$50 K Street NW Suite 215 Washington, bC 20006�2200 (2p2I 466•3344 FGbYll�l'y 17, 1995 Fax: t202) 223-1362 Mr. Jef�May, Director of Finance Rosemount City Hal! P.a. Bax 510 Rosemcunt, MN 55068-0510 Re: Present Value Analysis of Equipment Finance Options Dear Mr. May: As you are aware the present value analysis of various equipment finance options compares the current worth of streams of revenue ar debt. Revenue ar debt schedules may have widely divergEnt terms o# receipt or payment rec{uiring some exact method of analysis whieh reduces the time and periadic cost af money ta a single value. Th� accompanyi�g present value analysis af lease payments versus capital note payments illustrates the true effeCtive cost vf money for this type of situation at this particular window in the capitai markets. When the cast of short term equipment certifcate$ are repaid over a period af five years and then compared to a series of equipment lease tr�nsactions with varying terms, #he present value advantage falls to the lease transactions by a sum of approximately $10,�00. ln addition, there are several other advantages to following thE iease course. One, the lease allows you to amortize the cost aver a ten-year periad as opposed to the five year equipment certificates statutory limitation. Two, the equipment certificates count ag�inst the city's statutary debt IimEtation and the lease a�reement does not create a similar charge which is beneficiat to a city, such as Rosemount that is in a grovuth mode. Sincerely, ,._.� _ i _ .� , - �Z� anie . Neill ��,�o Executive Vice President �' il' cjb /Saint Paul Office