Item B: Tax Levy for Funding of Pavement Capital Preservation Projects0

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another $0.5 million to the capital local option levy instead of allocating this amount to a solid waste collection surcharge. In addition, the subcommittee recommended that $350,000 of that amount should be allocated each year for bike path capital preservation. The section of the subcommittee report that discusses this recommendation is included as Attachment C. The subcommittee considered both a capital local option levy and a long-term general obligation bond (“GO bond”) approach to funding street construction, overlays and reconstruction. Based on advice from staff, the subcommittee chose the capital local option levy as the preferred property tax funding method. One reason was that a capital local option levy would provide funding annually to match the annual spending need for pavement capital preservation activities. In addition, a capital local option levy would not incur the substantial issuance or interest costs that a long-term GO bond approach would incur. The primary downside of the capital local option levy approach is that the levy would count against the Measure 5 tax rate cap of $10 per $1000 of real market value for general government taxes. Alternative Short-Term GO Bond Approach Subsequent to the subcommittee discussions, staff has worked with the City’s bond counsel and finan- cial advisor to develop an alternative approach using short-term GO bonds. This is an approach that the City used for the recent Parks, Athletic Fields and Open Space General Obligation Bonds. This approach works when project costs are spread out over a long period of time, such as annual pavement capital preservation projects. For large building projects, like a library or city hall, this type of GO bond approach is not suitable because the full amount of the bonds are needed up front to pay for the project. Under this alternative approach, the City would enter into a line of credit type arrangement with a bank to borrow $6.5 million per year and repay that amount, with interest, when property taxes are received. This approach differs from a typical long-term GO bond issue, which carries higher debt issuance costs and higher annual interest payments. The short-term GO bond approach requires that the City pay inter- est, but that interest would be based on a short period of time, typically less than one year, and would be a lower rate than long-term bonds would require. The interest on a short-term GO bond approach would be similar to what the City encounters with a capital local option levy. For either approach, projects would occur in the summer of a given year, while the property tax revenues would not be received until December of that same year. Therefore, with a capital local option levy, the City would have to enter into an external or interfund loan to cover those costs between the construction season and the receipt of property taxes. With a short-term GO bond approach, that is taken care of automatically. The short-term GO bond approach would minimize the concerns that staff had about incurring high issuance costs and significant interest expense of the long-term bond strategy. It is estimated that one- time issuance costs for the short-term approach would be approximately $100,000, and annual interest costs would be approximately $130,000. This will, of course, depend on interest rates from year to year, but such short-term securities tend to have low rates compared to other types of longer-term borrowings. These additional issuance and interest costs would increase the tax rate by less than $0.01 per $1,000 of assessed value, which would cost the typical homeowner less than $1.50 additional per year. The issu- ance costs and interest costs on a $65 million long-term general obligation bond issue would be signifi- cantly higher than for a short-term bond approach, as shown in the chart below. The difference in cost to the typical taxpayer would be approximately $22 per year. F:\CMO\2007 Council Agendas\M071210\S071210B.doc