City calls in experts to help with its critical risk debt

By Karen Cornelius

The Finance Committee of city council met on Monday night, April 9, and were party to an impressive debt management presentation by Sudsina & Associates discussing the city’s debt service and what long-range planning can be done to save the city a significant amount of money and eventually cure their present financial state.

 

Finance director Amy Hendricks stated that based on discussion at the March 26 committee meeting, she was charged with investigating funding sources to complete various projects to upgrade the streets, water and sewer systems. With the city’s present financial position, she said it is going to take important planning. She elaborated that the financial health indicators provided for the city as of December 31, 2015 and 2016, by the Auditor of State, expressed that the city was in the critical risk range for its debt to revenue ratio. This ratio is an indicator of a city’s ability to repay debt without negatively impacting day to day operations. The Auditor of State classification of debt in the Financial Health Indicators for Cities are: Cautionary at 12-15 percent and Critical over 15 percent. Hendricks said that the city of Vermilion debt/revenue in 2015 was 30 percent and in 2016 it was 34 percent.

 

As a result, the finance director said that work has commenced with the city’s bond counsel at Squire, Patton & Boggs along with bringing in a new member to the team with Michael Prcela, a municipal financial advisor with Sudsina & Associates. She explained that a financial advisor differs from the service of a traditional underwriter as they are serving solely as an advocate for the client when structuring and evaluating transactions. She said that mayor Jim Forthofer and herself met with Prcela and Greg Van Wagnen last week to review the city’s current status. She also determined that there were no additional loans secured for projects in late 2017 although there had been talk about borrowing money to start the waterline distribution replacment project.

 

Hendricks introduced Prcela and Van Wagnen to the committee and said she believes in calling in the experts for help due to how technical the process can be. She said she has worked with both gentlemen in the past during her career as school treasurer. Prcela presented council members with a portfolio which was also a teaching tool on how going to the market works including money saving opportunities through planning. He said he has 20 years of experience as a municipal advisor. He is the managing director of Sudsina and the lead advisor and project manager. Van Wagnen is the analytical and day-to-day support and senior advisor for Sudsina. He said they advise several cities, school districts, and counties and act as their fiduciary. “We represent the best interest of the city unlike the bond underwriter who has a duty first to investors, then to the issuer,” said Prcela. He said they have the daily experience with public finance markets to assess whether the debt issue’s structure and interest rate pricing is the best available in the market.

 

It was suggested that Vermilion has opportunities and could use a competitive sale rather than a negotiated sale to get the best interest rates. He said Vermilion was not in dire financial straights, but just in the middle and needs a little help with debt management. To Vermilion’s advantage, it has an A2 rating which is high, and its name is known in the marketplace. The advice was to take a multi-year approach to improve and do some long-term strategy. The cure will not happen overnight, but under control with payments easier in a possible five years. Once some debt is free, the city can borrow when necessary. Under discussion was just the general fund debt of $2,618,000 not debt from the enterprise funds, water and sewer, and other debt. All debt will be examined going forward. Vermilion has been rolling over its notes and paying the interest down which was said to be redundant paying yearly costs. There was also no value in short-term borrowing. The advice was to go from a note to a bond when opportunities arise in the marketplace and to create a five-year plan and restructure. Further discussion centered on ways the city would be able to realize some large savings with this debt management firm. The representatives went over all the various bond terms such as coupon, serial bond, term bond, call date, and bank qualified/non-bank qualified, and various methods of sale, market update, current debt review, and long-term strategy. It was quite an overview and a lot to absorb on debt planning, execution, and on-going management.

 

Finance director Hendricks asked the representatives to talk about their other municipal clients. Van Wagnen said he is from Lorain and the founder of the company is from Vermilion. He said they work with the city of Huron, Sandusky, Sandusky County, Toledo, Lucas County, Lorain City Schools and other school districts. “Our area is the Lake Erie ring.” Finance chairman Brian Holmes thanked the men for coming and Councilman John Gabriel said he is excited to get started and their professional expertise will be an asset.

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