MEMORANDUM 04-____

MEMORANDUM 04-76

DATE: May 2, 2004

TO: Mayor Cushing / Homer City Council

FROM: Walt Wrede

SUBJECT: Ordinance 04-24 / Homer Animal Shelter

The Agenda for the May 10, 2004 regular meeting contains Ordinance 04-24. Ordinance 04-24, if adopted, provides for an appropriation in the amount of $450,000 to construct the proposed new animal shelter this year as planned. The final design and cost estimate for the new shelter is now complete and available for your review. It is decision time for the Council. This is the point at which Council must decide to either go forward and build the project this year as planned or postpone until next year or beyond when we may have more of the funding that is needed. The City cannot take this project to bid unless all funds are identified and secured. There are benefits associated with both courses of action. They include:

Benefits of Waiting

· This is the more fiscally conservative approach. Postponement of construction would give us more time to apply for grants and raise the additional funds needed

· Fund raising activities and grant writing may become more difficult after the Council appropriates money and construction begins

· The Community could take pride in the great amount of progress already made this year while continuing to work hard to leverage additional funding and reduce the financial impact on City. Significant achievements this year include elevating the profile and public awareness of the project, final site selection, completion of the final design and budget, the organization of construction volunteers, and the significant increase in fund raising efforts.

· A delay would take some pressure off of the Public Works Department which is inundated with big projects this summer.

Benefits of Going Forward

· A great deal of momentum and enthusiasm has been building around this project. People in the community are starting to believe that a new shelter is possible and could actually happen. This is a chance to build upon that momentum. Volunteers are lining up to raise additional money, help with moving the shelter to a temporary location, and assist with construction of the new shelter.

· Costs will only go up the longer we wait.

· Moving forward now will send a signal to the community that the Council is serious about building a new shelter and addressing this long- standing need in the community.

The $450,000 Dollar Question

The cost estimate for this project provided by the architect is $900,000. As you know, the City has approximately $410,000 in the bank. We fully expect that fund raising efforts and grant receipts will raise that total to at least $450,000 before the end of the year. That means that the City will need an additional $450,000 to take this project to bid and commence construction this year if that is what the Council desires. The obvious question then, is where can the Council get the money??? I believe that the Council basically has five options. They are:

Option 1: Direct Appropriation / General Fund

The Council could simply make a direct appropriation from the General Fund. This would essentially amount to a capital construction grant. The funds could come from the existing fund balance and Council could compensate for this expenditure by reducing capital expenditures by a like amount in the upcoming FY 05 Operating Budget (or spread the reductions over several years). Upside: This option is quick and uncomplicated. The needed funds are secured and the project could be built this year. Downside: It would definitely have an adverse impact on the General Fund by squeezing operations, needed capital projects, and contributions to fleet reserves and depreciation. This option makes an existing problem worse.

Option 2: Direct Appropriation / Special Projects Fund

This option is essentially the same as Option 1 except that it makes a direct capital grant appropriation from the Special Projects Fund instead of the General Fund. Upside: This option is quick and uncomplicated and the funds are available. It has the added advantage of not impacting the General Fund. Downside: Some Council members have expressed reservations about using this fund to pay for a capital project like the animal shelter. This option taps further into the City's reserves.

Option 3: Sell Bonds

There has been a fair amount of discussion among the staff and supporters of both the animal shelter and library projects about whether to ask the voters to approve a bond sale for this project. Upside: the immediate impacts to the General Fund would be greatly reduced and the City would have the money in hand before it goes to bid and begins construction. Downside: The project would have to be delayed at least until next spring, it would increase the City's long-term debt, and the impacts upon the library project if both projects appear on the same ballot are unknown. Finally, $450,000 is a small amount to sell bonds for. A bond issuance of that size would generally be discouraged by financial institutions. It could be done by combining this with the library project and selling general capital construction bonds but, as noted above, that approach could create a whole separate set of concerns.

Option 4: Long Term, Low Interest Loan

Like the library, this project is eligible for a long term, low interest Community Facilities loan from USDA. Initial indications from USDA are that this project has a good chance of being approved. Under this option, the Council could "upfront" some money from either the General Fund or the Special Projects Fund to start construction now and repay itself with money from the loan. The loan repayment schedule could be structured in such a way that revenue from the new shelter could make the payments. (for example, a $450,000 loan on a 30 year repayment schedule at 4.375% would be $27,221.30 per year). Upside: The impacts to the General Fund are greatly reduced, potential impacts to the library project are greatly reduced, and the City would have the money secured that is needed. Downside: It would obligate animal shelter revenues and necessitate increased fees and/or other new sources of Shelter revenues. It could delay the project and it would increase long- term debt.

Option 5: The City Finances the Project (Loans Money to Itself). THE PREFERRED OPTION

Under this option, the City would make a capital project construction loan using money from the Special Projects Fund. In essence, the City would loan money to itself. The money would be repaid to the Fund on a repayment schedule and interest rate approved by the Council. The payment would be budgeted every year in the General Fund Budget.Upside: The impact to the General Fund is reduced. The money is readily available, the needed funds are identified and the project can proceed. The City pays interest to the Special Projects Fund instead of a financial institution or the Federal Government.Downside: The City taps its reserves again and long-term debt is increased although, at terms and conditions much more favorable to the City.

Tough Choice / What Should the Council Do?

My recommendation is that the Council adopt Ordinance 04-24 and build the animal shelter this year. I think that funding Option 5 is the best alternative and that Option 4 is probably the next best. I believe this is a sound course of action for several reasons.

First and foremost, based upon the information I have received, I have come to believe that it is not realistic to expect that we can raise an additional $450,000 in the next 10 months (or two years for that matter). The State has little or no discretionary funding left and almost no money for capital projects. The Federal government has shown no interest in this project. Although there are many grant programs for animal shelters, most of them have terms and conditions or special stipulations that Homer either cannot meet or are inappropriate for Homer's situation. Finally, there are many fund raising efforts going on in Homer and donors are beginning to feel tapped out. In short, if we delay, it is not likely that the City will be in a much better position a year from now. We are basically on our own. Fund raising efforts and the search for potential grants are ongoing.

Second, I think it is important to build upon the momentum, enthusiasm, and good will that has been accumulating around this project. If it is delayed, folks might lose momentum and any hope that this much needed project will be built any time soon. The longer we wait, the higher the costs will be and that, along with the loss in momentum, will make it even harder for future Councils to complete the project.

RECOMMENDATION: Adopt Ordinance 04-24, implement financing Option # 5 above, and authorize construction of the Animal Shelter this year. The recommended repayment terms are $52,000 per year for 10 years (3% interest).