DATE: June 10, 2004
TO: Mayor Cushing / Homer City Council
FROM: Walt Wrede
SUBJECT: Interest Rate / Ocean Drive Loop Bluff Erosion Control LID
Resolution 03-143 (S) (A) established the final assessment roll for the Seawall LID and set the first payment date as September 1, 2004. The interest rate was set at .5% above the interest rate to be established at the time the bonds were sold. As you are aware, the bond sale has been delayed due to threatened and/or pending litigation. However, it is the City’s intent to proceed with the assessment district process regardless of whether bonds are ultimately sold or not. The Finance Department is preparing to send out the first bills in anticipation of the September 1, 2004 payment date. Therefore, it is necessary to establish an interest rate.
We chose the interest rate of 6.5% primarily because it seemed reasonable and because that is the number Dean mentioned most often when people asked what the interest rate would be. Our standard answer was something like “ we will not know what the interest rate will be until the bonds are sold, however, it is probably safe to assume that it will be in the area of 6 percent.”
There are justifications for a higher interest rate. For example, the interest rate established in the HARP is 8.32 percent. Also, our financial advisors have pointed out that a higher interest rate could be justified based upon increased administrative burden and financial opportunity costs associated with the delay of the bond sale. In other words, there are costs associated with the fact that the City “up-fronted” approximately $ 1 Million Dollars for this project two years ago has not been about to recoup its investment. We discussed these issued but concluded that 6.5% was pretty reasonable.
Please note that Resolution 04-54 provides that if bonds are eventually sold, the original interest provisions in Resolution 03-143 (S) (A) will apply. In other words, we will go back to .5% above the interest rate established by the bond sale. There will be no credits or reimbursements if the new interest rate is lower than 6.5% and no additional payments due if the interest rate is higher than 6.5%.