PITTSFIELD, Mass. — The needed cash flow to pay to build the new Taconic High School hits a peak in the coming months.
The Finance Department is closely monitoring the funding of the project, working to find ways to keep the city's total debt service payments level throughout the life of the bonds. Right now, the city has only gone to the market for long-term financing of $10 million of the anticipated $46 million the city will need to fund and is managing the cash flow as construction goes on.
"We estimate it will be no more than $46 million. Ultimately what we are responsible for will be the ineligible costs, meaning the ones the state will not pay. That continues to be an ever-evolving thing," Director of Finance Matthew Kerwood said.
Management of the borrowing is twofold: managing the cash flow during the project and then long-term bonding. Right now the focus is on ensuring the bills are being paid. About 64 percent or so of the $120.8 million project is being funded through the state. The state's reimbursement is based on a criteria it has established for what is eligible for reimbursement and what is not.
As construction moves along the project manager, Gilbane, bills the city for the work. The city pays Gilbane, which in turn pays the various subcontractors working on the project. Then the Purchasing Department reviews the bills and determines which costs the state will pay and submits the bill to the Massachusetts School Building Authority. The state then sends the city a check for that reimbursement.
"Within 30 days of submission, we get reimbursed. And the idea behind that is you then take that cash that you get back and put it back into the cash flow of the project. It is like a revolving door type of thing - cash out, cash back," Kerwood said. "The intent is to not have to have municipalities go out and bond for the entire amount of a project and then have to wait until the end of the project to get reimbursement. The idea is to limit the amount of debt communities have to take on in order to do these projects."
The project will hit its peak in cash flow needs in May when the city will need $6,017,033 to pay the bills.
"The peak of the cash flow needs are really between December and June, right now," Kerwood said. "We are in the high point of the project's needs."
Previously the bills, which were as low as $125,000 a month, were being paid with city funds. On January 24, the city bonded $10 million to essentially pay back the money spent. That is just first of multiple long-term bonds which will be taken out.
For the cash flow, early in the project the city took out a $5 million bond anticipation note as well and that will be rolled over in June. Bond anticipation notes create a short-term cash flow.
"It is essentially short money. You borrow for $5 million or any amount and what happens is there are no principal payments, you are only paying interest," Kerwood said.
The city has spent on that $5 million note and in June the city will have to pay that back plus interest. Kerwood simplified the notes by saying rolling it over would mean borrowing again enough to pay back the initial note and then more for whatever new money is needed. Those bond anticipation notes grow in amounts. When the city wants to, it can then take those notes and put them into long-term financing.
"This is an ongoing situation we really have to monitor is identifying the opportunities to take on additional debt that doesn't overburden us on an overall debt payment schedule but yet provides the project the cash that it needs to move forward," Kerwood said.
Kerwood said the city does have the option to bond for everything at once. But, that creates an immediate increase in debt payment bills. Instead, the city can long-term finance at various times and amounts depending on the market and interest rates.
"The downside to saying let's take it all and do the $46 million is twofold: one you are taking on all of the debt at the same time. It would be a big hit to your debt payments. Secondly, we really don't know what our total amount is," Kerwood said. "You wouldn't want to bond for $46 million and then have our portion be $42 million. Now you've got bond proceeds you are paying principal and interest on that you don't need."
Kerwood said the city's financial advisors continually monitor the market and helps make the determination of when to issue long-term debt for the project and how much to capitalize on strong markets and lower interest rates.
"That's what their expertise is. They obviously help us bring these things to market but also to analyze the market for us and working in partnership with us to help us make the sound decisions on when is the best time to do these things," Kerwood said.
When it comes to getting interest rates lower, the state's Municipal Finance Oversight Board has given the city the approval to use the state's bond rating when going to bond instead of the city's. That approval was granted for $110,800 million (since $10 million was already bonded) for the anticipated bonds. The city received that approval for the entire project but will only need to bond for its portion of the costs.
"Our bond rating is good but the state's bond rating is better than ours. By using the state's bond rating we can get better rates," Kerwood said.
That authorization also included using the rating when the city bonds for three other capital projects. Kerwood said the city asks for that authority every time it looks to issue long-term debt.
For that $10 million Taconic money that is already bonded, Kerwood said the city structured the payments so that for the first five years are mostly interest. For those years, only $5,000 per year will go to principle and some $369,231 in interest. By structuring it that way, the city will spend less on interest throughout the life of the borrowing.
What that means for next year is that the city will be paying a total of $7,595,982 in principal payments for all of the city's long-term debt. That is a decrease from the previous year of $118,487. On the other side, though, the city will be paying $2,392,100 in interest, which is a $238,836 increase. The total debt payments for every debt the city has in the upcoming fiscal year is $9,988,082. Though it is worth noting that the city still has about $2 million in reimbursements from previous school projects expecting to come in, lowering the total needed to budget for it.
There aren't any debts scheduled to fall off the books in this upcoming fiscal year but there will be some falling off in the next. Kerwood has a schedule of all of the payment plans placed into a spreadsheet to show the payments for the next handful of years with the numbers dropping as more and more falls off.
All of those factors - from how to structure the particular bonds, when and how much to bond at different times, use of bond anticipation notes, the current debt scheduled and loads, and the market - are all factors considered as the city manages the borrowing. The idea is to structure the funding in a way that does not add to the annual payments each year but fills in when past debt falls off.
"We're going to manage this on an ongoing basis so we can take advantages of opportunities in the market. As a philosophy, the idea will be to take on the debt associated with this project in such a way so that it does not have a dramatic impact on our overall debt. We can phase it in so our outstanding debt obligations remains relatively steady and consistent," Kerwood said.
As the project goes along, the long-term bonds for the project will increase while the short-term funding decreases. The bills will be eased into the city's annual budgets throughout the course of construction.
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