Memorandum

City of Lawrence

Finance Department

TO:	Dave Corliss, City Manager
FROM:	Ed Mullins, Finance Director
CC:	Debbie Van Saun, Asst. City Manager Bruce Flanders, Library Director
Date:	December 11, 2006
RE:	Library Funding Options

If a new library is constructed, it will impact two areas of the City budget, the operating and the debt service budgets. This memo describes those impacts as well as some options for funding that may be available to the City Commission if there is a decision to proceed with a new building for the library.

Operational Costs and Mill Levy Impact

Due to the increased size of the proposed library and the additional services it will provide, staffing and costs for utilities and maintenance will increase. Bruce Flanders, Library Director, provides the attached as background information on projected operational costs in an expanded library. He estimates $5,000,000 as the total projected operational costs for 2009 (projected first year of operation in a 94,000 square foot building) as a reasonable figure, based on data gathered from peer libraries. Since City property tax revenue comprises 90 percent of the library's annual operational revenue, this would result in a figure of $4,500,000 in City funding, starting in 2009 under this scenario. In addition, please note that the City has typically used Capital Improvement Reserve Funds in the past for major maintenance and upkeep expenditures for the library, such as carpeting, lighting improvements, shelving, etc. Staff anticipates that those types of expenditures will need to be factored into any future library building maintenance scenario.

As per the adopted 2007 budget, the City of Lawrence will provide $2.95 million to operate the currently situated library via the Library Fund. The revenue for the 2007 Library Fund budget is derived from a 3.258 mill levy. The 2007 budgeted revenues anticipated from this mill levy are $2,700,000. Assuming a 5% annual increase in assessed valuation, a $4.5 million Library Fund budget in 2009 would require a mill levy of approximately 4.9 mills or an increase of 1.642 mills from the current levy. A charter ordinance caps the Library levy at 4.0 mills; therefore an ordinance amending this cap would need to be approved.

Debt Service Costs and Funding Options

Construction of a new library will likely require the City to issue between $20 and $30 million in general obligation debt. The annual debt service to support either a $20 million or $30 million bond issue is $1.5 million and $2.3 million, respectively, assuming a 20 year issue at an average interest rate of 5%.

Property tax funding option - It is anticipated that the City would issue fixed rate bonds with a maximum maturity of 20 years. In addition, the bonds would be structured to be paid off in equal annual payments. Since it is expected that assessed valuation will increase 5.0% per year, the debt levy required to generate the necessary revenue will decrease in future years. Under this scenario, the debt levy would range from 1.80 to .72 mills for a $20 million issue and from 2.67 to 1.07 mills for a $30 million issue. Tables showing the estimated mill levy impact of the debt service are attached.

Provided below is a comparison of the 2007 library mill levy and what might be the mill levy in 2009 for a $30 million bond issue:

Year	Operating mill levy	Debt Service mill levy	Total
2007	3.258	0.000	3.258
2009	4.900	2.567	7.467

Sales tax funding option - Another possible funding source to pay off the library bonds is a sales tax increase. Such an increase would require approval of the voters. If sales taxes are used as the revenue source to pay off the bonds, it is recommended that the bonds be structured with increasing payments over the term of the bond. It is expected that sales tax revenue will grow 3-4% per year, and unlike the property tax levy, the rate cannot be adjusted on an annual basis. Assuming a 3% annual increase in sales tax, in order to pay off a 20 year, $21.3 million issue, a .10 of a cent sales tax would be required. A 20 year, $31.9 million issue would require a .15 of a cent sales tax. Tables showing the projected debt service to be paid by sales tax revenue are attached. The proceeds of a 1% sales tax could pay off a $30 million bond issue in approximately three years.

Combined revenue sources – Combining funding sources from both property tax and sales tax is another option the City Commission may wish to pursue.