Memorandum

City of Lawrence

City Manager’s Office

TO:              David L. Corliss, City Manager

CC:               Charles Soules, Director of Public Works

Diane Stoddard, Assistant City Manager

FROM:          Roger Zalneraitis, Economic Development Coordinator/Planner

DATE:           October 15, 2009

RE:               Analysis of ED versus GO Bonds for Waterline

The waterline extension can be paid either through General Obligation Bonds or Economic Development Bonds.  Economic Development Bonds were authorized by the IRS earlier this year as part of the American Recovery and Reinvestment Act of 2009.  Economic Development Bonds allow a municipality to issue taxable bonds and receive a 45% tax credit against the interest charged.  In contrast, General Obligation Bonds are tax exempt.

The 45% tax credit would generally be sufficient in current market conditions to make the Economic Development Bonds more cost effective for municipalities.  However, Economic Development Bonds also have Davis-Bacon wage requirements.  If Davis-Bacon is not otherwise required on a project, this usually results in raising the labor costs and thus making the project more expensive.

The City requested two bid responses for the Waterline, one with Davis-Bacon wage requirements and one without.  The two winning bids were $646,000 for the Davis-Bacon bid and $599,000 for the non-Davis-Bacon bid.  This is a difference of $47,000, or about 8%.

As of October 15^th, Bloomberg reported the interest rates on 20 year, Triple A bonds for municipalities was 4.07% for tax-exempt bonds and 5.65% for taxable bonds.  For the purpose of this analysis, staff added .15% to each bond to account for issuance charges and a difference in bond ratings (Lawrence has a Aa2 General Obligation Bond rating).

A preliminary analysis using October 1^st interest rates showed about an $8,000 benefit in using General Obligation Bonds.  However, the slightly higher interest rates on October 15^th yield a General Obligation Bond benefit of just over $1,200 (the calculations are attached). 

There are several factors that could change the outcome of this analysis.  If interest rates are higher- or the spread between taxable and tax exempt bonds narrower- than calculated, Economic Development Bonds may be less expensive to use.  Similarly, applying a discount rate would lower the present value of the later year payments, which would benefit the Economic Development Bonds in this analysis.  Conversely, if the bond yields rise from year to year over the life of the bonds, General Obligation Bonds would be more favorable.