UNION — When you borrow money you have to pay it back and usually the lender requires you to put up collateral so that if you are unable to pay back the money you borrowed along with the interest you are charged the lender will still be able to get their money back.
That’s true for individuals, for businesses, and even for public entities like municipalities including the City of Union which owes over $7.5 million to the State Revolving Fund (SRF) and on which it makes quarterly payments each year. Under state law, a municipality that obtains funding from the SRF for infrastructure projects must set aside a certain amount of funds which can be used to make payments on its bonded indebtedness to the SRF if it is unable to make its payments on that debt.
“When we obtained the funding from the SRF the city was required to put money in a reserve fund, so that if there was ever a default on an SRF loan payment it will be covered,” City of Union Finance Director Laura Hembree said Monday.
Hembree said at the present time the city owes the SRF a total of $7,554,422.29. She these are 20-year bonds which were taken out to finance water and sewer improvement projects in the city. Hembree said the payments on the bonds are made quarterly. She said the payments are made from the revenues generated by the city’s Combined Utility Fund.
A recent development, however, will allow the City of Union to get more than $600,000 it has held back as required by state law and use it to cover one year’s worth of its bond payments to the SRF. No, the city is not having trouble making its bond payments, quite to the contrary. The city is able to apply to have those funds released because of the excellent bond rating it received in December 2017 from Moody’s Investors Service.
Moody’s awarded the City of Union and its Combined Utility System an A2 rating which means that the entity that received it is rated as upper-medium grade and a low credit risk and has the best ability or high ability to repay short-term debt.
A press release issued by Mayor Harold Thompson announcing the A2 bond rating stated that in issuing the rating, Moody’s cited that the city’s “’[f]inancial flexibility will likely remain healthy because of conservative budgeting and strong rate setting policies… along with a strong debt [service] coverage ratio and ample liquidity.’ Additionally, Moody’s stated that ‘usage will likely stabilize in the Combined Utility because of revitalization and industrial expansion within the service area.’”
In other words, the city is in really good financial shape and is able to meet its obligations, including make its quarterly bond payments.
With it being awarded the A2 bond rating, however, the city is now in a position to get those funds it has put on hold in accordance with state law and use it to make a year’s worth of bond payments.
“By obtaining the A2 rating we are now able to go through the process of having the funds released,” Hembree said. “They will go back to the city’s utility fund.”
At its January meeting on Tuesday, Jan. 16, Union City Council voted unanimously to approve second and final reading of an ordinance authorizing the steps necessary to have the funds, which Hembree said totals $633,200.59, released.
“The bond documents are being amended to allow for the A2 bond rating to come into effect and release those funds to us,” Hembree said. “The documents for the changes to the loan agreements are being processed by our bond attorney and should be executed in two to three weeks.”
Hembree said that while the funds will be released, they will not return to the city in a lump sum, but will instead be released in quarterly payments on the city’s bonded indebtedness to the SRF.
“It is not going to come in check form,” Hembree said. “It will instead be returned so we can make our bond payments over the next year. “
The funds to be released were held back by the city on its 2008, 2010, 2011, 2013A, and 2013B SRF bonds which were used to help finance the wastewater improvements, Meng Creek Wastewater Treatment Plant closure, Tosch Creek Wastewater Treatment Plant improvements and pump station work, sewer lines and pump station upgrades, water system improvements and meter replacement.
Hembree said that the funds that would normally be used to make the quarterly bond payments will be retained in the Combined Utility Fund and can be used for other projects.