ESCANABA - The Escanaba City Council unanimously agreed Thursday to refinance a $2.4 million building debt with a loan from the electrical fund and money from the general fund.
The debt originally came from the construction of the city hall/library complex and the public works building when funds were borrowed from the Farmers Home Administration, explained City Controller Mike Dewar.
The loans represented a debt of the Escanaba Building Authority (EBA), a legal entity separate from the City of Escanaba. The city has been paying off the debt in the form of rent to the EBA. All payments have come from the city's general fund.
In 2004, when market rates decreased significantly, the EBA paid off both of the Farmers Home loans by borrowing $3.88 million from the competitive municipal bond market, stated Dewar.
"As of this date, the EBA still owes $2.415 million on the bonds at interest rates ranging from 2 percent to 4.65 percent," he said.
"Continued decreases in earning rates have resulted in a situation where the EBA is paying more for the bonds than we are earning on our savings," he added.
Following an impact analysis, administration recommended the bonds be paid off with $1 million
rom the general fund and $1.25 million the EBA would borrow from the electric fund over 10 years at an interest rate of 2.5 percent, explained Dewar.
He told council he believes the city is in good shape to use $1 million of its current $4 million fund balance.
"This makes good financial sense, is prudent and fairly risk free," Dewar said, adding the refinancing should have an "overall positive impact" on the city's general fund.
The refinancing will eliminate a substantial interest expense due on the outstanding bonds and will decrease the commitment for future lease payments by the general fund, he added.
Council agreed Thursday for the administration to initiate an internal loan to pay off the EBA loan with city funds for an anticipated overall savings. Final approval will be made by council during the 2014-2015 budget process.
Council action is necessary because of the approval required on the two budget amendments and the loan from the electric fund, said Dewar.
In other action Thursday, council scheduled three of five public hearings to allow citizens to offer input on the city's upcoming fiscal budget. Public hearings are set for Jan. 16, Feb. 20 and March 20 during regular council meetings.