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What Your Board Needs to Know About Financing

By Kristin Withrow posted 09-27-2022 12:26 PM

  
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At CSDA’s 2022 General Manager Leadership Summit, consultants of the CSDA Finance Corporation and a special district general manager collaborated in a presentation providing insight into preparing board members for a financing. Panelists included Pat Kaspari, general manager of McKinleyville Community Services District, as well as consultants from the CSDA Finance Corporation: Rick Brandis and Nicki Tallman of Brandis Tallman, a division of Oppenheimer and Co. Inc.; Albert Reyes of Kutak Rock LLC; Stefan Morton of Municipal Finance Corporation.

 

When it comes to infrastructure projects and large equipment purchases, general managers play a pivotal role in defining the scope of the need and securing the funds to get the job done. When funding for those big-ticket items means identifying the right financing option, it is crucial that the members of the board be educated and informed throughout the process so they feel confident in the decisions they make.

 

While board members may have an understanding of personal loans or home mortgages, few have experience with the type of financing options available to local governments. Keeping an eye toward their responsibility to protect district finances and the pocketbooks of their constituents, board members may approach financing with questions like: “Why do we need to finance?” and “Why can’t we use our cash reserves?”

 

Every scenario is different, and there are pros and cons to paying cash as well as to financing. Some considerations include: the type and size of the project or purchase, the immediacy of the needed improvements, and the district’s fiscal health.

 

Using cash reserves may seem expedient in the short term, it could cost the district more in the long run. In addition, there is an element of fairness to consider before the cash reserves are drained.

 

In 2021, McKinleyville Community Services District completed a financing through the CSDA Finance Corporation (CSDAFC) for improvements to the district’s water system and wastewater system. General Manager Pat Kaspari explained, “Even if a district has cash reserves, choosing to finance avoids putting the entire burden on today’s ratepayers.”

 

For larger capital improvement projects such as installation of new water or sewer lines, financing spreads the cost burden over the life span of the capital being improved, ensuring that future users also contribute to the infrastructure. CSDAFC consultant, Rick Brandis, defined this as “generational equity” that allows all users who benefit from the infrastructure to share in the responsibility of paying for it.

 

For the purchase of equipment with a shorter life span, such as a fire truck or snowplow, there are still issues board members need to weigh when making the decision to finance. CSDAFC consultant, Stefan Morton, stated, “In today’s market, it is important to take inflation into consideration when deciding to finance instead of using cash reserves.”

 

Financing a large equipment purchase now can preserve cash for future purchases when inflationary factors are in play, thereby saving money in the long run. In addition, some financing options may include price reductions for in-full purchases and no pre-payment penalties that can be strategically leveraged to reduce cost.

 

Regardless of the size of the financing, CSDAFC consultant, Albert Reyes, emphasized the serious responsibility held by board members when considering approval of a financing. “Board members should carefully read the resolution approving the financing so they are familiar with what its approval means to the district. The resolution not only authorizes the district to proceed with pursuing the financing, but also authorizes staff to enter into certain agreements either with a lender or bondholders that places obligations upon the district other than make debt service payments.”  

 

Board members have a duty to review the financing documents prior to the board meeting. At the meeting, board members should ask staff and legal counsel clarifying questions about what the obligations are and confirm the district can comply with them.

 

Discussions in board meetings with recorded minutes also ensures the public is aware of the work being done by the district’s board to weigh their options and act responsibly. CSDAFC consultant, Nicki Tallman, underscored the need for “a fully transparent and vetted process” that helps the public maintain confidence in the responsible representation of the district.

 

 

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