Under different scenarios presented Monday, financing for the new Montrose Police Department building is projected at between $16 million and $17.36 million, depending on the option Montrose City Council ultimately selects.
Mayor Dave Bowman was firmly in the $16 million camp, saying that is the amount he told the community would be borrowed for the facility, after voters approved a controversial ballot measure last year for more police funding.
“My feeling is, I stood in front of the community and said this is how much we’re borrowing and that was going to be the cost of the police station,” Bowman said after council’s Monday work session.
“I want council to remember that when they decide how much money we’re going to borrow.”
City voters in November approved a 0.58-percent city sales tax increase to better fund the Montrose Police Department in the face of rising crime and needs beyond what the city’s annual general fund allotment for the agency covers. The city will continue to provide general fund money for the Montrose Police Department, on top of sales tax revenues generated for that purpose.
Part of the sales tax goes to fund a bigger police headquarters and an evidence storage facility; once the structures are paid off, the public safety sales tax rate will drop to 0.44 percent.
Monday, Kyle Thomas of the underwriter D.A. Davidson presented financing options for the police building. Council, which met in work session, has not made a decision on those options.
Thomas said D.A. Davison looked at both U.S. Department of Agriculture loans and certificates of participation, a type of lease-purchase agreement, to finance the construction of new facilities. Investors can purchase a certificate for $5,000 under the scenarios Thomas presented.
Certificates of participation, or COPs, are not considered a type of long-term debt, the Colorado Supreme Court previously ruled and so, do not require voter approval prior to be issued.
The USDA loans would provide “attractive” interest rates, but are not available for construction lending, so COPs were assessed, Thomas said.
“The rates are very similar to the USDA and there are very few covenants or requirements,” he said.
D.A. Davidson looked at three scenarios.
Under one, the city would finance $16 million in project expenses. Debt service in the first two years would be $790,000; $821,805 thereafter, for a total payment by 2049 of $24.58 million.
The second scenario assessed repayments if $16.46 million were borrowed. Debt service in the first two years would also be limited to $790,000 and level at $850,000 for the years following. The total payment by 2019 would be about$25.3 million under this scenario.
The third assumes financing of $17.36 million in project expenses; again, the first two years of debt service is $790,000 and then would be level at $900,000 thereafter, for a total repayment by 2049 of $26.71 million.
Thomas said D.A. Davidson was considering various alternatives, because construction costs now, versus when the building is actually being erected, may vary. “As you’re planning now for the construction that is going to happen, there is going to be some uncertainty as to what construction costs are going to be, exactly,” he said.
City Manager Bill Bell said the city had budgeted $900,000 for 2020 and wanted to keep it under that range.
The interest rate is the same under all three scenarios — 3.06 percent — and although the rate fluctuates daily, it has been generally flat, Thomas also said.
“There’s a lot of flexibility in how you structure debt,” he later said. “This could be changed in a variety of ways. It’s not going to really change the interest rate.”
Although election years sometimes spell volatility, interest rates have been trending down, he also said.
“The idea here is when you build a project, we have a dedicated tax source, which is really strong … investors really like that. The city asked voters for the tax, but to borrow the money, it would be under the lease structure, which is the most common financing structure in Colorado,” Thomas said.
The lease would be on the building itself. The lessor would assign its interests in a lease-purchase agreement to a trustee, customarily a commercial bank, which holds title to the property and collects the lease payments from the municipality, then makes payments to the investors.
“It’s a financing plus real estate transaction kind of wrapped up in one,” Thomas said after the meeting. “No matter what, the city still owns the property.”
Mayor Pro-tem Barbara Bynum, formerly on the Montrose Recreation District board, pointed to the COPs used to finance the Community Recreation Center when it was being built. It was important to make the local investing community aware of the opportunity, she said, asking if D.A. Davidson would be willing to talk to locals.
Thomas said that could be a priority.
“We sell to the universe. They (COPs) are on sale to everyone. … We can make sure we put a retail priority on this,” he said, adding that the city can also promote the process.
Councilor Roy Anderson said after the work session he was concerned about not underestimating financing needs and that the cost-estimate for the police department was completed last year. Costs are on the rise, he said.
“They’re increasing very rapidly in Montrose. There’s a lot of things involved, like the demolition of existing buildings in the way, furnishings and all these incidental things that go into the total project, beyond just the construction costs of the building,” Anderson said.
“All we said was the estimated costs they calculated last fall was about $16 million. Those things change practically monthly and then there are those extraneous costs. It seems to me you fund yourself a little bit generously and then are not in a crisis in the middle of building that you did not expect,” he said.
He said he is leaning toward borrowing a higher amount, but also that the city is still receiving expert advice on its financing options.
Bynum said after the work session that financing options are merely in the discussion phase.
“We don’t even have an architect yet, or a general contractor. It’s way too early. We weren’t basing (our) questions on anything other than, ‘Let’s look at a couple different scenarios,” she said.
“Council appreciates when we are given some options by staff. … I appreciate we were given three different scenarios so we could see the effect of borrowing more or borrowing less would have on annual payments.”
City council does not make formal decisions at work sessions. Bynum said it appears councilors are leaning toward the COP mechanism, although formal action has not been taken.
Bowman, also after the meeting, said that the COP package is attractive, particularly because of the current interest rate.
“We’re very fortunate that we said we thought we would borrow at 3.5 percent. It’s actually 3.06 percent,” he said. The city needs to get that locked in, Bowman also said.
“The information given to us today is very good news for the taxpayer. I hope the council keeps in mind they said they were only going to borrow $16 million. They were given three options and it’s up to everyone to do what is best for the community,” Bowman said.
The mayor reiterated that no decision has been made.
“I just know what I told the community,” he said during the work session, after Bell said construction costs are on the rise locally and the $16 million estimate was for construction, not design or furnishings.
Bowman said if council wanted to go to $16.46 million, there is money in capital reserves.
“I would just like to remind council that when we floated (ballot measure) 2A, we told the community we were going to borrow $16 million. I want you to keep that in mind as you look at these figures,” Bowman said.