Strong investor demand lowered the city's borrowing costs, while officials say the water and sewer system can take on its share of the new debt without a rate increase tied to the financing.
The Commerce City Council has approved the final pieces of a financing plan that will put $8.5 million toward water and sewer improvements and other capital projects while restructuring some of the city's existing debt.
Council members approved the measures during a short special meeting Aug. 4. While much of the 16-minute meeting dealt with the mechanics of municipal bonds, the decisions will affect how Commerce pays for infrastructure projects over the next quarter-century.
Here's what Commerce residents need to know.
The city is getting $8.5 million for projects
The largest portion of the new money will be used for improvements to Commerce's water and sewer system, according to the city's financial advisor. A smaller portion will pay for other governmental capital projects.
The city expects to receive the $8.5 million when the transaction closes Aug. 27.
The new debt is being issued as certificates of obligation, a common form of municipal financing that allows Texas cities to borrow for certain capital projects without holding a bond election.
At the same meeting, the council approved a separate refinancing of existing city debt. That refinancing is intended to rearrange upcoming payments and create room in the city's budget for the new borrowing.
Most of the new debt won't be paid with property taxes
One important distinction in the financing is how the debt will be repaid.
The smaller governmental portion will be supported by property tax revenue. The much larger portion associated with water and sewer improvements will instead be paid from revenues generated by the city's utility system.
Jorge Delgado, representing the city's financial advisor Hilltop Securities, told the council the water and sewer system is financially healthy enough to absorb the additional debt.
After paying both its existing debt and the new obligation, Delgado projected the utility system would still have an annual surplus of roughly $315,000 to $340,000.
He told council members the borrowing itself should not require an increase in utility rates.
That does not necessarily mean Commerce water and sewer rates cannot change for other reasons. Rather, the city's financial advisor said the additional debt can be serviced with the revenues the system is currently expected to generate.
The property tax picture improved somewhat
Commerce officials received another piece of favorable news before completing the transaction.
Earlier estimates from the Hunt County Appraisal District had suggested the city's taxable property values might decline. When values were certified, however, the city's tax base showed slight growth instead.
That matters because a larger tax base can spread the cost of the city's debt across more taxable value.
The financing plan presented earlier this year anticipated that Commerce might need a debt-service tax rate of around 23 cents per $100 of taxable value. The final financing itself reduced that calculation to about 21.94 cents.
But that is not the rate Commerce property owners are currently expected to see.
Assistant City Manager Jamie Campbell explained that the Hunt County Tax Office performs an additional state-required calculation that accounts for factors including collections and money already available in the city's interest-and-sinking fund.
After that calculation, the proposed debt-service portion of Commerce's property tax rate is approximately 18.78 cents per $100 of taxable value.
Campbell said the revised figure is close to the number council members had already been using during budget discussions and does not materially change the city's proposed budget.
The debt-service rate is only one component of the city's total property tax rate.
Investors wanted more Commerce bonds than the city had to sell
The city also received strong demand when the debt was offered to investors Aug. 4.
Commerce brought approximately $11.2 million in bonds and certificates to market, including both the new borrowing and the refinancing. Investors submitted approximately $31.5 million in orders.
In other words, investors sought nearly three times as much Commerce debt as the city had available to sell.
That competition allowed the underwriter to reduce the interest rate slightly. Delgado estimated that the change saved Commerce about $44,000 in interest over the 25-year life of the financing compared with estimates prepared the previous day.
The final borrowing cost on the certificates was approximately 4.78 percent.
Commerce kept its AA-minus credit rating
Standard & Poor's also affirmed Commerce's AA-minus credit rating with a stable outlook before the sale.
According to the presentation to the council, the rating agency cited the city's healthy fund balances, historically stable financial operations and conservative budgeting practices. It also pointed to Commerce's university presence and its mix of industrial, residential and retail activity.
The rating agency did note the city's existing debt burden, but continued to characterize it as manageable.
A stronger credit rating generally makes a government more attractive to investors and can reduce what taxpayers and ratepayers ultimately spend on interest.
Some of the debt could be refinanced again
The refinancing approved Aug. 4 is taxable debt, which makes it more expensive than tax-exempt municipal borrowing.
The city's financial advisor said the current structure was deliberately designed to give Commerce room for roughly the next five years. At that point, the city could potentially refinance the debt again using tax-exempt bonds if market conditions and federal tax rules make doing so advantageous.
That could lower future interest costs.
It is not guaranteed. Interest rates, property values, city finances and other conditions could change before another refinancing becomes possible.
For now, the new debt carries a fixed interest rate, meaning the city's interest cost on this transaction will not rise if broader interest rates increase.
The bottom line
The Aug. 4 meeting accomplished two related things: Commerce refinanced some of its existing obligations to make its near-term debt payments more manageable, and it authorized $8.5 million in new capital funding, primarily for the water and sewer system.
The city says its utility revenues are sufficient to cover the utility portion without a rate increase specifically caused by this borrowing. Slight growth in taxable property values and favorable results from the bond sale also left the city's projected debt-service tax requirement lower than officials anticipated earlier this year.
The tradeoff is that Commerce is committing to additional long-term debt, with the new financing extending as far as 2051.
The City Council approved both financing measures unanimously.
The full Aug. 4 special meeting is available below.
