Q & A – Additional Considerations
Dated: October 14, 2020
Q: If Proposition B is passed, will the City be required to implement the Magellan Model?
A: The City will not be required to implement the model by Magellan Advisors. There is no existing contract agreement between the City and Magellan Advisors to implement the project.
Q: If the City is not comfortable proceeding with the Magellan Model as is, could they make changes to it?
A: The City Council would need to decide on the next steps in the broadband initiative and can make changes to the model as they see fit. The broadband feasibility study indicates as the City’s business environment and conditions change, it is important to periodically update the forecast and financial model with changes in the business environment as it moves towards the decision to implement the broadband utility.
Q: If the City decides not to use the Magellan Model, could they hire another company to do a broadband proposal or feasibility study?
A: The City Council would need to decide if they would consider hiring another broadband firm to conduct a broadband proposal or feasibility study. The City Council has the ability to authorize the use of funds for a specific purpose.
(Reference: Broadband Feasibility Study; Fiscal and Budgetary Policy)
Dated: October 12, 2020
Q: Can you guarantee that there will be no impact on property taxes as a result of this project (i.e. no funding will come from residents property taxes and no property tax increases will occur as a result of this project)?
A: The City cannot guarantee there will be no impact on property taxes as a result of the project. The sample ballot language for Proposition B indicates: “The issuance of not to exceed $19,190,000 of City of Lucas, Texas general obligation bonds for a fiber optic cable utility system to provide broadband internet service, and the levying of a tax in payment thereof.” General obligation bonds (GO Bonds) are backed by the full faith and credit of the City as well as the City’s ad valorem taxing authority. GO bonds must be authorized by a vote of the citizens of Lucas. It is not the City’s intent to impact property taxes and the broadband feasibility study recommends the City to take a conservative and measured approach on building a sustainable operation through careful planning and phasing of the system. (Reference: Fiscal and Budgetary Policy; Broadband Feasibility Study)
Q: If the Lucas Broadband Project is approved, will those costs be reflected in local taxes outside city limits? Are non-Lucas resident voters allowed to vote in the bond election?
A: If the project is approved and moves forward, the project would be implemented and operated within the City limits and would not affect non-Lucas residents living outside the City. Non-Lucas residents are not eligible to vote in the City’s General and Special Election. (Reference: City of Lucas Elections Webpage)
Dated: September 21, 2020
Q: How do General Obligation Bonds work?
A: On page 124 under the section Types of Debt of the City’s Fiscal and Budgetary Policy, General Obligation Bonds (GO Bonds) must be authorized by a vote of the citizens of Lucas. GO Bonds are used only to fund capital assets of the general government and are not to be used to fund operating needs of the City. The full faith and credit of the City as well as the City’s ad valorem taxing authority back general obligation bonds. The City’s Fiscal and Budgetary Policy is available at: https://www.lucastexas.us/financial-policy/. (Reference: City of Lucas Fiscal and Budgetary Policy)
Q: I’ve been hearing that the City would need to keep cash on hand as collateral for the amount of the General Obligation bond, and that the city would have limited funds available for other projects. In addition, would this large bond limit the city’s ability to complete other necessary projects?
A: At the September 17 City Council meeting, the Council indicated adding a future agenda item to review the updated Capital Improvement Plan (CIP) and to prioritize the funded and unfunded projects. Should the voters approve the GO bond for the broadband project and the Council adopts a bond ordinance, the Council has the authority to approve the prioritization of capital projects and consider the availability and appropriation of funding resources for any approved project(s).
On page 117 under the section Capital Improvement Plan (CIP) of the City’s Fiscal and Budgetary Policy, all capital project expenditures must be appropriated in the capital budget. The Finance Director or City Manager must certify the availability of resources before any capital project contract is presented to the City Council for approval.
On pages 126-128 under the section Fund Balance Policy, the City will maintain minimum reserves in the fund balances to provide a secure, healthy financial base for the City. The fund balance provides cash flow liquidity for the City’s general operations. The assigned fund balance comprises of amounts intended to be used by the government for specific purposes. In governmental funds other than the general fund, assigned fund balance represents the amount that is not restricted or committed. This indicates that resources in other governmental funds are, at a minimum, intended to be used for the purpose of that fund. Please refer to the policy for more information on the types of fund balances.
The City’s Fiscal Year 2020-21 Operating Budget also includes fund balance summaries and capital projects on pages 4-6 at the following link: https://www.lucastexas.us/documents/fy-20-21-city-of-lucas-proposed-budget/. Additional information on the City’s projected reserves, funded and unfunded priority projects is available in Agenda Item No. 5 under Budget/Financial Impact of the 9/17/2020 City Council meeting agenda at the following link: https://www.lucastexas.us/meetings/city-council-september-17-2020-2/#/tab-agenda. (Reference: City of Lucas Fiscal and Budgetary Policy; City of Lucas FY 2020-21 Budget; and 9/17/2020 City Council Meeting Agenda Item No. 5)
Dated: September 4, 2020
Q: Is there a link to the City’s Fiscal and Budgetary Policy that refers to Debt Management and Types of Debt?
A: The City of Lucas Fiscal and Budgetary Policy can be found at the following link: https://www.lucastexas.us/financial-policy/. Please refer to pages 123 to 126 for the section on Debt Management, and the subsection Types of Debt can be found on page 125.
Q: Since interfund transfers do not create external liabilities, does the Council have wide latitude to set policy/terms however they deem appropriate? Is there a historical precedent for interfund loan arrangements (e.g. have similar working capital loans/terms been made to the Water Utility fund)?
A: The Council has the ability to authorize the use of reserve funds and any appropriate terms. On page 125 of the City of Lucas Fiscal and Budgetary Policy, debt structuring may refer to market factors, such as the effects of tax-exempt designations, the cost of early redemption options, and will be given consideration during the structuring of long-term debt instruments. The City does not have any historical precedence for interfund loan arrangements. (Reference: City of Lucas Fiscal and Budgetary Policy)
Dated: September 1, 2020
Q: Has the City considered any funding strategies to discover hidden opportunities and modeling the use of city funds differently from the bond’s working capital in the financial model? Are there any legal or fiduciary hurdles with this?
A: Generally speaking, the City of Lucas tends to be fiscally conservative and risk adverse due to the fiduciary responsibilities associated with managing taxpayer dollars. The City currently has no formal business plan related to the project. Should the bond election/project be approved by voters, staff would need to gain approval from the City Council on the next steps in the broadband initiative which would include the development of a formal business plan where buildout strategies and additional funding strategies would be considered. In regard to internal borrowing between city funds, the City may authorize the use of reserves as “loans” between funds. Council’s direction for the feasibility study was that borrowed funds would be repaid at a rate consistent with current market conditions. Feasibility study projected that the loans will be repaid within ten (10) years. The loan will be considered an investment of working capital reserves by the lending fund.
(Reference: City of Lucas Fiscal and Budgetary Policy, Section: Debt Management – Types of Debt)
Q: If re-engagement with Magellan Advisors is not possible, could the City run official analyses manipulating only the “standard accounting” portions of the financial model?
A: The City is currently not considering any additional analyses to manipulate portions of the financial model due to the infinite financial scenario possibilities. Any official information related to the broadband project should be derived from the broadband feasibility study and documents posted on the City’s broadband webpage at https://www.lucastexas.us/departments/lucas-broadband-project/.
(Reference: City Council Direction, City of Lucas Broadband Project Webpage)
Dated: August 28, 2020
Q: What is the cost to the City for re-engagements with Magellan Advisors for additional financial model scenarios?
A: The contract agreement with Magellan Advisors indicates that the hourly rate for services is $175 per hour. (Reference: Magellan Advisors Contract)
Q: Would it be possible to run a “+20% rate” version of the model at various take rates to see how it affects sustainability? Also, can it be modeled to allow residents to bear the full cost of connection and/or giving residents the ability to make pledge contributions could capture more “goodwill” from enthusiastic residents and reduce the upfront costs borne by the City?
A: There are infinite financial scenarios that can be modeled and analyzed using various take rates to see how it affects the sustainability of the project. Per the scope of work in the contract agreement with Magellan Advisors, the final broadband feasibility study including modeling financial scenarios has been completed. Any other services for analyzing financial scenarios would be at an additional cost to the City. The City is currently not considering requesting additional financial scenarios due to infinite financial scenario possibilities, the completion of the broadband feasibility study, and that the scope of work in the contract agreement with Magellan Advisors has been fulfilled. (Reference: City Council Direction and Magellan Advisors Contract)
Q: Has the City considered any strategies for “working the financing harder” to discover hidden opportunities?
A: Generally speaking, the City of Lucas tends to be fiscally conservative and risk adverse due to the fiduciary responsibilities associated with managing taxpayer dollars. (Reference: City of Lucas Fiscal and Budgetary Policy)
Q: Can the City put something together to give residents a more intuitive feel of how the take rate / service rate / payback period / potential tax liability interact in different scenarios?
A: As stated previously, the City is currently not considering requesting additional financial scenarios due to infinite financial scenario possibilities, the completion of the broadband feasibility study, and that the scope of work in the contract agreement with Magellan Advisors has been fulfilled. (Reference: Magellan Advisors Contract)
Dated: July 2, 2020
Q: What are options to explore possible public-private partnerships to implement a broadband network?
A: Partnerships can take many different forms. In a potential partnership, assuming the City would fund the infrastructure buildout, and would be required to cover debt service, and other relative expenses, it is questionable whether a private partner could provide a better service at a lessor cost. The partner would have to charge fees for its services, associated operational expenses, overhead, and profit requirements, which would likely require higher rates than is already proposed. Magellan does not see a partnership opportunity unless the City were willing to fund the infrastructure outright or would be willing to make key investments into the partners buildout costs. (Reference: Courtney Violette and Scott Moehnke, Magellan Advisors)
Q: What are options to having a third party manage this broadband system for the City?
A: We believe it would be very difficult to outsource the entire operation without raising the rates…. Debt service on the infrastructure build/deployment drives rates higher already. Add in private sector profit requirements, and rates would likely have to increase from where they are proposed today… (Reference: Courtney Violette and Scott Moehnke, Magellan Advisors)