City works with state on bond packages

August 20, 2012
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Grand Rapids city commissioners approved three bonds last week that should be worth about $40 million to the city when sold.

The first is a junior lien revenue bond that the Michigan Finance Authority will buy for $4.9 million at an interest rate of 2.5 percent. The city will use the proceeds to make improvements to its water-supply system, most notably to the East Paris Service Center in Kentwood. The city will upgrade and expand the 35-year-old service center and replace the pumps.

The bond receipts also will pay for the installation of a 1,700-foot watermain on Patterson Avenue SE and for a public easement between 33rd Street and 36th Street SE. Both locations are also in Kentwood.

A junior lien revenue bond signifies that a buyer has a subordinate, or secondary, claim against a seller’s revenues. In contrast, buyers of senior lien bonds have first rights to the revenues or property of a seller. City Debt and Authority Finance Officer Jana Wallace said the bond’s debt service will be paid from revenues the city’s water department receives. The transaction should be completed around the middle of next month.

“They’re willing to subordinate their debt for us,” said City CFO Scott Buhrer.

“This is the second year we’ve used the Michigan Finance Authority to pay for this. The 2.5 percent interest rate is a positive for us. We will probably use this again next year,” said Wallace. But she added that the city’s water-supply system will probably be in too good of a condition to go back to the MFA after next year. “After 2013, we don’t expect to be eligible for this again,” said Wallace.

Commissioners also gave the Grand Rapids Building Authority the green light to issue two series of refunding bonds that are not to exceed a total of $35 million. The bonds were originally issued in 2002 and 2004. The revenue was used to renovate the building at 1 N. Division Ave. into a home for a Secretary of State office and the U.S. Bankruptcy Court.

The state leases the building from the city and originally was going to occupy all of it. But Lansing pulled back from the plan and subleased a portion of it to the bankruptcy court.

The Michigan Department of Management and Budget asked the city to refund the bonds because interest rates are lower today than the 8 percent that was common when the securities were sold eight and 10 years ago. One refunded bond will be tax-exempt and is expected to raise about $18 million with an interest rate of roughly 5 percent. The other will be a taxable bond for not more than $17 million with a 6 percent rate.

Wallace said she expects the bonds will be priced next week. Closing is set for the second week of September. The building authority approved the sales agreement a few weeks ago.

The state’s rental payments will be used to cover the debt service. The state has agreed to pay the city $2.7 million annually for its lease through September 2028, once the bonds are sold. Currently, the state pays rent of $2.8 million per year for its space in the structure.

“It’s been a very good relationship with the state. As for the city, there are no savings,” said Wallace. “There is no detriment to the city. We’re being very good stewards for doing this.”

Prior to its current use, the building on the northwest corner of Division and Fulton Street was, at various times, home to Kidzmall, City Centre Mall and Herpolsheimer’s, a popular department store.

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