City Council signed off at its meeting Tuesday on issuing a little more than $8 million in bonds to buy out a lease and refinance a land purchase, in a transaction that will free up money to help close Lancaster’s 2025 budget gap.
In 2021, the city government used $5.9 million in federal American Rescue Plan Act funds to buy 30 acres adjoining its Oyster Point reservoir, to provide for future expansion needs. Subsequently, the U.S. Treasury finalized rules that disallow the use of ARPA funds for that purpose.
The bond issue will allow the city to substitute bond funds for the ARPA funds, returning the ARPA funds to the city’s coffers for reallocation.
In all, the city received $39.5 million in ARPA. Excluding Oyster Point, it has committed $36.1 million of it, which means $3.4 million of the money refunded from the Oyster Point purchase is available. All ARPA money must be allocated by the end of 2024; any unused dollars return to the U.S. Treasury.
In July, Mayor Danene Sorace said that if Lancaster adopts home rule in November, allowing City Council to raise the Earned Income Tax, she would recommend using $2.4 million of the $3.4 million to balance the 2025 budget, but putting the remaining $1 million toward renovating the Ewell Gantz Playground, Joe Jackson Tot Lot and South End Park in the city’s southeast.
If home rule doesn’t move forward and Lancaster remains under its existing tax structure, all $3.4 million would have to go toward the budget, she said.
About the bond
The bond issue’s other component involves the buyout of a 2013 lease for property owned by the High Cos., where the city built a pump station. The buyout will cost $2.3 million, city Director of Administrative Services and Daryl Peck of Concord Public Finance told City Council.
Adding in the $5.9 million for the Oyster Point refinancing, plus capitalized interest and issuance and insurance costs brings the total to $8.4 million.
The city was open to doing either a bank loan or a bond issue, Peck said: Its due diligence, which included reaching out for terms from more than 30 banks, determined that a bond issue was the better deal. A bond auction conducted Tuesday morning yielded an offer from Bancroft Capital with an interest rate of 3.857%.
The lease buyback component of the bond will be paid back over 12 years beginning in 2025, with annual debt service of around $240,000. Current lease payments are $268,000, so the net result is an annual savings.
The land purchase refinancing, however, will add to the city’s debt load, albeit modestly. Repayment will start in 2026, with annual debt service of around $475,000. When Peck first discussed the bond issue with City Council in June, he had conservatively estimated debt service at more than $500,000; paying less is “a much better end result,” he said.
The debt will be paid out of the city’s water fund. It is planning to seek rate hikes on its suburban customers from the Public Utility Commission in 2025; that’s why the debt service on the Oyster Point refinancing starts a year later, Peck said.
Credit rating
As is standard when a municipality issues debt, Lancaster’s credit rating was reviewed and renewed. Its rating remained at A3, but its outlook was upgraded from negative to stable. That’s “great news,” Peck said.
In its rating, Moody’s applauded the increase in incomes in Lancaster from 64% of the U.S. median to 84% currently. Red flags include high debt — more than three times revenue — and limited liquidity.
“Lancaster is likely to spend down some of its remaining cash as it exhausts its federal stimulus funds, and its ability to find solutions to build liquidity will determine its credit trajectory after that,” the agency said.