Crestwood aldermen: Keep excess cash or prepay debt?

Adviser suggests aldermen make decision by early March


Crestwood aldermen will decide in the coming months whether to use excess cash in the city’s general fund to prepay debt on an annual-appropriation note to Royal Banks of Missouri or convert that note from tax exempt to a more costly taxable status to retain cash balances.

The city’s $2.87 million note approved in October 2006 with Royal Banks of Missouri to refinance and pay off remaining debt through a tax-rate increase approved in April 2006 by voters contains an Internal Revenue Service provision that limits the city’s general-fund balance to no more than 5 percent of the previous year’s expenses.

Aldermen already have transferred money out of the city’s general fund to keep the majority of that note as tax exempt, but still must decide whether to convert more roughly $400,000 in excess cash above the 5-percent limit into a more costly taxable note.

Aldermen voted unanimously Dec. 11 to repay from the general fund $331,228 to the capital-improvements fund and $53,281 to the sewer-lateral fund.

City Administrator Frank Myers has said that cutting down the general fund’s cash balance to no more than 5 percent of this year’s expenses in that fund to keep the note tax exempt would result in the general fund’s cash balance being negative by the end of the year.

But financial adviser Carl Ramey of Stifel, Nicolaus & Co. told aldermen last week that the city essentially has three options to use its excess general-fund cash:

• Prepaying existing debt that would otherwise be paid by residents through the 2006 Proposition S tax-rate increase.

• Converting the excess cash above 5 percent into a separate taxable note.

• Converting the entire annual-appropriation note with Royal Banks of Missouri into a taxable note.

“The first scenario is we’re not doing anything except taking our excess cash and prepaying,” Ramey told aldermen Jan. 8. “The second scenario is we’re going to convert just that portion of the excess cash this year to a taxable (note) and we’re going to retain the balance as tax exempt. And the third is let’s consider entirely converting to a taxable note so that in the future you don’t have the question of the 5-percent IRS limitation. And I think that those are things that deserve a couple things from me.

“No. 1, I think I need to develop for you financial scenarios so that you can look at them and say this is the end result, this is the impact of this decision. I would anticipate working with Royal Banks in the process so that we can have some accurate numbers before you so that you can look at what the overall, at the end of the day, what it’s going to cost you to go either direction or any one of the three directions.

“And then finally, you’re going to have to as a board decide is it more important for us to preserve some of this cash, all of this cash or prepay? I don’t know that there is an absolute right answer or an absolute wrong answer.”

The city owes principal and interest on the note on March 1. April 1 is the latest date the city can determine to what extent the general-fund balance exceeds the federal 5-percent limit under a tax-exempt note. After April 1, the city would have 10 days to make a prepayment on the funds above the 5-percent limit.

Ramey said he would have those scenarios presented in February to aldermen and advises the board to choose an option in late February or early March.

“There is no hurry, no urgency to do anything with respect to any conversion or potential conversion of that note between now and March 1,” Ramey said. “I see no reason to advise you to convert any portion to a taxable component when you have a tax-exempt payment coming up March 1.”

Ramey also said that the city’s auditor, Schmersahl Treloar & Co., likely would have an updated balance for the general fund by the Board of Aldermen’s Jan. 22 meeting.

“I think it is critical that we all come together and agree on what the actual number of excess is,” Ramey said. “What is that number? It’s my understanding that in December, you made some transfers. All of the things that had been projected in the month of December, the auditors are now in the process of closing out the books …”

Ward 4 Alderman Steve Nieder reminded aldermen that when the note was approved, city officials “promised” that they would pay it off if the city had excess cash instead of generating more money through Prop S, which produces more than $520,000 per year through a 20-cent tax-rate increase.

The successful ballot measure is scheduled to end in 2013.

“When we refinanced this debt, we promised the public we’d pay this thing off as fast as we can,” Nieder said. “… We took on an obligation to Royal Banks to pay them back if we exceed a 5-percent cash position. And here we’re trying to escape it. So basically, my opinion is we just pay as we go and move forward. We’ll decide that later.

“… I guess one other possibility that we might possibly investigate would be just totally refinancing the whole amount … Since we’ve demonstrated we have funds, we do have the money and are responsible in repaying the loan, possibly now we might have more people interested in refinancing the whole loan other than Royal Banks. Is that a possibility? …”

“It is a possibility, yes,” Ramey said.

“Would it be fair to say that we may draw more interest because we’ve demonstrated responsibility? …,” Nieder asked.

“I think the question the bank might have is after … a year and a half, you move from one bank to another,” Ramey said. “I don’t know whether or not you would get a lot of interest or whether people would sit there and say: ‘I don’t know if I’m going to have this loan in another year. So what would my interest rate be?’ I think that I would be a little skeptical if I were a financial institution.”

Ramey reiterated that if aldermen were to pursue a tax-exempt note with another bank, that 5-percent limit still would be in effect because it is federally mandated.

“If you’re going to keep it tax exempt, you will always have that cost,” Ramey said. “That’s not a Royal Banks issue. That is an IRS issue. That’s a federal-government requirement. If you’re talking about going out and determining if you’re going to completely convert it into a taxable note, that may be something to look at in the market and do some work and see whether or not there would be people interested because now all of sudden you’re changing the rules of the game.”

Myers said conversion of the city’s debt into a taxable note would not only allow the city to retain its cash balances, but also eliminate the issue of wrestling with that 5-percent fund-balance limit each year.