HomeMy WebLinkAboutA014 - Resolution approving in Interfund Loan from the Electric Fund to the Resource Recovery FundITEM #:16
DATE:06-23-26
DEPT:FIN
SUBJECT:RESOLUTION APPROVING AN INTERFUND LOAN FROM THE ELECTRIC
FUND TO THE RESOURCE RECOVERY FUND
COUNCIL ACTION FORM
BACKGROUND:
The City is currently in the process of constructing the Resource Recovery & Recycling
Campus (R3C). To date, the City has incurred project-related expenditures associated with
land acquisition, engineering, design, permitting, and other pre-construction activities.
Additional project expenditures will continue to be incurred prior to the issuance of permanent
financing.
On June 9, 2026, the City received proposals from four financial institutions for the lending of
$24,000,000 General Obligation Solid Waste Disposal Bond Anticipation Notes (BANs) to
finance the project. Following a review of the proposals, PFM Financial Advisors, in
consultation with staff, determined that the interest rates received were higher than anticipated
and estimated that utilizing BAN financing would increase borrowing costs above original
estimates.
As a result, PFM recommended that the City finance the project through its regularly
scheduled General Obligation bond issuance planned for August 2026, with bond proceeds
anticipated to be delivered in September 2026. Based on this recommendation, the City
Council elected not to award a financing agreement for the BAN issuance and instead
directed staff to include the R3C project financing as part of the City's upcoming
General Obligation bond sale.
INTERFUND LOAN:
While permanent financing is expected to be available in September 2026, the Resource
Recovery Fund requires temporary financing to reimburse expenditures already
incurred and to provide adequate cash flow for ongoing project costs. Staff estimates
that up to $7,100,000 will be required during this interim period.
Interfund loans are a common municipal financing practice utilized by Iowa local governments
to address temporary cash flow and project financing needs. Iowa Code provides the authority
to local governments to transfer resources between funds and provides the statutory
framework under which these transactions occur. When a project has an identified repayment
source, interfund loans provide an efficient and cost-effective alternative to external short-term
borrowing.
The Electric Fund currently maintains sufficient available cash reserves to provide
temporary financing without negatively affecting utility operations, capital projects, or
reserve levels. Accordingly, staff recommends approval of an interfund loan in the
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amount of up to $7,100,000 from the Electric Fund to the Resource Recovery Fund.
The proposed loan will bear interest at a rate of 3.60% per year, which approximates the
earnings currently being received on City deposits held at First National Bank. As a
result, the Electric Fund will receive substantially the same financial benefit it would
have earned had the funds remained on deposit, ensuring that electric utility customers
are not disadvantaged by the temporary use of Electric Fund cash reserves.
The interfund loan is intended solely as a short-term financing mechanism until
permanent project financing is secured through the City's planned General Obligation
bond issuance. Upon receipt of bond proceeds, anticipated in September 2026, the
Resource Recovery Fund will repay the Electric Fund in full, including accrued interest.
The proposed interfund loan does not increase the overall cost of the project or authorize
additional project expenditures. Rather, it provides a temporary source of liquidity that allows
the project to continue moving forward while preserving the City's ability to utilize the lowest-
cost long-term financing option identified by PFM Financial Advisors.
The final amendment to the City's FY 2025/26 budget, approved by the City Council in May,
projected an ending fund balance of $43.4 million in the Electric Utility Fund. In accordance
with the City's fund balance reserve policy, $20.3 million of this amount is designated as
reserve, leaving approximately $23.1 million available above the established reserve
requirement. Additionally, as of June 17, 2026, the utility's cash and investment balance
totaled $52.1 million. Based on this information, the Electric Utility Fund is in a strong position
to provide the proposed interfund loan while continuing to maintain adequate reserves and
liquidity.
ALTERNATIVES:
1. Approve the resolution authorizing an interfund loan in the amount of up to $7,100,000
from the Electric Fund to the Resource Recovery Fund.
2. Do not approve the resolution and provide alternative direction regarding the interim
financing of R3C project expenditures.
CITY MANAGER'S RECOMMENDED ACTION:
The City initially pursued Bond Anticipation Note (BAN) financing for the R3C project.
However, proposals received from lenders resulted in borrowing costs that were higher than
anticipated. Following a review of the proposals, PFM Financial Advisors recommended that
the City instead include the project in its planned September 2026 General Obligation bond
issuance as the lowest-cost financing option.
Approval of the proposed interfund loan will provide the necessary interim financing to
fund project expenditures until bond proceeds are received, while ensuring that the
Electric Fund receives interest earnings comparable to those currently available
through its existing investments. Therefore, it is the recommendation of the City Manager
that the City Council adopt Alternative No. 1, as described above.
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