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Taxpayers lower Oak Harbor Marina bond rates

A hiccup in the bond market that caused Oak Harbor government to take out an emergency loan and alter its long-range plans for funding the marina dredging project may actually have been a blessing in disguise.

By waiting for the market to improve, and moving forward with a different type of bond than originally planned, the city was able to secure an interest rate of 4.03 percent, far below the original 5.6 percent weighted average. Over the next two decades, that tallies up to a savings of about $700,000 on the $2.56 million bonds.

“Essentially we’ll save about $35,000 a year,” City Finance Director Doug Merriman said.

As part of a long-term redevelopment plan, Oak Harbor hired Northwest Marine Construction in 2010 to dredge certain parts of the marina. Silt buildup in some areas, particularly around “A” dock, was so bad that fixed-keeled sailboats were stuck in the mud on extreme low tides.

Dredging was already underway in January when the city’s planned funding method was hamstrung by unexpected turmoil in the bond market. Attempts to lure buyers at reasonable interest rates were unsuccessful and the decision was made to wait until the market improved.

In the meantime, bills from the contractor were beginning to rack up so the city council approved an emergency funding option that allowed it to borrow $2.56 million from the city’s equipment replacement fund.

The delay also allowed Merriman and the city’s bond consulting firm, Seattle-based Martin Nelson and Company, to reevaluate the planned long-term funding method. Instead of looking for buyers for revenue bonds, they decided instead to recommend the city council approve the sale of Limited Tax General Obligation, or LTGO, bonds.

One reason was that the city’s bond rating for LTGO bonds – AA- – was a vast improvement over that of revenue bonds – Baa2. The “high quality” rating over the “medium grade” rating is the primary reason the city was able to sell the bonds at a better rate. With LTGO bonds, taxpayers are ultimately responsible to cover the debt if necessary.

According to Merriman, the score is earned through a complex methodology that looks at the overall financial security of the investment. Operational and revenue policies are examined closely to determine level of risk.

“The less risk you have, the higher your rating will be,” Merriman said.

In this case, revenue bonds, which would have been backed solely by marina revenues, compared to LTGO bonds backed by the general fund, were deemed to be far riskier by investors.

Although the marina’s financial practices were one of two findings identified by the state Auditor’s Office last year, Merriman said it did not contribute to the poor rating. Rather, there is a widespread perception that bonds backed by taxpayers are more secure than those that rely solely on revenue from a business-like entity, such as the marina.

The marina is not an actual city department, as it’s under the umbrella of Development Services. However, it is unique because it’s self-supporting and does not receive anything from the general fund.

Merriman also confirmed that the improved rating had nothing to do with the recent, and still unexplained, resignation of former Harbormaster Mack Funk. The rating methodology looks at financial policies, not operation management, he said.

And while proceeding with LTGO bonds appears to have been a money saver, they may carry a certain risk. The city still plans to pay for the dredging project with marina revenues alone, but in the event that it could not, the money would come from the general fund.

Anticipated marina revenues in 2011 are about $1.47 million while expenditures are estimated at $1.1 million. The annual bond payment is about $185,000 for the $2.56 million bonds.

Steve Powers, Oak Harbor’s Development Services director, said not making the payment is a very unlikely scenario. Marina occupancy appears to be holding relatively steady and is actually hoped to increase due to recent improvements, such as the dredging project, he said.

But even if occupancy dropped so much that it threatened the city’s ability to make the bond payment, the marina puts away money every year for capital projects.

“In a pinch you could utilize that reserve,” Powers said.

As of February, just 66 percent of the marina was occupied. That compares to an occupancy rate of about 71 percent at the same time last year.

Occupancy numbers always decline during the winter months and the dredging project was also a significant disruption, which makes it difficult to draw any solid conclusions from this months numbers alone. But while there does not appear to be an immediate threat, nothing is being left to chance.

“We can’t take it for granted either,” Powers said.

Powers said occupancy numbers are going to start being reviewed on a monthly basis and likely reported to the Marina Advisory Committee.

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