City Budget and the Premium

September 19, 2013 6:54 AM

On Tuesday, September 17, 2013 the city of Madison held a competitive sale of debt to raise funds for capital projects and equipment. The winning bid of 2.16%, which will cost about $600,000 less than the highest bid of 2.33%, reflects current market conditions and the city's Aaa bond rating.

In recent years, winning bids included a reoffering premium. When a bid includes a 'premium' it means the purchasers of the city's debt are willing to pay cash upfront in order to receive higher interest payments from the city in future years. 

The city placed a maximum price on the bonds. The goal was to obtain a targeted premium amount of $4 million, which was factored into my Executive Capital Budget. Prior to my taking office, the city was using this premium to help fund on-going operating costs. This violates a sound budgetary principle. Irregular revenue sources should only be used to fund programs that do not occur year after year.

It is my goal to use the $4 million in premium to fund capital projects-that will reduce the need for additional borrowing in the future.  Hopefully, despite disagreements on this point in the past two budget years, the city council will agree. In 2011, when I came into office, the city was projected to spend 20% of its operating budget on debt. Prudent decisions, despite some tough budget disagreements with the city council, means that, if the council adopts the recommended capital and operating budgets, only 14% of our 2014 budget will be devoted to paying off debt.

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