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The City has addressed two separate major financial issues over the past few weeks, and the two highlight some of the complex changes underway in Marco Island and the country.

These issues specifically involve the issuance of debt to support the continuing Septic Tank Replacement Program (STRP), and the changes in the bond market that have resulted in the city’s loss of bond insurance. The issues are largely unrelated, but show the difficulties of financing large projects in a changing economic environment.

Why issue bonds now to pay for construction? The city continues the construction of the STRP and in November, the City Council approved an interim $11 million short-term bond to pay for construction. Clearly one question of importance to all of us is whether the city should continue to issue debt and continue with this major project in today’s environment.

City Council made a commitment to move forward with the STRP three years ago, and construction on this multi-year project is both underway and timed with bond issues or debt to pay for this construction. The construction is taking place in advance of the bond issue, with the debt timed to keep the city’s expenses and costs to each taxpayer as low as possible. This new interim debt is to cover the cost of construction already obligated and to some extent complete.

The $11 million bond is a short-term loan to bridge today’s volatile bond market until the city is able to secure a $35 to $40 million water/sewer revenue bond issue as the market stabilizes within the next few years. This larger bond issue will replace the interim $11 million financing with Fifth Third Bank, and will provide financing for the major capital construction currently underway on the utility system upgrades. This larger bond issue will also be the permanent funding source for the $24 million in construction commitments that are currently underway.

How do the current credit problems of the nation affect past bond issues? In 2004, the city purchased the water system from Florida Water Services, Inc. With this system the city did not have the utility operating experience that would allow the bond rating agencies (Moody’s, S&P, Fitch) to assign a good rating to the utility system. Instead of paying the higher rates of interest with a lower rating, Marco Island did as most cities and counties do in this instance — bought bond insurance through MBIA to achieve the AAA rating — generally the only reason to buy bond insurance.

If the city’s natural rating had been high enough to result in an A or AA rating, the insurance would have been an unnecessary expense.

The bond commitments required the city to either maintain bond insurance to merit the AAA rating or to set aside adequate reserves to protect investors. With the collapse of many of the bond insurance companies over the past few weeks, cities, counties, and utility districts are scrambling to find replacement insurance or build reserves.

This issue is the utility system debt, which is treated as a business operation. Unlike general obligation debt, this revenue debt does not pledge the full faith and credit of the city, but instead pledges the utility system’s revenues as the source of funding. The bond agencies recognize this difference with slightly higher interest rates.

The city’s financial advisors believe that we can establish and fund an increase in the system’s reserves with little or no impact to our rates through a series of investment alternatives, but clearly everyone is trying to work through this rapidly-changing issue.

Thank you for living in and supporting Marco Island. The city is always working with residents and customers on a variety of issues, including utility and other services, and the city’s Web site, cityofmarcoisland.com, provides a wealth of information and listing of contacts and offices. In addition, I am always available to meet personally or by e-mail at sthompson@cityofmarcoisland.com or by telephone at (239) 389-5001.