The payments will be packaged into a new bond which will be paid off over the next five-years. In the first year of the new bond, the city will levy $89,500, with the levy amount for the remaining four years of the bond set at $98,600. Steve Mattson on behalf of Northland Securities said the reason for the higher levy in the final four years of the bond was because the interest rate of the bond was much higher than anticipated. Rather than adjusting the bond levy in the first year, Mattson said the levy amount was kept the same in the first year since he had already given the council an estimated payment amount, and 2009 preliminary levy already passed based on that amount.

Mattson said ideally the economical situation in Starbuck will turn around so the bond, which is currently being backed by Northland Securities, can be sold and a lower interest rate achieved.

While the bond is set up over a five-year payback, Rusty Fifield of Northland Securities said “if the financial planning works out you can make this debt go away sooner,” and avoid further interest payments. He said the new bond will give the city some financial flexibility to get out of its current financial shortfall, without defaulting on the general obligation bonds.

If the city had failed to make the December payments, Mattson said any number of negative actions affecting both Starbuck and potentially the state could occur.

Mattson said some of the repercussions for not making the general obligation bond payment included everything from: bond holders being upset about the missed payment, front page stories in the Star Tribune and Pioneer Press stating the missed payments and financial situation in Starbuck, and virtually no chance of borrowing money while being in default, which could in turn worsen the city’s financial situation to the point where bankruptcy would be an option.

In addition, Mattson said by defaulting on the bond, Starbuck would be affecting the credit rating of the school district and county, as well as hurting the chances of other cities in the state who are looking to bond in the future.

“It is a multi-multi million dollar problem if Starbuck went down,” and failed to make a payment said Mattson.

Fifield said he didn’t recall hearing about a general obligation bond going into default in his lifetime in Minnesota.

“There are few investments that people look at with the same security as a general obligation bond of a Minnesota city,” said Fifield. “A default by anybody takes that away and I think that would really be unfortunate.”

The current $367,940.75 December 1 and 15 bond payments, will end up costing approximately $385,000 at its current six percent interest rate, a rate Mattson said is approximately two percent higher than most cities in the state due to the current financial situation in Starbuck. The $385,000 total includes the interest and fees for setting up the bond itself.

Financial analysis

As part of the refunding of the December 1 and 15 bonds, Fifield did a financial analysis of the City of Starbuck to find out the best course of action to correct the current economical problem. Mattson said the analysis was meant as a way to look at where the city has been, where it is now, and where it is going to go.

During the presentation, Fifield pointed to a couple of the reasons for the current financial shortfall in Starbuck, including: a lack of an adequate reserve or “rainy day fund” incase some unforeseen issues arise, inadequate internal controls, and a 2008 budget which featured revenue falling short of projected totals and expenditures exceeding the budgeted amount.

Fifield said the city had approximately $45,608 in cash at the end of October, and will run close to a $250,000 deficit by the end of the year.

Given the current numbers, Fifield said there are a number of solutions the city needs or could take, some of which have already been taken by the city. Some of the solutions include: the passing of the refunding bond, increasing the 2009 levy (the preliminary levy was increased by 75 percent in September), sticking closer to the 2009 budget, additional financial planning, and adding additional financial management policies and controls.

Fifield said when the council looks at correcting the current measures it should look at the future and keep in mind “the solution for this doesn’t just lie in 2009, it lies in 2010 and beyond.” By raising the preliminary levy by 75 percent this year Fifield said the city “will begin the process of rebuilding fund balances.”

Though Fifield cautioned raising the preliminary levy by 75 percent in one year, after raising it approximately just 2.5 percent over the past few years, may be difficult for some to swallow, it was a necessary step to take.

In fact, Mattson reported that the 2009 estimated tax capacity rate for the City of Starbuck, is not too much more than levels seen in 2003 and 2004, when the tax capacity rate was 162.162 and 164.475 percent. The estimated tax capacity rate for the residents of Starbuck in 2009 is approximately 174.485 percent (this includes the tax capacity rates for Pope County, City of Starbuck, Minnewaska Area School District, and Pope County HRA).

In addition, Fifield said the council should take a look at adjusting the budgets to more equally reflect the spending needed. He said the council should look at what made the city go over its 2008 budget and figure out a way to correct the problem of overspending the budget in the future.
Fifield also said the council should come up with a list of controls and guidelines for general fund reserves and balances. When asked by Councilman Jamie Logan if the policies should be in writing or if Northland Securities had such a policy to suggest, Fifield said he knew of policies installed in other communities, which he could offer to Starbuck if so desired.

With only approximately $45,608 in cash on hand, Fifield was asked whether the money from the various city entities such as, the fire department and water and sewer fund, was included in that amount. He said even though those entities show a positive amount, when the general fund is in a deficit the money from those accounts will be used to offset the deficit.

Mayor Milo Holte explained that despite the money being shown up as a positive on a monthly expense report, when it came to the checking account that money may not be there if there is a deficit.

Next Step

In addition to passing the $385,000 refunding bond, the city has enlisted the help of Northland Securities to look at the 2009 budget. Fifield said the organization will help at the city’s discretion with the budget and “we want to be whatever resource we can to help you.”

The final levy is due to the county by the end of December.

The city has also scheduled a December 1, Truth-in-Taxation meeting for the taxpayers in Starbuck to discuss the 75 percent preliminary tax increase.

In other action

The Starbuck City Council performed the following action at its regularly scheduled meeting on November 10:

• Approved a refunding bond totalling $385,000 for the December 1 and 15 general obligation bond payments.
• Approved hiring Northland Securities to help with the 2009 budget.
• Approved granting permission to a group of people including Lori Vaadeland, to speak to the Minnesota DNR about possible expansion of the marina. The group would be doing such in conjunction with a 25-year revitalization project in Starbuck, which Vaadeland also presented to the city council for the first time.
• Heard from Darin Peterson who gave the council an update on the building currently being rented by T. Vincents Cafe. Peterson said his closing date for purchasing the building has been delayed, meaning work on reinforcing the stairwell has also been pushed back.
• Accepted the 2008 election results. In the City of Starbuck there were 781 registered voters at the beginning of the day on Nov. 4 with 721 people voting or 92.3 percent of the registered voters casting a ballot. There were also 172 new registered voters in Starbuck.
• Approved up to $150 apiece for two new batteries for the fire department.
• Approved payment for $5,000 for Innovative Builders for the community center contingent on a broken tile in the community center being replaced.
• Approved asking for bids for new water meters for the City of Starbuck. The new meters can be read each month electronically.
• Approved advertising the Senior Citizens Center/chiropractic office for sale. The building would be sold as one unit.
• Set December 1 as the date for the Truth in Taxation meeting for the City of Starbuck. The meeting will begin at 5:30 p.m. at the Starbuck Community Center.
• Set the next regularly scheduled Starbuck City Council meeting for December 8, at 6 p.m.
• Approved calling for a bid for the services of a new engineering firm. Currently the city enlists the services of Widseth, Smith and Nolting and the city would like to see what other firms could and would offer the city.
• Approved minutes from the October 13 Starbuck City Council meeting.
• Approved refunding 11 properties money for a storm sewer project south of town. The percent the group was suppose to pay on their special assessment was six percent, when in fact the group was paying an interest rate of seven percent. The property owners will be refunded the additional money already paid.
• Approved contract for Lakes Country Services Cooperative for health insurance needs.
• Approved bills totalling $71,437.12.
• Acknowledged receiving two letters, one from Michael Dinsmore and one from Harry Blok, concerning rental properties they own in the city.
• Closed meeting to fill out PERA survey.