# Budget COW-Bond, Dept, and Capital - April 28, 2011 > Auto-transcribed civic record · April 28, 2011 - **Permalink**: https://meetings.lexingtonky.news/meeting/1990 - **Source video**: https://lfucg.granicus.com/player/clip/1990?view_id=14&redirect=true - **Date**: 2011-04-28 - **Last revised**: July 17, 2026 - **Length**: 2,089 words > ⚠️ **Auto-generated content.** Audio from the official Granicus video was auto-transcribed with OpenAI's open-source Whisper large-v3-turbo model, run locally by The Lexington Times. Structured facts were extracted with GPT-4o; the narrative summary was written by Anthropic Claude. Verbatim wording may contain errors. See [methodology](https://meetings.lexingtonky.news/about/methodology) or [report a correction](mailto:editor@lexingtonky.news). --- ## Meeting Overview The Committee of the Whole met on April 28, 2011, to address municipal debt and capital planning matters. The meeting included 13 agenda items focused primarily on debt obligations and capital improvements, with presentations covering general obligation debt, revenue debt, and fiscal year 2012 capital planning. The committee took 1 vote during the session and heard 2 public comments. Three items were approved: FY12 Road Resurfacing, FY12 Capital Bond Reallocation, and the Eastern State Hospital Conduit Financing Update. The remaining 10 items were presented for informational purposes, including comprehensive reviews of outstanding debt obligations, debt service schedules, affordability tests for both general obligation and revenue debt, and capital improvement project assessments. ## Votes and Decisions A motion regarding permanent long-term financing for the Eastern State Hospital conduit bond passed by voice vote [timestamp: 00:07:58]. **Motion Details:** The motion recommended proceeding with permanent long-term financing for the Eastern State Hospital conduit bond. The proposal included replacing Phase 3 with Phase 4 and transferring the obligation to the state via lease agreement. **Outcome:** The motion passed by voice vote with no abstentions recorded. **Conditions:** Approval by Council is required for the following timeline: - First reading on May 12th - Second reading on May 26th - Bond sale by June 9th These dates were established to align with fiscal year end and state bond market timing considerations. ## Budget and Financial Actions The meeting addressed two significant financial actions: **Eastern State Hospital Conduit Financing** The government approved funding for Eastern State Hospital conduit financing through a $140,000,000 bond issuance. This bond offering is secured by a state ground lease and was directed to the Lexington and Fayette Urban County Government Public Facilities Corporation. **Capital Funds Reallocation** The government approved an amendment reallocating $3,634,359 in capital funds from various closed or dormant projects to support new capital initiatives. The reallocation directed funds toward four specific projects: Switches & Sewer, Elevator Repair, Kentucky Theater Fire Suspension, and Senior Citizen Renovation. ## Public Comment Two council members raised questions regarding the financial structure and risk associated with the proposed lease arrangement. **Council Member Beard** [timestamp: 0:10:09] addressed concerns about the risk of state default on lease obligations. Beard questioned the financial risk if the State of Kentucky fails to meet lease payments, noting that such a default would affect the state's credit rating. Beard also questioned the city's exposure to this risk despite the lease structure in place. **Council Member Henson** [timestamp: 0:10:09] sought clarification on bond phases and the city's financial responsibility. Henson asked whether the city would remain responsible for payments if the state defaults. In response, it was confirmed that the city would not service the debt and that the state would be responsible for making lease payments beginning in 2013. ## Contested Items **State Default Risk on Lease Obligation** Council members engaged in a heated discussion regarding the city's financial exposure related to a lease obligation with the State of Kentucky. The core concern centered on the potential consequences if the state failed to meet its lease payment obligations. The discussion addressed the legal and financial implications embedded in the lease structure itself, as well as broader questions about the state's financing practices. Council members raised concerns about how the city would be protected—or potentially left vulnerable—if Kentucky defaulted on its lease payments. The contested nature of this item reflected uncertainty about the adequacy of existing protections and the degree of risk the city was assuming through this arrangement. No specific outcome or resolution was documented in the meeting record. ## Overview of Debt & Capital Workshop: Controlling the Gap [timestamp: 00:00] This agenda item presented an overview of the city's debt and capital situation, focusing on the sustainability of long-term capital demands and current debt affordability metrics. **Presentation Content** The presentation addressed the city's outstanding general obligation and revenue debt, examining affordability tests and assessing capital needs across coming decades. A key finding was that capital demands projected over the next decades are unsustainable at current levels, indicating a significant gap between anticipated infrastructure and service needs and available resources. **Debt Affordability Status** The city's debt service burden relative to operating expenses and recurring revenue was analyzed against standard affordability benchmarks. The presentation indicated that the city is currently operating slightly above the 10% affordability target for debt service relative to operating expenses and recurring revenue, suggesting limited fiscal flexibility for additional debt obligations. **Outcome** This item was presented for informational purposes, providing the city with a comprehensive overview of its debt position and capital constraints. The presentation established baseline data and analysis regarding the gap between capital demands and fiscal capacity, which would inform subsequent discussions and decisions regarding capital planning and debt management strategies. ## Outstanding General Obligation Debt The city's outstanding general obligation (GO) debt was presented as an informational item. Key figures discussed included: * $387.8 million in outstanding GO debt * $158.7 million in GO leases * Debt service of $34.4 million in fiscal year 2011 * Debt service of $34.1 million in fiscal year 2012 The discussion emphasized the city's debt affordability position. While the city was noted to be slightly over the 10% affordability threshold, officials highlighted that the city maintains future debt capacity due to a downward-sloping debt profile. This means that debt obligations are projected to decrease over time, providing flexibility for future borrowing needs. The outcome of this agenda item was informational, with no formal action taken. ## Existing General Obligation Debt Service This agenda item provided an informational review of the entity's general obligation (GO) debt service obligations, both historical and projected. **Key Findings** The discussion focused on debt service metrics for fiscal year 2012. Debt service was projected to remain stable at 12.6% of operating expenses. When adjusted for recurring revenue, this figure fell slightly below the 10% affordability target, indicating a manageable debt burden relative to the organization's financial capacity. **Outcome** The item was presented for informational purposes, with no formal action required. The stable debt service projection and compliance with affordability benchmarks were noted. ## General Obligation – Affordability Test The city presented its affordability targets for general obligation debt service during this agenda item. The presentation established two key benchmarks: * 10% of operating expenses * 10% of recurring revenue The discussion confirmed that current debt service levels are slightly above these target thresholds, indicating that the city's existing obligations exceed the established affordability parameters. This finding underscores the need for fiscal discipline in capital planning going forward. The outcome of this agenda item was informational, providing the council and public with an assessment of the city's current debt position relative to its stated affordability goals. No formal action or decision was recorded as part of this discussion. ## Proposed General Fund Debt Service (as of FY11) This agenda item presented an informational discussion regarding the city's proposed general fund debt service as of fiscal year 2011. **Key Concerns** The discussion highlighted significant concerns about the city's capital planning capacity. A key issue raised was the "Unsustainable Capital Plan," which identified a fundamental mismatch between the city's long-term capital needs and its financial capacity to fund them under current affordability metrics. This gap between desired capital improvements and available resources was presented as a critical concern for the city's fiscal sustainability. **Outcome** The item was presented for informational purposes, allowing the governing body to understand the debt service implications and capital funding constraints facing the municipality as of FY11. ## Outstanding Revenue Debt Obligations This agenda item presented an overview of the sewer fund's outstanding debt obligations [timestamp: 00:03:13]. **Debt Overview** The sewer fund carries total debt of $64.5 million. Debt service obligations are projected to increase, with FY11 debt service estimated at $7.8 million and FY12 debt service projected at $11.1 million. **Risk Assessment** The presentation noted that the sewer fund maintains a lower risk profile due to its revenue-backed structure. The fund operates under a 125% coverage covenant, which provides an additional safeguard for debt obligations. **Outcome** This item was presented for informational purposes. ## Existing Sewer Revenue Debt Service [timestamp: 00:03:13] The meeting included a discussion of the existing sewer revenue debt service. The presentation confirmed that sewer fund debt service is stable and operating within industry norms. A key requirement discussed was the 125% net income and revenue coverage test mandated by bond covenants. This metric ensures that the sewer fund maintains sufficient revenue relative to its debt obligations, providing a financial safeguard for bondholders and the municipality. The outcome of this agenda item was informational in nature, with no formal action required. The discussion served to update the body on the current status and compliance of the sewer fund's debt service obligations. ## Revenue Debt – Revenue Affordability Test [timestamp: 04:20] This agenda item provided an informational overview of revenue debt affordability requirements. The discussion explained that revenue debt affordability is measured by a 125% coverage ratio of maximum annual debt service by net income and revenues. This coverage requirement represents a key covenant in bond documents and serves as an important financial metric for assessing the organization's ability to service its debt obligations. No specific concerns or debates were recorded during this discussion, and no particular speakers were identified in the meeting record. The item was presented as informational in nature, with the primary purpose of explaining the affordability test framework rather than deliberating on policy changes or responding to substantive questions. ## FY12 MPB – Road Resurfacing [timestamp: 00:05:36] The council considered a proposal for road resurfacing funding in the FY12 Municipal Performance Budget (MPB). The proposed funding totaled $3,076,710 and would draw from multiple sources including the Municipal Road Aid Fund, County Road Aid Fund, and Coal and Mineral Severance Funds. The agenda item was presented as a presentation to the council. No specific concerns or debate points were documented during the discussion of this item. The council approved the proposed road resurfacing funding. ## FY12 MPB – Debt This agenda item presented a proposal for the issuance of a $31 million taxable bond with a 20-year amortization schedule. The bond is intended to address Police and Fire Pension liabilities. The proposal is contingent on two conditions: an affordability test and a financial forecast. These requirements must be satisfied before the bond issuance can proceed. This item was presented as informational in nature, with no formal action taken during the meeting. ## Capital Improvement Project Review The meeting included a discussion of capital improvement projects and bonding decisions [timestamp: 00:05:36]. **Key Decision** The body decided not to issue capital bonds at this time, citing financial forecast concerns and affordability constraints as the primary reasons for this decision. **Project Review** The discussion included a review of unspent bond balances associated with closed or dormant projects. This examination of existing project funds informed the recommendations made regarding future capital spending. **Recommendations** Based on the financial analysis and project review, the body recommended limited funding for new capital improvement projects going forward. **Outcome** This agenda item was presented as informational in nature, providing the body with an overview of the capital improvement project status and the rationale for the bonding and funding decisions. ## FY12 MPB – Capital Bond Reallocation [timestamp: 00:05:36] The council reviewed a reallocation of capital bond funds totaling $3,634,359 from various closed or dormant projects to support new initiatives. **Reallocation Details** The proposed reallocation redirected funds from projects that were no longer active to finance the following new priorities: * Switches & Sewer * Elevator Repair * Kentucky Theater Fire Suspension * Senior Citizen Renovation **Outcome** The reallocation was approved by the council. ## Eastern State Hospital Conduit Financing Update A proposal was presented to refinance the Eastern State Hospital's Phase 3 temporary financing with permanent long-term financing [timestamp: 00:06:12]. The plan involves issuing a $140 million bond through the Public Facilities Corporation, which would be secured by a state ground lease. **Key Elements of the Proposal** The proposed transaction would remove the city's general obligation pledge from the financing structure, thereby transferring financial risk from the city to the state. This refinancing is intended to replace the existing temporary financing with a more stable, long-term funding mechanism. The bond sale was scheduled to occur by June 9th. **Outcome** The proposal was approved. --- ## Decisions - **Motion** — passed: Recommendation to proceed with permanent long-term financing for Eastern State Hospital conduit bond, replacing Phase 3 with Phase 4 and transferring obligation to the state via lease agreement --- ## Full transcript ...debt profile looking on what we had outstanding. To touch on that affordability, we spent months of last calendar year working on some type of debt management policy. There's kind of three components to when I started here, I guess a year and three days ago. One of the things I wanted to look at was our debt policy, cash management policy, and our capital improvement plan. We didn't really have formalized or at least updated plans. So we spent quite a bit of time last year working with council on our debt affordability or our debt plan. And what I pulled out of that is in draft form. And I've extracted out of that what we had worked on. What we had worked at. And at the time, based on looking at our comparable cities, based on looking at what the credit agencies supply, and based on actually looking at policies that we have had decades ago and what council has mentioned in numerous meetings, we went with 10% of recurring revenues and 10% of operating expenses, which does, as I mentioned before, put us slightly over what our ideal affordability test would be on our general obligation debt. We've worked in previous presentations on this graph, and again, just putting it in here, but the red at the bottom is what we have outstanding, and I talked previously we had that downward sloping. It's maybe a little high this year, but it does give us future capacity. But what this tells us, we have large, large, large capital needs. The green band in the middle is our five-year capital plan, And we look at that in pretty good detail on a five-year basis. That's where we issue pension bonds as originally proposed by the previous administration. And we have some recurring projects in there. And then that gray band to the top and to the right is just an assumption of $15 million thereafter of projects. So basically anything above the red is what's kind of anticipated over the next several decades. And that black line in there is a key piece of this nuance. It assumes some revenue increases, but that's the 10% of our revenue line. So if you're under that line, based on our debt management plan, we would be what would be considered affordable in terms of our debt. And what this jumps out at me, and we happen to write it on the screen here, is that our capital needs over the next several decades is unsustainable. And I think that that's in some of the comments that the Commissioner of Finance is going to go over later. I think some of that's reflected in the fiscal year 12 budget. I want to transition over. We talked about general obligation debt, full faith and credit of the city. Let's talk about our other kind of component in terms of sewer debt. It's revenue. It's revenue supported, not necessarily tax-based supported. That fund has substantially less. It's a lot lower, but it has about $65 million in there. And then we have some KIA funding, which in my previous life I encouraged clients to pursue vigorously because it is subsidized. It's a subsidized loan, a lot cheaper than what you can borrow in the market. And that's not applicable at this time because we have a couple of projects outstanding. It's roughly $17 million for which we're still drawing on, and that loan has not been amortized yet. The debt service projected in 2011 is roughly just under $8 million. and that we have some assumptions in there for that KIA loan coming on and some additional loans coming on that will put us just over $11 million in terms of debt service payments for the sewer fund. That's substantially different when you look at it on a visual basis. It's what you would call an industry level where it's the same for a few years, steps down, same for a few years. And this gives us additional capacity. But I think the sewer fund, in terms of the large amount of capital that will be required in this fund, is something that we need to spend quite a bit of time on and looking at pro formas and such in this fund. This affordability test is substantially different. It's not a test of total revenues. It's a test, and we actually agree to this in our bond documents, and it's a bond covenant. but it's an actual test of 125% net income and revenues coverage over your maximum annual debt service. So revenue, less expenses, has to be 125% of what your debt payment is. So roughly if your debt payment is $10, you would need $12.50 after you pay all your expenses. And that's what's the affordability test. It's a revenue test. which is substantially different than what you would see on GeoDebt. Thank you. Since I was here at the beginning of this process, I was going to take this part of the presentation. And as Commissioner Driscoll said, we met with the Finance Cabinet and Cabinet for Health and Family Services Capital Projects group yesterday about the Eastern State Hospital conduit financing that Lexington is a part of. And just as a reminder, it was in 2009, Council adopted Ordinance 58-2009 with an MOU, Memorandum of Understanding, that we would be conduit financing for the construction of Eastern State Hospital. And the state authority and responsibility were passed both in 2008 as well as subsequent legislative sessions. And the project was originally to be in these phases, first issue in 2009 of $8 million, second issue and 10 that would take out the first one and replace it with $70 million to finance the construction. That was actually at $65 million. And so that would put us in the position where we would have a third temporary bond to be issued this year until there was final financing later. And what the state has proposed is for us to go ahead and enter into the permanent long-term financing. And this is very advantageous to Lexington because it will become the obligation of the state through a lease agreement and take it off of our general obligation list for our debt and go ahead and enter into that lease as well as issue the long-term financing this summer. To accomplish that, we're talking about a bond of a par amount of $140 million. It would be issued by Lex and Fayette Urban County Government Public Facilities Corporation, which would be authorized by the council, and it would be secured by a ground lease with the state. And as I mentioned, that drastically reduces our financial risk, lowers our outstanding general obligation debt, and the timeline that they have proposed is aggressive. we would bring all of the documents before Council for first reading on May the 12th, second reading May 26th, so that we can conduct the bond sale by June 9th. That would be completed before the end of our fiscal year, and the general obligation notes would then drop off of our consolidated financial statements and be listed as a lease revenue bond as a conduit through the state. And these dates that are proposed are in order to comply with getting it done by the end of our fiscal year and also to coordinate with other bond issues that the state is going to market for. So we wanted to give you that update. I'll tell you that we met with them yesterday morning. There was further e-mails and information that went through the legal side throughout the day, and this is what we think we can get accomplished. And we think it's a great home run for Lexington as well as for the project at Eastern State. The actual construction is well underway. The site work is about 85 percent complete, and most of the major construction has been started. The personal care homes are all under construction. The major patient towers of the main hospital already have the steel up. And then the footings and foundation for the rest of the building are underway. So they feel that they are past the point of major construction delays. And the work is going forward. and it's going to be an energy-efficient LEED Silver certified building. So they're very excited about it. We think this is a great acceleration of the original program and want to recommend it to Council today. It might be appropriate now to have questions on the Eastern State proposal. I presume we're going back to the other packet eventually. So, Council Members, until we get the Granicus fixed, are there any of you? Okay, just raise your hands. Council Member Beard and then Henson. Heaven forbid me saying this, but what happens if the State of Kentucky can't meet their obligations on the lease? The entire credit rating of the State goes with it. I understand, but this is... From what I hear, it's probably already. A one downgrade does not mean it's gone all the way down. I'll let Ryan has professionally worked with these type of arrangements so he can better articulate how it works. In terms of the state, the state has a very low authorization to do general obligation debt, which we do general obligation debt all the time. State finances almost everything they do with a lease appropriation. I've done hundreds of millions of dollars under that structure. The thing is, is in this particular transaction, we have a geo pledge on this right now. We are on the hook for it. If we do this new financing, it's under the lease structure. We take away our geo pledge, say no longer that we back it. And in the state, that's part of the reason we'll do the public facilities corporation. The security on this debt, and you'll be able to read it in the official statement when it's sent out on the 12th or so. So security to the investor is that lease agreement. If that lease agreement doesn't come through, then tough luck to the investor. It's their responsibility. They can go sue the state and under the default provisions in the document. But without this new financing, we would be on the hook. In terms of the question really how it would happen, if the state didn't make good on the lease appropriation, they'd never be able to borrow money in the market again. I don't think the legislators would go that route. But this is how they finance pretty much everything. They've been sold to Phase 1. Phase 1 was an $8 million transaction that was done in 2009. They were sold, and they've been paid off with Phase 2. Okay. So Phase 2 takes care of Phase 1. Yes. And then Phase 3 is eliminated? That's, yes, that's what I'm going to say. We wrestled the state to the ground and we were able to achieve this. But, you know, given our financial situation, this is very advantageous. And we were all very pleased after walking out of the meeting yesterday. So we're proposing getting rid of Phase 3 and going directly to Phase 4 where it's their problem. Okay. So have we began to make payments on those bonds? No. The agreement as agreed, council agreed to this in 2009 to do all four phases. And the intention was to marry the needs of the state with the needs of the city. The city obviously is not servicing the debt on this. So what was proposed was a series of short-term financings, then a long-term financing, for which the interest would be capitalized. So additional money is set aside to service the interest for each transaction. We've never had, nor have we ever intended, to pay any payments for this facility. Okay. Now, lease payments, when do they begin? The first lease payment is 2013, and that will be paid by the state. And we'll have interest-free debt up until that point? We'll do the same mechanism that was done where additional money is set aside to service the interest until the first payment's made in 2013. And it's actually going to be in the budget for health and family services at the state. That's how it'll be paid. They'll service the debt. Okay. And so it'll be, we're just working really almost like an agent. Is that the way I'm?