Franklin to borrow up to $4 million for capital projects

Published 6:57 pm Wednesday, August 24, 2022

Franklin City Council made arrangements Monday, Aug. 22, to help pay for roof renovations to two of the city’s public schools, the construction of a recreation facility at the armory and renovations to the city courthouse.

Amanda C. Jarratt

The Franklin City Council voted 6-0 to adopt the official resolution allowing city staff to work with Davenport & Company to proceed with interim financing in the maximum amount of $4 million. 

Ward 1 Councilman Mark R. Kitchen was not present at the meeting.

“As you all know, we’ve been discussing for over a year now borrowing funds for several projects,” Franklin City Manager Amanda C. Jarratt said to council members. “The most time-sensitive one is the roof replacement for two of the schools owned by Franklin City Public Schools. The other two projects are the armory and then the city of Franklin courthouse, which we discussed at our work session earlier tonight.

“So we are planning to do an interim financing of $4 million to pay for those upfront costs and the two time-sensitive projects,” she continued. “As you recall, we are also pursuing literary loan funds, and that application has been submitted, but it’s quite a lengthy process, and it’s important that the roofs are replaced as soon as possible.”

Kyle Laux, a representative of Davenport, which is the city’s financial adviser, gave a presentation to the council in advance of the public hearing Monday, sharing what Davenport has been doing since June in connection with the interim financing.

“We’ve applied to and talked a fair amount to the Department of Education in terms of that literary loan funding,” he said, referring to the state-specific Literary Loan Program.

Of the $4 million, the literary loan funding is anticipated to cover about $2 million.

Laux noted that the other $2 million will be for the armory and courthouse projects.

“The other thing we’ve done is gone on and competitively bid to local banks, regional banks and national banks this $4 million interim financing,” he said. “That’s really what we have for you tonight is the results of that competitive bidding process.”

Franklin received 10 bids to choose from.

“The city got a really incredible amount of responses,” Laux said, “so I think kudos to council, kudos to the management in terms of what you’ve done on the finance side, because we saw clearly from the banking world — local banks, regional banks, national banks — that there’s an interest in providing loans and doing business with the city of Franklin. That would not be the case if your finances weren’t in a strong position.”

Jarratt said, “I will say that I was thrilled when Davenport briefed (Franklin Director of Finance Tracy) Spence and myself on the (Request For Proposal) responses, so it’s wonderful news.”

“I’ve been sitting up here for a while looking at these things,” Franklin Mayor Frank M. Rabil said. “It’s the first time that I can recall we’ve had so many bids presented to us as options.”

Bidders included Powell Valley National Bank, Chase Bank, Truist, M&T Bank, Webster Bank, Zions Bank, First Internet Bank, Key Bank, Huntington and KS State Bank.

In his presentation, Laux noted that Davenport requested, within the RFP, that bidders provide proposals for borrowing structured as either of the following options:

  • A drawdown line of credit (money borrowed as needed); or
  • All proceeds drawn at closing (money is borrowed all up front).

Laux indicated that Davenport’s advice was to take the drawdown option, specifically favoring the one offered by Powell Valley National Bank, which he described as a “very good bank in southwest Virginia.” Powell Valley’s offer included a 2.880% drawdown rate.

“That is a fixed interest rate,” he said. “That is a rate that is fixed — if council wanted to move forward this evening — basically through closing and until the very early part of 2025. And so as you work through the roof projects, the planning, etc. of the other capital projects, we would know as a city with certainty what that rate is through that entire time period.”

He said the 2.880% is not only a fixed interest rate, but it also allows Franklin to draw only what it needs when it needs it.

“And so at closing, working with city staff, we’ll end up only drawing down enough dollars to make sure we can fund what is absolutely needed for the project, and thus we’re only going to pay interest on the portion of that $4 million that we draw down at closing, and so forth and so on, which helps to limit the dollars that we need to pay out of the budget, helps to limit pressure on the budget, thus we’re only borrowing and paying interest on what is ultimately needed to do the capital projects,” he said.

The other alternative, he noted, is the all proceeds rate of 2.80%.

“While it’s a lower interest rate, we’d have to basically borrow all $4 million at closing,” he said. “We ran some numbers on that. Given the fact that especially that second $2 million for the armory, courthouse, etc. is going to be needed over a little bit longer time period, it’s actually more cost effective to do the drawdown as we need it, hold that drawdown rate at 2.88% and hence that is our recommendation to you.”

He indicated that this recommended course of action limits the city’s risk, since the status of rates in the future is unknown.

Ward 4 Councilman Dr. Linwood Johnson noted how Laux said the fixed rate existed until 2025 and then asked Laux what happens after 2025.

“That’s the final maturity of this loan,” Laux said. “Between now and basically January of 2025, the expectation is, that state (literary) loan will come in and pay off $2 million of the $4 million. The other $2 million piece is again part of that plan. We would expect as you’re working through the courthouse, working through other projects, (it) will be financed with the larger financing that’ll be done in accordance with the other capital projects.

“And to the extent that the other capital projects, for whatever reason, don’t happen, something goes awry, etc., you have the ability to pay off this loan any time with no penalty,” he continued. “And so while the rate is fixed until January of 2025, we also have the ability as a city to, at any point in the future once the loan closes, pay it off without penalty and in essence kind of make it go away that way.

Gregory McLemore

“So it’s basically the most flexible that you can have, drawing it down as you need it and paying it back with no penalty as soon as you’d like to,” he said.

Just before the council voted to adopt the resolution, Ward 3 Councilman Gregory McLemore asked about the status of the city’s debt.

“Almost every year we entertain a loan through Davenport,” he said. Speaking to Jarratt, he asked, “How much has our city’s debt increased over the last five years or since you’ve been here?”

“I don’t have that specific number in front of me,” she said, though she noted she could provide it later in the week. “I wouldn’t want to misspeak. The things that we’ve borrowed money for over the last five years have been for things that were in the Capital Improvement Plan, which is a part of the budget every year, and council authorizes any borrowing on behalf of the city.”

McLemore acknowledged that council must OK the borrowing and that city leaders do not borrow money unless they think they need it for something, but he encouraged everyone to be cognizant of how much debt the city is accumulating, noting warily that it could lead to having to raise taxes in the future.