DISCLAIMER

 

FINANCE COMMITTEE


08-0224R


RESOLUTION PROVIDING FOR THE APPROVAL OF A MASTER EQUIPMENT LEASE/PURCHASE AGREEMENT REGARDING THE AUTOMATED METER READING SYSTEM IN THE AMOUNT OF $9,564,617.

CITY PROPOSAL:

     BE IT RESOLVED, by the city council of the city of Duluth, Minnesota (the city), as follows:

     Section 1. Purpose and authorization.

     1.01 the city has entered into a contract with Johnson Controls, Inc., to provide equipment for and installation of an automated meter reading system (the equipment) for the city’s water utility and gas utility meters. The equipment will benefit and become part of the city’s water utility, the gas utility and the sewer utility.

     1.02 Under and pursuant to Minnesota Statutes, Section 465.71 (the act), the city is authorized to purchase personal property under an installment contract, or lease personal property with an option to purchase under a lease-purchase agreement. The city council hereby determines that it is in the best interest of the city and it is necessary to finance the equipment through an installment contract or lease-purchase agreement under the act in the amount of $9,564,617 for the purpose of financing the costs and installation of the Equipment, capitalized interest and the costs of such financing.

     1.03 The city has solicited proposals to obtain financing for the Equipment through such an installment contract or lease-purchase agreement and has received an offer from Banc of America Public Capital Corporation (the lessor), to enter into a master equipment lease/purchase agreement and provide such financing for the equipment at an annual interest rate of 3.79 percent through and including February 1, 2024. Rental payments shall be made in semi-annual installments commencing August 1, 2009, subject to the city’s rights of prepayment as set forth in the master equipment lease/purchase agreement. The form of the master equipment lease/purchase agreement and related schedule of property, rental payment schedule and certificates currently on file in the office of the city clerk as Public Document No. __________ (the agreement), between the lessor and the city is hereby approved, subject to such non-material modifications approved by the mayor and finance director. The city council hereby finds this offer reasonable and proper and hereby accepts the offer. The mayor and city clerk are hereby authorized and directed to execute the agreement and other necessary closing certificates on the part of the city.

     Section 2. Lease rental payment account; appropriation of lease-purchase payments.

     2.01 The city hereby establishes a 2008 lease payment account within each of the water utility enterprise fund, the gas utility enterprise fund and the sewer utility enterprise fund, to which shall be deposited funds appropriated in the city’s annual utility budgets to pay the rental payments under the agreement.

     Section 3. Federal tax.

     3.01 In order to ensure that the interest portion of the rental payments under the agreement shall be at all times excluded from gross income for purposes of federal income taxation, the city specifically represents, warrants and covenants that:

     (a)  It will fulfill all conditions specified in sections 103 and 141 through 150 of the Internal Revenue Code of 1986, as amended (the code) and applicable treasury regulations as necessary to maintain the tax-exempt status of the interest portion of the rental payments under the agreement;

     (b)  During the term of the agreement, the city will not take or permit any of their officers to take any action with respect to this agreement or the equipment which would cause the interest portion of the rental payments to become includable in gross income of the lessor under the code, and will take all actions necessary to ensure that such interest remains not includable in gross income under the code insofar as they have the power and authority to take such actions;

     (c)  Unless the city has received an opinion of bond counsel stating that such action will not adversely affect the tax-exempt status of such interest, the city shall not enter into any contract with a non-governmental person for use or the management or operation of the water utility system, gas utility system or sewer utility system, or any part thereof, which would violate the private use tests of Section 141 of the Code;

     (d)  The city shall not use the equipment in a manner which will cause the agreement to become "private activity bonds" within the meaning of the code;

     (e)  the city will comply with and fulfill all other requirements and conditions of the code and treasury regulations and rulings issued pursuant thereto relating to the acquisition, construction and operation of the equipment financed by the agreement to the end that such interest shall at all times be exempt from federal income taxation.

     3.02 The city covenants and agrees with the lessor that the city will:

     (a)  Take all action on its part necessary to assure that the interest on the agreement to be executed from gross income for federal income taxes including, without limitation, restricting, to the extent necessary, the yield on investments made with the proceeds of the agreement and investment earnings thereon, making required payments to the federal government, if any, and maintaining books and records in a specified manner, where appropriate; and

     (b)  Refrain from taking any action which would cause interest on the agreement to be subject to federal income taxes, including, without limitation, refraining from spending the proceeds of the agreement and investment earnings thereon on certain specified purposes.

     3.03 Pursuant to Section 1.148-7(d) of the treasury regulations, relating to exception from rebate, the city hereby reasonably expects that with respect to the gross proceeds of the agreement, the following schedule will be met: (i) at least 15 percent of the gross proceeds of the agreement will be allocated to expenditures for the governmental purpose of the agreement within six months of the date of issue of the agreement; (ii) at least 60 percent of such proceeds will be allocated for such purposes within the one-year period of such date; and (iii) 100 percent of such proceeds will be allocated for such purposes within the 18-month period beginning on such date; subject to an exception for reasonable retainage of five percent of the available proceeds of the agreement, and that 100 percent of the available proceeds of the agreement will be allocated within 30 months from the date of issue of the agreement.

     3.04 The city shall use its best efforts to comply with any federal procedural requirements which may apply in order to effectuate the designation made by this section.


FIN RET:CW:rb 3/14/2008


STATEMENT OF PURPOSE:  This resolution authorizes a master equipment lease/purchase agreement with Banc of America Public Capital Corporation to provide financing for the automated meter reading system for the city’s utilities. The principal amount of the financing is $9,564,617. The interest rate on the agreement is 3.79 percent.