WASHINGTON- Niagara Falls may be the first city in New York State to finance a major project using level principal and interest payments instead of front-loaded debt service, a city official said.
In late June, New York State enacted a law permitting municipalities to amortize their payments. Essentially, localities would repay debt as if it were similar to a mortgage, said Niagara Falls city administrator Thomas C. Lizardo.
Previously, New York municipalities were faced with "the 50% rule," which was a calculation based upon the amount that one would pay and the period of probable usefulness, or a locality could never make a payment that was more than 50% above the lowest payment.
This method insured front-loaded debt that was designed so that the city administration authorizing the new borrowing would have to pay a large portion of the debt instead of leaving it to future administrations, Lizardo said.
The new law, which was part of debt reform legislation passed by the state legislature this year, may be used to finance a new drinking water treatment facility for Niagara Falls under a court-mandated partnership between the city and Occidental Chemical Corp.
The project, including engineering and construction, will cost about $70 million, Lizardo said. Depending on the length of debt service, the total cost could be up to $150 million over 40 years, he said.
Occidental will finance about $65 million or half the cost over 20 years using private-activity bonds, he said. The other half will be financed by the city, which will issue tax-exempt general obligation bonds in a negotiated offering, he said.
The city received about a dozen replies to its request for underwriting proposals and plans to choose the financing method and underwriter by mid-October, Lizardo said.
Although the drinking water is untainted, the current treatment plant is next to a toxic waste dump operated by Occidental Chemical.
The Niagara Fails drinking water is "probably the most tested in the world, but 95% of water safety is perception," he said.
Some of the potential underwriters were hoping to take advantage of federal loans that would be available through the Safe Drinking Water Act once it becomes law, said Craig Ayers of Lebenthal & Co.
But, the bill didn't move through Congress in time to be considered for the Niagara Falls deal. The drinking water legislation, which has been approved by the Senate and is awaiting action in the House, contains a provision allowing states to leverage federal funds.
Whether Niagara Falls uses the level debt method or not depends On the underwriter, Lizardo said.
"What we're looking for is to see who's been able to do something innovative with this stream of payments," he said.
Considering the proposal deadline just passed, "I don't know if [the underwriters] all proposed going level debt, or if they've proposed going 150%, or even multiple options."
The benefit of level debt is that the city can count on "an almost identical payment" each year, Lizardo Said.
Since the city intends to, "meet its bond payment by way of the water rate rather than by way of the property tax rate," having a level debt allows the city to advance plan its rate structure, he said.
It beats "a sort of wild swing where you have front-loaded your debt and you have a significant rate increase followed by either a significant decrease or an overinflated rate," Lizardo said.
"Level debt has a significant positive benefit for the consumer in most instances, particularly in a financing where even though it's not a revenue bond, it's secured through a particular revenue stream instead of through property taxes," he said.
Another issue facing Niagara Falls is whether the city can get the bonds insured, he said. In 1993, the city completed its first insured deal in 15 years.
Niagara Falls experienced significant financial problems throughout the 1980s, but has recovered in past years and expects to have little trouble getting this deal insured, Lizardo said.