The city will soon have twice the sales tax revenue to make stormwater sewer upgrades, but officials are looking at issuing bonds to further expedite the projects.
Sterling residents approved a referendum last month that doubles the city's revenue from the local option sales tax. The tax will now bring in an estimated $2.35 million a year for infrastructure upgrades.
The city will start collecting the extra tax in July, and the money should start coming no later than November. Sterling residents' total sales tax rate will increase from 7.75 percent to 8.25 percent. That amount is a combination of the state's 6.25 percent sales tax rate, 1 percent from Whiteside County, and the city's, which will increase from 0.5 percent to 1 percent.
City officials promised voters that stormwater sewer projects would be the top priority if the referendum passed. Some of the money will also be used for road projects, some of which are linked with the targeted stormwater sewer work.
The city compiled an ambitious 10-year capital projects list with an estimated $30 million price tag. Tackling only the highest-priority stormwater sewer upgrades would cost an estimated $10 million to $15 million, and the city wants to speed up the process.
"We have several half-million dollar stormwater projects, and if we issue about $10 million in 4 years, we could then bond out again for more projects," City Manager Scott Shumard said.
The extra sales tax money would be used by the city to back up alternate revenue bonds. The council took the first step in the bond process Monday by giving permission to sign an underwriting engagement letter with Bernardi Securities.
"We did a similar bond arrangement for the big project on Lynn Boulevard, and backed it up with the sales tax," Shumard said.
While the city says it wants to speed up the projects to reward residents for approving the sales tax referendum, the prospect of rising interest rates also brings a sense of urgency to borrowing money.
"Short-term interest rates have crept up, and long-term rates will follow, so we think it's wise to get the process going as soon as possible," Shumard said.
Shumard wants to get the engineering done for five or six projects before the end of the year, and start the work next spring.
Robert Vail of Bernardi Securities was at the May 15 council meeting to talk about the bond issuance process and the impact of rising interest rates.
"Interest rates were raised in December and March, and two more rate increases are expected this year," Vail said.
The municipal bond specialists drew up a payment schedule for the city based on a nearly $10 million issue. Based on current interest rate estimates at 3.44 percent, the city's $9.7 million principal would bring the total debt service to more than $13.6 million over a 20-year repayment period.
Changes in interest rates are measured in basis points. One basis point equals 1/100th of 1 percent. Even small rate increases can make a big difference for municipal borrowers.
"For every 50 basis points, you would lose about $500,000 for your project," Vail told the council.
If the city continues the bond process as planned, the bonds would go to market July 20, which is when they could lock in the interest rates.
City officials said the sales tax increase and bonds have been considered in tandem since the capital projects plan was updated late last year. When the referendum passed, the city was able to solidly back up the bond issue.
"We knew we were going to have to bond out if we wanted to make any real progress on these projects," Mayor Skip Lee said.
The mayor said with the help of bonds, 10 years could be cut off the capital projects timeline.
"Since I've been mayor, we've been talking about the need for these projects, but we didn't know where we'd get the money," Lee said. "When the referendum passed, we could back up the bonds."
Lee said several neighborhoods have been dealing with flooding for many years, and it was time to stop kicking the can down the road.
"Our top priority is the residents on Miller Road, near Jefferson School, and in other areas where this has been a problem for a long time," Lee said.
The prospect of rising interest rates is more affirmation that the time to act is now.
"Bond rates are still very favorable, and I want every penny possible to go to the work we're doing and not interest," Lee said.
The city could have a bond ordinance ready for a vote at its June 5 council meeting. Officials are still deciding which projects would be chosen for the first round of engineering work.
