Kenai Peninsula Borough officials are considering loaning Homer and Kachemak City a combined $13 million to help create a natural gas grid on the heels of last year’s state capital appropriations that will bring a gas line from Anchor Point south.
Although the borough helps connect residents with gas through utility special assessment districts outside of city limits, it usually does not make such large loans and therefore the assembly must consider whether or not to amend their investment policy to allow for the transaction.
A measure to that end — Ordinance 2013-02 — is up for public comment at the borough assembly’s Feb. 5 meeting and represents the first step toward a potential agreement.
Although specific details would need to be written in an agreement that would again need assembly approval, the current ordinance outlines two loans — one to Homer for $12.7 million and one to Kachemak City for $300,000 — each at a 4.5 percent interest rate.
Borough Finance Director Craig Chapman said Homer officials first approached the borough about a loan. He said such a deal could save Homer money depending on other commercial interest rates and could add flexibility to the municipality’s options.
“From my perspective this is a pretty simple transaction,” Chapman said. “It does two things — it expands what the borough’s investment portfolio can invest in, and it gives back to the community.”
While the borough is weighing its options, the city of Homer is also preparing to request proposals from commercial lenders starting next week, said Homer Finance Director Regina Mauras.
However, the borough’s offer is “in all likelihood the way we’ll end up going,” she said.
“The thing is that we have a duty and an obligation to get the best rate we possibly can,” she said. “So in talking to a couple of commercial lenders, we may actually get a better deal via interest rates on the same type of package that the borough is willing to offer us.”
The loans, Mauras said, would fund construction of trunk lines from the main line to the edge of properties. All Homer property owners would pay the principle back through their property taxes via a special assessment district. However, those Homer residents who want to connect their home to the trunk line would pay for that themselves, Mauras said.
“Every citizen who owns property in Homer will be paying for the trunk line,” Mauras said. “... To put the line in from their property line to their home will be their choice.”
Mauras said project — headed by ENSTAR Natural Gas Company — is projected to take two years. Residents will not see a difference on their bill until the whole project is finished, which could be as late as 2015, she said.
“From the time we start drawing down (on the loan) to the time the project is finished, we will pay interest only and once the special assessment districts have been established after the project is done, then ... it will be 10 years we will be paying on that loan,” she said.
Chapman said he has received some questions about how the loan would affect borough finances and if the borough would be appropriating money.
“We are not,” he said. “It has no impact on the fund balance. What has an impact on the fund balance is when you spend money and we are not spending money.”
The other consideration is the interest rate. Chapman said the borough usually charges prime plus two percent — currently about 5.25 or 5.5 percent — on its utility special assessment districts. The borough landed on 4.5 percent after considering the magnitude of the project and the government-taxpayer nature of the loan.
“When we looked at the borough’s investment pool and the rates of return that it has been provided over the last few years, currently we are not getting 4.25 or 4.5,” he said. “But when you go back just a few years, we were making about 5.5 percent return so the extremely low rates we are at right now are not projected to be that low (in the future).
“So the reason why we picked 4.5 percent is because it helps to protect the borough from interest rate risk in the event rates go up substantially.”
Kenai Peninsula Borough Mayor Mike Navarre said he thought the loan was a “win-win for everybody.”
“It helps the Kenai Borough just because we have facilities down there that will benefit from that distribution system,” he said. “It helps the residents down there from an economic standpoint because the fuel cost is going to be good for residents and businesses.”
In addition to helping the community, Navarre said the loan makes sense from a pure investment standpoint.
“We wouldn’t expect the city of Homer would not honor their commitment and not be able to pay their commitment, so it is good, secure funds,” he said. “And for the tax payers in the borough in general, the benefit for them is that we get a better return on the dollars invested in that project than we do on funds that are invested in other things because we have a very conservative investment policy.”
Brian Smith can be reached at email@example.com.