The City Council at its meeting Tuesday approved issuing bonds worth just over $8 million to buy out a lease and refinance a property purchase, a transaction that will free up funds to close Lancaster’s 2025 budget gap.

In 2021, the city government used $5.9 million in federal funds from the American Rescue Plan Act to purchase 30 acres adjacent to the Oyster Point Reservoir to prepare for future expansion needs. The U.S. Treasury Department subsequently passed rules prohibiting the use of ARPA funds for that purpose.

By issuing bonds, the city can replace ARPA funds with bond funds, allowing ARPA funds to flow back into the city’s coffers for redistribution.

In total, the city received $39.5 million under ARPA. Excluding Oyster Point, it has committed $36.1 million of that, meaning $3.4 million of the money refunded from the Oyster Point purchase is available. All ARPA funds must be allocated by the end of 2024; any unused dollars will be returned to the U.S. Treasury.

In July, Mayor Danene Sorace said if Lancaster adopted home rule in November and allowed the City Council to increase the earned income tax, she would recommend using $2.4 million of the $3.4 million to balance the 2025 budget and spending the remaining $1 million to renovate Ewell Gantz Playground, Joe Jackson Tot Lot and South End Park in the southeast part of the city.

If home rule does not proceed and Lancaster maintains its existing tax structure, the entire $3.4 million would have to go into the budget, she said.

About the bond

The other component of the bond issue is the buyout of a 2013 lease on property owned by High Cos., where the city built a pumping station. The buyout will cost $2.3 million, the city’s director of administrative services and Daryl Peck of Concord Public Finance told the council.

Add to that the $5.9 million for the Oyster Point refinancing, capitalized interest, and issuance and insurance costs, bringing the total to $8.4 million.

The city is open to issuing a bank loan or a bond, Peck said. After careful consideration, in which she sought terms from more than 30 banks, she concluded that a bond was the better deal. A bond auction Tuesday morning yielded an offer from Bancroft Capital with an interest rate of 3.857%.

The lease buyback portion of the bond will be repaid over 12 years starting in 2025, with annual debt repayments of approximately $240,000. Current lease payments are $268,000, resulting in a net annual savings.

However, refinancing the land purchase will increase the city’s debt burden, albeit only slightly. Repayment will begin in 2026, with annual debt service coming in at about $475,000. When Peck first discussed the bond issue with the City Council in June, he had conservatively estimated debt service at more than $500,000; paying less would be “a much better bottom line,” he said.

The debt will be paid from the city’s water fund. The city plans to ask the Public Utility Commission for a rate increase for its suburban customers in 2025. Because of that, debt service for the Oyster Point refinancing will begin a year later, Peck said.

credit-worthiness

As is typical when a municipality takes on debt, Lancaster’s credit rating was reviewed and renewed. The rating remained at A3, but the outlook was raised from negative to stable. This is “great news,” Peck said.

In its assessment, Moody’s praised the rise in income in Lancaster from 64 percent of the US average to the current 84 percent. Warning signs include high debt – more than three times revenue – and limited liquidity.

“Lancaster will likely spend some of its remaining cash as federal stimulus funds are depleted. After that, its credit performance will depend on its ability to find solutions to build liquidity,” the agency said.