Ocean City Council heard a proposal about establishing a $2.5 million line of credit with the Bank of Ocean City during its work session on Tuesday.

(July 12, 2019) Discussions this week over establishing a $2.5 million revolving line of credit to provide bridge financing for capital projects before bond sale revenue can be obtained, evolved into a conversation about efforts to increase Ocean City’s general fund balance.

Finance Director Chuck Bireley reviewed a proposal to open a $2.5 million line of credit with the Bank of Ocean City during a City Council work session on Tuesday.

Bireley said the city’s financial advising firm, Wye River, had recommended entering into an unsecured revolving line of credit to provide short-term financing for land acquisitions and capital projects.

“If the line of credit is used to finance a property acquisition or capital project, we will require a resolution to reimburse the town in the next bond issuance,” he said.

The city received bids on June 26 from three of four financial institutions contacted for proposals earlier last month.

“The Bank of Ocean City was the low bidder with a fixed rate of 2.9 percent for three years,” he said.

Bireley said associated costs include an initial $2,500 fee to establish the line of credit and an annual $250 renewal fee.

“We have no downside to worry about if interest rates … increase over the next three years,” he said.

Councilman Dennis Dare asked Bireley what the current rate of return is on the city’s reserve fund balance.

“I would say on average we’re about 2.5 percent,” Bireley said.

Noting the return on investment from fund balance nearly equals the interest rate for the line of credit Dare questioned the need to pursue the proposal.

“Historically, I thought we’ve used our fund balance to bridge these expenses that come up in between bond issuance,” he said. “That’s one of the reasons I was in favor of maintaining the constant tax rate, so that we’d have the opportunity to build our fund balance up from 15 to 20 percent.”

Bireley said the credit line would only be intended for big-ticket expenditures.

“This is geared mainly for something that would be over $1 million,” he said. “In the past, I think we’ve used $1 million as kind of a cutoff [for] using fund balance.”

While the million-dollar mark was not an official edict, Bireley said prior practice for financing high-dollar projects or property purchases outside of bond issuance was though standard bank loans.

“Last year, when we financed the Jeep and trams purchase … if we had the line of credit at that time, our fees probably would have been a little less,” he said.

Those types of scenarios were the basis for Wye River suggesting the city establish a line of credit, Bireley said.

“On smaller dollar items, the intent is not to use the line of credit ... it would be to continue to use fund balance,” he said.

Councilman Mark Paddack echoed Dare’s thoughts about increasing fund balance.

“We went from a constant yield to a constant tax to allow for growth in our reserve fund,” he said.

Paddack asked Bireley to estimate the city’s current indebtedness for current bond-funded projects.

Bireley said estimating the exact figure would be challenging, as the numbers are somewhat fluid.

“We’re literally paying that down every month,” he said.

Bireley did confirm the city had an outstanding balance of just over $101 million at the end of June 2018.

“That would have decreased since then, so right now we’re looking at approximately $90 million,” he said.

Following Dare’s thought process, Paddack also questioned the need to open the line of credit.

Bireley reiterated that having an established line of credit would not preclude obtaining financing through fund balance.

The council voted unanimously to send the proposal forward for first reading during its meeting on July 15. If approved the closing date for establishing the financing arrangement is Aug. 1.

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