Dale Coulam explained that the City Council received a citizen’s comment from Fitness Ridge asking that the City consider the use of surety bonds for improvements and warranty guarantee on public improvements as opposed to some form of cash. The Subdivision Ordinance requires the guarantee to some type of cash: either cash deposited with the City, an irrevocable letter of credit from a bank, or cash deposited with a third party bank or escrow company. With a surety bond, a developer puts up a percentage of the premium. That frees up working capital to construct improvements. If they bond for improvement, the developer can record the Final Plat and sell lots immediately. If a bond is not posted, the public improvements must be completed before recording. It’s a significant cash investment on a developer in a difficult economy. Fitness Ridge is asking for consideration for a surety bond. Jason Hunt provided a packet about surety bonds from The Insco Dico Legacy Center. In the information, it was mentioned that a surety bond is continuous and it says that an irrevocable letter of credit expires. However, the City requires the letter of credit to be automatically renewed and is not accepted with expiration dates. If a surety bond is allowed instead of cash, there is some additional risk to the City. Holding cash compared to filing a claim with the insurance company is preferred. A surety bond is a higher risk and the City must, at a minimum, have a requirement for for the surety company. The materials provided talked about ratings but did not recommend a specific rating. A.M. Best’s highest rating is "Superior" which is an A+ to A++. The materials also talked about the insurer being registered with the state and listed on the U.S. Treasury list. If the Commission considers surety bonds, there should be some restrictions that we are dealing with a reputable insurance company. The surety bond could be allowed for just the warranty portion and not for the whole improvement bond. Currently, the City requires as an improvement guarantee of 125% of the estimated cost of the public improvements. Once completed, inspected and accepted the cash bond is reduced to 25% and is held as a Warranty Bond for one year. The issue is does a surety bond provide enough security for the City. If the Commission wants to allow surety bonds, the Subdivision Ordinance would have to be amended to allow surety bonds.
Commissioner Scott inquired about the experience with surety bonds in other municipalities with regards to pay out.
Dale Coulam did not know about the pay out but other cities do accept surety bonds but not all of them. There has been a trend for cities to go cash. In today’s environment working capital and loans are hard to come by. The trade off is that it might push development away. It’s a risk, benefit analysis.
Commissioner Mehr inquired as to why it’s on the Commission’s agenda.
Dale Coulam explained that the improvement and warranty requirements are located in a Land Use Ordinance which is the Subdivision Ordinance. It is on the agenda as a discussion but the Commission can make a recommendation to the City Council. He explained the procedure.
Commissioner Mehr asked about the City’s response to previous requests for surety bonds in the past.
Dale Coulam explained that several years ago there was a request but the ordinance required cash. The developer did not push it further. Economic times have pushed the request forward again.
Commissioner Murphy inquired as to whether the developer has to pay each year to keep the bond into effect.
Dale Coulam explained that it depends on the surety bond which may require another premium the next year. It could get expensive if it is in place very long.
Commissioner Benson inquired how many times in the last five years has the City had an issue with a warranty or claims not finished.
Dale Coulam stated that the City has gone against some warranty bonds and at least one improvement bond. The City has also used restoration bonds to finish improvements when a subdivision was foreclosed on.
Commissioner Murphy asked about the average cash amount required by the City on a project size.
Dale Coulam stated that it varies depending on the size.
Lance Anderson explained that the developer submits an engineer’s estimate. Then the City Engineer checks the estimate to see if it is reasonable with the economic times. Then, a 125% of the estimate is posted for improvements. After improvements are complete, the warranty bond is based on 25% for one year. 100% is released after improvements are completed. After the one year warranty, an inspection and at the end of the warranty period, the 25% is released. Surety bonds are accepted for road construction, and a bond is like a letter of credit. Every freeway or highway job accepts surety bonds. Even improvement projects require bonds such as asphalt overlay. Ivins City does not require it but usually a City does require it. Bonds are used everyday. Its risk and benefit.
Commissioner Mehr stated that cash is "king" and the ordinance is in place for a reason. Given our national economy, the City is at risk. The information submitted says, "with a bond the public entity can turn to the claims staff of a professional assurety company to determine if it is appropriate to coordinate completion of work or tenure cash to a public entity." There’s a certain degree of risk. He was not in favor of allowing the surety bonds.
Commissioner Benson felt that the City is facing the same economy as it is nationally. In this economy, the City should holdfast and make sure that the projects that come into the City will be completed properly.
Commissioner Scott was of the same mindset. He understood the developer’s dilemma of putting up less cash upfront particularly for infrastructure. It has a magnifying impact and determines how feasible the development will be. It creates a bind for developers. But if the City has a problem then it creates a problem for the whole community. If the City has cash, it doesn’t have to be negotiated.
Vice Chair Murphy commented that the economy has been down for some time, and a lot of thought was put into the ordinance when it was done. She was in agreement with the other Commissioners.
MOTION: Commissioner Todd Benson moved to recommend that we do not redo the ordinance allowing for surety bonds and leave the Subdivision Ordinance as it is.
SECOND: Commissioner Mike Scott
VOTE: The motion carried unanimously.
| Commissioner Todd Benson |
AYE |
| Commissioner Dennis Mehr |
AYE |
| Commissioner Adel Murphy |
AYE |
| Commissioner Mike Scott |
AYE |
| Chairman John Reed |
ABSENT |
It was mentioned in the last meeting that June 14, 2011 might be the best date for the work meeting with commercial owners. However, Commissioner Benson will not be able to attend the June 14, 2011 meeting. Therefore, the Commissioners decided to discuss scheduling the commercial meeting at the next meeting on May 17, 2011.