Line of Credit Charter Change FAQs
What is a line of credit?
A line of credit is essentially a pre-approved loan or “credit facility” in which an organization enters an agreement with a bank to establish a preset borrowing limit. If the organization has a short-term need for cash (or “working capital”), it can draw down any amount up to the preset limit from the line of credit. Any amount drawn down is considered debt. As the debt is repaid, it can be borrowed again. Lines of credit are often used to smooth out month-to-month cash flow, for example in the case of a business that has seasonal variation in monthly revenues but relatively stable monthly expenses.
Why does Burlington Electric Department (BED) have a line of credit and how does BED use it?
BED’s line of credit was established circa 2007 to give BED ready access to a source of working capital in case of need. BED last drew down the line of credit in 2013 and does not have plans to borrow against it in the foreseeable future. We develop a cash flow forecast as part of our annual budget and monitor our cash position monthly to help ensure sufficient cash to cover our monthly obligations. That said, the line of credit provides important assurance that BED could access working capital quickly if an unexpected need arose or if it was advantageous to the organization to do so. Importantly, the line of credit is also a consideration in our “days cash on hand,” one of the metrics used by Moody’s in determining BED’s credit rating.
Why is the line of credit limit set in City Charter?
The line of credit is considered a form of borrowing or debt (if drawn upon), and all forms of borrowing or debt must be authorized by voters, either on a case-by-case basis (such as for issuing bonds) or through voter approval of a City Charter provision authorizing debt issuance.
Why is BED seeking a Charter amendment to raise the line of credit limit?
Since the current line of credit limit was set at $5 million in 2007, BED’s operating expense budget has significantly changed. In 2007, $5 million represented about 50 days cash on hand for BED; today, as a result of inflation, it represents only about 32 days cash on hand. BED is seeking to raise the limit to $10 million to provide access to an amount of working capital commensurate with the current size of its operating budget, with some room for growth.
How will an increase in the line of credit affect BED’s rates for electric service?
All things equal, increasing the line of credit should reduce pressure to increase BED’s rates. Having the line of credit available, unused, helps BED’s credit rating at a very low cost and provides access to working capital if ever needed. A strong credit rating helps BED issue debt to finance capital improvements at attractive interest rates, also to the benefit of ratepayers. Without the line of credit, to obtain a similar level of access to working capital or liquidity, BED would have to increase its cash reserves, likely by raising rates. BED pays a minimal fee to maintain the line of credit and pays no interest on it unless it is drawn down.
How does the Charter change advance Burlington’s Net Zero by 2030 goal?
Strong financial health and a strong credit rating puts BED in a better position to pursue the City’s Net Zero Energy goal. For example, having a strong credit rating helped BED obtain lower interest rates for our Net Zero Energy Revenue Bond.
What is BED’s current credit rating?
In December 2023, Moody’s affirmed BED’s credit rating of A3 with a stable outlook.
How will the proposed Charter amendment to increase BED’s line of credit appear on the March 5, 2024 Town Meeting Day ballot?
“Shall the Charter of the City of Burlington, Acts of 1949, No. 298, as amended, in Title III, Article 24, Bonding the City, Section 62(a), be further amended as follows:
(a) Except as otherwise provided, the credit of the city, except by temporary loans not exceeding during any quarter of any fiscal year twenty-five (25) percent of the taxes assessed upon the entire grand list for such fiscal year, and except by emergency loans as hereinafter provided, shall not be pledged by the city council, or by any officer of said city, unless by vote of the legal voters of said city, at a meeting thereof duly called for that purpose; provided, however, that the chief administrative officer, when authorized and directed by resolution of the city council, may pledge the credit of the city by a temporary loan in anticipation of the receipt of revenue from the airport department, or the traffic division or the wastewater or water divisions of the public works department for their ordinary running expenses during times in any fiscal year when there are not sufficient funds on hand to the credit of the airport department or the above-mentioned divisions for the payment of such bills and accounts, or sufficient unappropriated funds in the city treasury from which such accounts may be paid pending the receipt of revenues of the division sufficient to pay such bills and accounts; and provided further, that the chief administrative officer, when authorized by the city council, may pledge the credit of the city by temporary borrowing in anticipation of the receipt of revenue from the electric department not to exceed
**five** *ten* million dollars outstanding at any time to provide working capital *and liquidity* for the electric department *, with the electric department to repay such borrowing from available revenues*. Temporary notes issued hereunder in anticipation of the receipt of the revenue from the electric department shall mature within two years from the date of issue, and may be renewed or refunded by the issue of other notes maturing within a similar period whenever such action is deemed expedient. Except as above provided, all temporary loans, except loans for the payment of bills and accounts of the water division of the public works department and the electric department and except emergency loans, shall be paid by the chief administrative officer from and out of the receipts from the collection of the installment of property taxes or other taxes next falling due after the making of the loan, and all moneys received from such temporary loans, other than for the water division of the public works department and the electric department and other than from emergency loans, shall be used to pay the current and ordinary expenses of the city, pending the collection of taxes. All such temporary loans made to pay the accounts and bills of the water division of the public works department pending the receipt of revenue shall be paid during said fiscal year from the revenues received by that division. Temporary loans under this paragraph for the water division and electric departments shall be general obligations of the city notwithstanding that they are primarily payable from the revenues or receipts of the respective division and departments.”
* Material underlined added
** Material struck out deleted