Financing for subdivision may put village bond rating at risk

If the Village of Fredonia were to borrow $1 million or more to finance the proposed Hillcrest housing development on Fredonia’s north side, it would push the village to 70% of its allowable debt limit and have a negative impact on its bond rating, officials learned Tuesday night.

Hillcrest Builders has proposed building about 100 single-family homes and condominiums east and west of North Milwaukee Street and north of the Northern Ozaukee School District campus.

The developer has proposed that the village operate as the project’s “bank,” meaning the village would borrow money at an interest rate lower than what’s available to Hillcrest to pay for infrastructure — such as streets, sidewalks and gutters — and engineering work and then be reimbursed by the developer as lots and homes are sold.

A limitation on that approach, however, is that a municipality’s indebtedness cannot exceed 5% of its total assessed value.

The village’s financial advisors at Ehlers Inc. told the Finance Committee Tuesday that borrowing $1 million next year for that purpose, combined with other debt related to the Fredonia Avenue reconstruction and work at the wastewater treatment facility, would push the village’s indebtedness to 70% of its limit.

That would reduce the village’s bond rating from its current “strong” AA-minus status to a “moderate” A rating, the consultant said.

If no new borrowing were to occur during the next decade, the bond rating would rebound to its AA rating in 2030 and to “very strong” AAA rating in 2035.

Developer Oyvind Solvang told committee members that $1 million would be insufficient for the current development plan and means he would have to reconfigure the project’s construction phasing.

Borrowing an additional $2 million would push the village to 80% of its limit, which committee members indicated they are unwilling to do. “I’d be very uncomfortable going beyond 70%,” committee member Bill McLarty said.

Committee members also expressed concern that the village was accepting more risk than Hillcrest and said they would seek additional protections in a developer’s agreement.

Solvang and committee members agreed to meet in two weeks go over the protective provisions and other details.