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Choices on how city government manages debt

On Monday evening, August 8, City Council is being asked to approve issuing $10 million in bonds for wastewater and water projects (see agenda). We absolutely need to borrow this money, but I have doubts about the staff’s plan for structuring the debt — that is, how we pay it back.

This is part of about $19 million that the city needs over the next couple of years to pay for sewer system improvements mandated by an EPA administrative order (estimated cost $14,567,000) plus some water system improvements ($4,150,000). The EPA order means we’ll have to increase sewer rates. City staff has proposed to pay this off over 20 to 25 years, and to limit the increases in sewer rates by delaying the maturity of the bonds until after most the city’s existing sewer debt is paid off. For the first 10 years, only $100,000 in principal would be paid off each year, and most of the principal would not be paid off until the late 2020s or even the 2030s, when huge chunks (principal amounts up to $2 million or more) would come due in a single year.

Borrowing for capital improvements is necessary to spread the cost of improvements over time, which is responsible, but this staff plan would shift the cost of today’s improvements to future decades, which I think is irresponsible. Also, the long pay-off  greatly increases the total cost by greatly increasing the interest. Under the staff plans, $10 million in bonds now would cost $17.5 million over 20 years or almost $20.5 million over 20 years. In the 20-year payoff plan, $8 million in principal and interest would come due the last 5 years of the 20-year period. Considering that these are improvements that cost $10 million in the first place, it appears that this is a structure whose main effect is shifting the costs to another generation.

I’ve made some spreadsheet tables (PDF file) comparing the staff’s plan for 20-year payoff with a plan that pays off equal amounts of principal each year (not a recommended structure for borrowing money, but it was useful to help me understand the choices involved in structuring this debt) and a modified version of that plan that somewhat evens out the annual principal-plus-interest. Under my “semi-level annual payments” plan, $10 million in bonds would cost $14.7 million — about $2.8 less than under the staff’s 20-year plan. In the first few years annual debt service for this bond issue would be only about $200,000 higher than under the staff’s 20-year plan (about $720,000 per year versus about $520,000 per year), and annual debt service would always be below $800,000 — compared with $2.2 million bills in 2031 and 2032 (for our kids and grandkids to pay!) under the staff plan.

Amazingly, the resolution Council is being asked to approve doesn’t specify how the bond issue would be structured — not even whether bonds must be sold at fixed rates or if variable-rate bonds could be used (I don’t believe anyone would endorse variable rate bonds). The resolution does specify that the city should be able to pay off or refinance the bonds after 2021, but otherwise Council is simply being asked to authorize staff and the mayor to issue bonds at legal interest rates and for not more than 25 years. We also are being asked to approve the bonds without first seeing any analysis of how these expenditures will affect sewer and water rates.

In these days when people are acutely aware of the impact of public debt, and when I consider that EPA has been telling us that the current improvements are needed to catch up with deferred maintenance — and that in the future the city will have to maintain a higher pace of sewer work than in the past, I think that we Oak Ridgers are going to have to “suck it up” and accept and acknowledge a big increase in the cost of doing wastewater business. We can’t assume that our kids and grandkids will happily pay off our needs 20 years from new — they likely will be facing new capital needs in the sewer and water arena, and if they aren’t, they should seize the opportunity to cover more of the system costs on a “pay as you go” basis.

Based on recent city financial reports, it seems that our wastewater system receives about $6 million annually in customer fees, so a rate increase of about 20% should bring in $1.2 million, which ought to cover the capital costs of this bond issue, along with other cost increases since the rates were last adjusted 3 years ago. Fortunately, it appears to me that Oak Ridge’s wastewater rates are lower than those of many other communities (for example, the Knoxville Utility Board residential wastewater charge for the first 2000 gallons is $18 in the city and $20.90 outside the city, compared with the Oak Ridge charge of $13.50 for the first 2000 gallons), which should make increases somewhat easier for customers to absorb (even if we don’t like them).

I fully expect that on Monday evening my fellow City Council members will vote to issue these bonds (they are necessary!), but I hope they will also agree to begin asserting some control over this one aspect of the city’s financial policies by:

  • Insisting on receiving a preliminary estimate of the effect of the wastewater work on sewer rates before we vote on the bond issue (so we have some idea of the impacts of what we are deciding on), including an analysis of how the difference between an initial payoff rate of $522K/yr (the staff’s 20-year plan) and a rate of $720K/yr (my “semi-level” 20-year plan) would impact rates.
  • Directing staff to issue these new bonds on a fixed-rate basis that spreads the annual cost out in roughly equal installments over a 20-year period (similar to my “semi-level” plan).

As always, citizen input on this matter would be helpful!

Note: Permission is given to republish the above material and the attached spreadsheet, as long as these items are attributed to me.

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3 Comments

  1. Angi says:

    For what it’s worth, I agree. We will have other needs in 20 years, and it seems like the poorer choice to spend that much on interest.

  2. Harry says:

    Pay as you go will be painful but it is the best way to go. Somehow we must get our city debt under control. I do not have a great deal of confidence in city staff to handle that in the way it should be.

  3. […] $10 million to cover the EPA mandates regarding our water & sewage upgrades. I agree with Ellen Smith’s recommendation in that we should essentially suck it up as much as we can now by increasing sewage rates and […]

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