Refinance? Pay off bonds? Buy parks?
A lot of information and misinformation is circulating right now about what the City Council is doing regarding some older, high-interest rate bonds. So what is really happening?
The City has a number of bonds outstanding from 1998 and 2001. The original concept was take advantage of the current low interest rates and refund (bond terminology for refinance) these bonds and save money on interest. The City’s bond counsel made a presentation and showed that these bonds could be refunded, with the same payoff dates, and save the City $52,000 a year in interest. Seems like an easy decision.
At the Jan. 4 City Council meeting, Councilmember Lora Petso suggested that the City take the $1.3 million remaining from the sale of Fire Department assets to Fire District No. 1, and pay off bonds issued for the building of City Hall in their entirety. These bonds are currently paid for with proceeds from real estate excise tax (otherwise known as REET) funds, which are restricted by Council action for parks acquisition, although if REET revenues exceed $750,000 in a year the remainder goes toward road maintenance. As current REET revenues are under $700,000, all the savings would be dedicated to parks acquisition. The council approved the idea by a 4-1 vote, with two councilmembers absent.
Council President Strom Peterson opposed this action and equated it to taking all of your savings and paying off your home when you aren’t sure you will have a job the next year. The concern is that while the city’s budget is balanced for 2011, it begins to use up our reserves in 2012 and beyond. It seems to Peterson that it is economically unwise to take cash, the ultimate flexible asset, and use it to pay off bonds when the savings can only be used for parks acquisition.
Several councilmembers said that they could gain flexibility by reducing the restrictions on the REET funds, lowering the amount that had to go to parks before money could be spent on other capital projects. However, state law does require that REET funds can only be used for capital projects, not other municipal needs. So the flexibility of the funds is still limited. We’ll have more on that later.
The council also had some discussion during the Jan. 4 meeting about how the Fire Department proceeds were to be used. They were originally placed in the General Fund, and so some said they should be available for any purpose. However, Councilmember Plunkett pointed out that they were always intended to be used for capital purposes as they came from the sale of capital assets. The only reason they were originally placed in the General Fund, Plunkett said, was because there was no other fund to place them in. Finally, Finance Director Lorenzo Hines established a new fund called the “Public Safety Reserve Fund,” which referred to where the funds came from, not necessarily what they were to be used for.
There is some real savings in paying off the bonds. With four years left and assuming a payoff of $1.334,338 at 4 percent interest, paying off the bonds and not borrowing any more money would result in a net savings of $136,000 in interest. This would be offset, of course, by the interest that could be earned on the $1.334,338 if the city didn’t spend it on the bond payoff. Figuring conservatively at 1 percent, this would be $53,373 over the four years or a net savings of $83,000. It would also reduce payments by $367,596 per year, which could replenish the $1.3 million, if it isn’t spent on other things.
Lora Petso points out that the reserves in the REET funds are shrinking, as revenues are less than current debt obligations. Once the reserves in the fund are used up, then the General Fund will need to make up the difference. This makes sense, but only if you don’t issue more bonds for acquisitions to bring the debt obligations back up again.
So much for background. Now comes the reaction. Several members of the community have expressed dissatisfaction with the concept of taking cash and using it to pay off bonds to free up money strictly for the purpose of parks acquisition. The council has heard these comments and is attempting to restructure the proposal to address them. Also, there was some talk that Mayor Mike Cooper might veto the bond payoff, and there don’t seem to be enough votes to override his veto.
So where do we go next? I’ve outlined some possible options here:
1. Remove the restriction that REET funds can be used only for park acquisition. This city-mandated restriction would have to be amended substantially, since the requirement now says that the first $750,000 must go to parks and current REET revenue is under $700,000. The savings are still restricted to capital-only projects by the state law. There is a long way to go before any money could be spent on other capital projects.
2. Use the savings from paying off the bonds to issue new longer-term bonds of $4 million or more and do some real capital improvements such as fixing roads and renovating buildings, and even add some money for parks. Not to be too critical, but this seems like paying off a low-limit credit card and using the increased cash flow to borrow more money on a longer-term second mortgage. It might make sense, since you would be buying longer-term assets and there is a need for these investments, but it doesn’t make sense to say you are paying off debt so you can get deeper in debt. These seem like they should be treated as two unrelated events.
3. Take advantage of the lower interest rates and set aside the money in the reserve fund until an immediate need is identified. This maintains the maximum flexibility, but some think the city already has sufficient reserves so by not making use of the money the city is not fully utilizing an asset.
4. Use the money to pay off those other bonds that are not paid for out of restricted revenues. This saves the interest but provides more flexibility in what to do with the $358,000 savings in annual bond payments. Then, of course, you need to be careful not to just fritter the money away on “like to haves” versus “needs” for the city.
Everyone will have their own opinion. The good thing is the City Council will be taking public comment at the meeting this Tuesday at 7 p.m. Make sure your thoughts are known.
And here’s my opinion, for what it is worth, of the best options (in order of preference):
1. Keep the money in cash and maintain flexibility.
2. Pay off other bonds without funding restriction and don’t spend the money but replenish the fund.
3. Remove parks-only restrictions on REET, then pay off City Hall bonds.
Edmonds resident “Citizen Harry” Gatjens provides regular reports to My Edmonds Newson the workings of the Edmonds city government, including the 2010 Citizens Levy Committee and the Citizens Technology Advisory Committee. Gatjens, an accountant, also offers insight into the workings of the city budget.