City administrator asks council: should city accept high debt level for next five years?

Bettendorf City Administrator Decker Ploehn is asking the city council if it wants to stay the course on a 10-year expansion of city debt – now $132 million and within 17 percent of the legal maximum – to continue to fund an "aggressive" program for capital improvements from streets to so-called "WOW" projects under discussion.

In his presentation to the council August 25, Ploehn said historically low bond interest rates and the need to fix and expand streets in the city justify the high debt strategy adopted five years ago by the council. He also pointed out that additional significant bonding may be required for the possible WOW projects, which were listed as: development of I-80/Middle interchange; sports complex; replacement of city pool, fitness center and community center with a new recreation facility; and a potential riverfront development project.

Since the council direction five years ago to use debt – rather than operating funds – to pay for essentially all municipal capital improvements, the city's debt has ballooned from just over $50 million to the current $132 million. The debt margin ratio – calculated at 5 percent of the city's assessed valuation each year – has jumped from 62 percent in fiscal 2008-2009 to more than 80 percent at the end of this fiscal year.

Ploehn and the city council are meeting with the city's strategic planning consultant, Lyle Sumek, of Lyle Sumek Associates, Inc., Palm Coast, Fl., this week and high the list of items for discussion is the city debt policy going into the coming fiscal year and formulation of the city's capital improvement (CIP) budget.

Under the debt scenario laid out by City Finance Director Carole Barnes at the August meeting, the debt margin would not fall below 70 percent until fiscal 2018-19 at the earliest.

The city debt was one of the main issues in the last mayoral campaign between Patricia Malinee and Mayor Bob Gallagher. Malinee questioned the city high debt level and prior to the November 2011 vote Gallagher also promised to address the debt if elected. However, city debt has increased each year since, except the past fiscal year when the city council decided to issue bonds every two years, rather than annually.

Today, more than 40 percent of all property tax paid by residents each year – $9.7 million in fiscal 2014-15 – will go toward paying off the city's debt. Over the next 20 years, interest costs alone on the city debt are projected to total more than $34 million, or $1.7 million annually.

The average homeowner (living in a $165,000 home) will pay $425 in the coming fiscal year to repay principal and interest on the debt, according to figures presented to the council by Barnes. That compares to a debt cost of $51 for a resident in Cedar Falls and a $170 annual debt cost for West Des Moines residents.

Using debt-financing to pay all capital improvements has enabled the council to avoid increasing the city's operating fund levy to pay for such capital projects. Consequently, taxpayers in Bettendorf pay the second lowest operating fund levy in the state, according to city figures. The average homeowner will pay only $642 to fund city operations in fiscal 2014-15, compared with $1,253 for a Davenport resident in a similar home and $855 for a resident of West Des Moines.

While the debt-financing avoids increasing the current operating fund levy, the bonds must be repaid with interest over their 20-year life, driving up the total cost of new streets and other capital improvements. In addition to the interest paid each year on the bonds, the city also incurs costs related to the issuance of the bonds.

For the $20.8 million in general obligation bonds issued earlier this year, the city paid its financial consultants and ratings agency more than $111,000 (Springsted, Inc., of Minneapolis $51,151, bond counsel Ahlers & Cooney of Des Moines $38,342, and bond rating agency Moody's Investor Service $21,963).

To save money on issuing bonds, city officials have now gone to a two-year cycle for issuing new debt, telling the city council there would be an approximate $300,000 cost savings over a 5-year period.

That left the debt essentially flat last year, but meant the city issued two years of bonds, adding $20.8 million to the city debt, this spring.