As of June 30, 2012, the city owed $111 million for projects, including the water and wastewater treatment facilities and road improvements
City debt: What is it used for, and why is it deemed necessary? Is there a cap on how much debt a city can have?
Albany City Councilor Floyd Collins answered those and other questions so residents could have a better understanding of how public money is spent before they vote on a debt-limiting measure in the March 12 special election.
If passed, Measure 22-117 would restrict the city of Albany’s total debt to what it was as of Feb. 28, 2012. No new debt or debt extensions would be allowed without voter approval.
City officials declined to answer questions about debt, saying the definition of the word in this instance is not clear, and they don’t want to influence voters by choosing to define it a certain way. (A state ruling prevents paid local government employees from providing their opinions once measures move to the ballot.)
Staff also declined to provide a dollar amount for the city’s debt as of Feb. 28, 2012. However, Albany’s Comprehensive Annual Financial Report indicates that as of June 30, 2012, the city had about $111 million in debt. (For details, see box above.)
Councilor Collins is familiar with city operations and spending because he was Albany’s public works director for about four years, retiring in 2002. Previously he spent 15 years as the city of Salem’s assistant public works director.
“My opinions,” he said, “are based on my experience, the reading of state statutes and relevant opinions at the state level.”
Here are questions posted to Collins and his responses:
Why do cities incur debt?
Most cities borrow funds to pay for things like roads and swimming pools and to improve water and wastewater systems.
“Much like a home mortgage, most of us would not be able to afford a home if we had to pay cash as opposed to securing a loan to be repaid in 15 to 3o years,” Collins said.
The city does not borrow money to pay for routine operation and maintenance of existing programs, which makes its debt different than that of the federal government.
How much debt does Albany have?
If “debt” refers to long-term and voter-approved debt, the amount is about $111 million as of June 30, 2012.
There is $3.76 million in general obligation bonds, a common type of municipal bond that requires voter approval and is paid off largely via tax revenues. These bonds were used to improve Elm Street, Salem Avenue, and Santiam and North Albany roads, among other projects.
The city has other long-term obligations of about $107 million, generally loans from the state or federal government for projects such as the recent expansions at the water and wastewater treatment plants.
Collins wonders if other city operations might also be construed as “debt,” such as wages owed to city employees or money owed to a contractor hired to repair a street.
How quickly is the debt being paid off?
The general obligation bond principal in Albany goes down about $1.2 million per year, which should result in a June 2015 pay off. At that time, the city will no longer have any voter-approved general obligation bond debt.
Non-tax-supported obligations are reduced annually according to their individual terms.
Last year, the city reduced its principal owed on all outstanding obligations by almost $8 million.
How much interest is paid each year on city debt?
The interest rates range from 2 percent to 7.36 percent, which reflects the market conditions when the bonds were issued. Those rates are reviewed periodically to see if bonds could be refunded at a lower rate.
Is there a debt cap?
For general obligation bonds, the state constitution limits debt to 3 percent of the true cash value of the city, generally referred to as real market value. On June 30, 2012, the RMV was $3,929,652,978 and the limitation was $117,889,589, of which the city was using $3.76 million.
How does the city use revenue bonds versus general obligation bonds?
Revenue bonds — which are repaid through revenue from rates charged customers — are typically used for projects that generate income, such as water and sewer improvements.
General obligation bonds normally go to make street or park upgrades, and in Albany’s case to construct fire stations 13 and 14.
Normally, general obligation bonds carry a lower interest rate than revenue bonds.
Albany Urban Renewal Manager Kate Porsche fielded question for the city: Is the Central Albany Revitalization Area plan part of city debt?
No, she said, the debt incurred by the Albany Revitalization Agency is not part of city debt. The agency is a separate government entity and was not named in Measure 22-117.
However, ARA’s borrowing could be affected under the measure if the agency and the city chose to back the tax increment financing revenue stream with the full faith and credit of the city to achieve the lowest borrowing cost. If the city’s ability to borrow is limited, then the city’s full faith and credit could be restricted as well.
According to the Comprehensive Annual Financial report, CARA debt totaled $5,548,200 as of June 30, 2012.
Next up: The Urban Ledger series will continue Sunday with a detailed look at Albany’s urban renewal district, the Central Albany Revitalization Area, and Linn County’s four other districts, three in Lebanon and one in Harrisburg.