Saturday, June 4, 2011

How $8.66M of Debt Was Issued Last City Council Meeting

When I was going through the record of the last city council meeting, I found something that I think is fairly significant, which to my knowledge hasn't been reported on by the StarNews, WWAY, or WECT.

Apparently, the council issued $8.66M in debt last meeting. Surprised?  I was too.  It's described here in R4, which was the last item on the agenda, over two hours into the meeting.

Three things were done in R4.

Firstly, the the city issued $3.66M in general obligation debt.  Now, in North Carolina general obligation debt typically has to be voted on, but there's a rule that allows cities to sidestep this.  It's called a "2/3rds bond."

A 2/3rds bond means that when the city retires some general obligation debt they are allowed to issue 2/3rds as much as new debt as they retired without a vote.  So, if the city retired $9M in general obligation debt one year, they will be able to issue $6M of general obligation debt the next year without a vote.

What is the debt going to be used for? 

Well, I can't really find too much info.  The city gives a very brief list here on pg 4, but nothing in-depth.  I looked through the records of the city council meetings within the last four or so months and couldn't find specifics, although in fairness those projects may be described in the capital improvement section of the budget.
The second thing done in R4 was the issuing of refunding bonds.  This seems to be legitimate.  It is basically like refinancing a house.  The city is apparently just trying to get a better rate on their debt. 

The third thing done in R4 was the issuing of $5M from the 2006 Streets and Sidewalks bond. This is all I can find on the $5M's intended use: "The 2011C Bonds [the $5M in bonds] are being issued to provide funds to pay the capital cost of improvements to certain City streets and sidewalks."

As far as I know, funds for streets and sidewalks typically come from the general fund, but this bond was approved for streets and sidewalks.

The greater point, however, is that simply because a bond was approved doesn't mean the city has to issue the debt. If the city doesn't issue the debt within eight years, it can no longer be issued.  A referendum simply gives the city the authority to spend up to that amount.  There's no requirement that the city issue any of it.

Of course, if the debt is never issued we don't pay any interest on it.  We do, however, pay interest on the $8.66M of debt issued last meeting.

How much? 

Well, I spoke to city finance director Debra Mack, and she said that our interest rate on this is 4%, which I got the impression is much lower than normal.  That means we will be paying $350k in interest on this debt every year.

Don't you love debt? It's the gift that keeps on giving.

No comments:

Post a Comment