Lee M. Kleinman

Home » Uncategorized » Dallas leaders tout capital projects amid rising debt

Dallas leaders tout capital projects amid rising debt

By STEVE THOMPSON 
The Dallas Morning News 
Published: 21 September 2010 12:55 PM

“But as the city fights to maintain the facilities it has, some have questioned whether the time is right to buy more.

“At a time when we are under a lot of budget constraints and a lot of concerns, I just want to make sure we are being prudent,” said Park and Recreation Board member Lee Kleinman last week. He and the other board members were asked to approve $13 million in construction at the Woodall Rodgers deck park.

“This stuff just seems to fly right past the Park Board and the council” without much discussion, Kleinman said. In the end, he and the rest of the board voted unanimously for the deck park’s construction. But Kleinman’s concern has been voiced by many.”

This week’s vote on a budget will cap months of struggle by Dallas leaders to find money for repairing streets, cleaning up parks and staffing libraries.

Yet even as they scrounge for every nickel to operate, they’ve approved major spending on new parks, libraries and other infrastructure.

The budget for such capital projects, paid for with borrowed money, will rise to $470 million next year, and the city’s tax-supported debt is approaching $2 billion. Meanwhile, an increasing percentage of the city’s property taxes are used to make payments on that debt. By contrast, the city’s roughly $1 billion general fund operating budget will shrink slightly next year.

City officials say the time is right to build, even if it means deepening the city’s debt. With the economic downturn, construction costs and interest rates are low.

“Dallas was made by pioneers that understood you make investments, you build for tomorrow,” said Mayor Tom Leppert during his state of the city speech last week.

But as the city fights to maintain the facilities it has, some have questioned whether the time is right to buy more.

“At a time when we are under a lot of budget constraints and a lot of concerns, I just want to make sure we are being prudent,” said Park and Recreation Board member Lee Kleinman last week. He and the other board members were asked to approve $13 million in construction at the Woodall Rodgers deck park.

“This stuff just seems to fly right past the Park Board and the council” without much discussion, Kleinman said. In the end, he and the rest of the board voted unanimously for the deck park’s construction. But Kleinman’s concern has been voiced by many.

While Fair Park’s $13 million Esplanade Fountain opened last year, the city has yet to come up with the $400,000 per year needed to keep its water flying. While library employees ponder their layoff notices, next year’s capital budget includes a $4 million renovation of the Polk-Wisdom branch. While the city struggles to keep parks mowed, it’s building a $4 million whitewater park at the Trinity River.

“I support the Trinity project – I wholeheartedly support flood control,” said Mayor Pro Tem Dwaine Caraway at a recent council meeting. “But as we talk about spending, is it necessary for us … to worry about the water rafting and all the other things at this particular time?”

Low construction costs

City Manager Mary Suhm and other city leaders say it is.

Citing the current economy’s reduced construction costs and record low interest rates, they say it would be shortsighted not to borrow for infrastructure.

“The investment grows our tax base in the future,” Suhm said. “If you can build it cheaper than any other time, you ought to be doing that.”

At least one city finance expert agrees.

“I look for cities to probably ramp up some of their capital spending here over the next few months, especially if they sense that the economy is starting to turn around,” said Robert Bland, a specialist in municipal finance who chairs the Department of Public Administration at the University of North Texas.

“They’re going to try to lock in those low interest rates and lock in those low contract prices, so they can get the best bang for their buck,” Bland said. “It’s not at all bad timing in that sense.”

Limit to debt

But there’s a limit to how much debt a city can safely accumulate. Each year, of course, the city must make principal and interest payments on it. In the case of the general purpose capital improvement budget, the bulk of these debt service payments are funded by property taxes. Other city debt, such as that of Dallas Water Utilities or the Convention Center Hotel, is supported by fees and other revenue.

Eight years ago, 27 percent of the city’s property tax revenue went toward payments on $762 million in tax-supported debt.

But that percentage has been climbing. Next year, 33 percent of Dallas property taxes will go toward servicing the debt.

“That’s something I would watch, because an older city like Dallas doesn’t have a lot of wiggle room,” Bland said. “Every penny that they spend on debt service is one less penny for maintenance and operations.”

How much is too much debt? There’s no right or wrong answer, he said. It’s ultimately a political question.

“The capital budget is probably one of the more forward-looking activities that governments do,” Bland said. “But they also are looking at the here and now, and especially the next election.

“It’s how much do we emphasize investment in the future and how much do we cater to the here and now,” he said.

In Dallas lately, it’s also been a question of whether to raise property taxes.

In 2006, when voters overwhelmingly approved a $1.35 billion bond program for city infrastructure improvements, they did so knowing city leaders planned to raise the property tax rate to service the resulting debt. City managers forecast needing to raise property taxes by more than 15 percent over the coming five years.

But city leaders didn’t do that. They did raise the property tax rate slightly in 2007, but since then they’ve held it steady. Various factors have affected the need for a tax increase. Property values, for instance, rose faster than forecast at first, then they slumped.

But the bottom line, Suhm said, is that policymakers and priorities changed. City leaders argued for holding the line on taxes in order to keep the city attractive to businesses.

If the City Council votes as expected this week, it will raise the property tax rate by 6.5 percent. Holding the debt service cost to this fiscal year’s level of about $260 million – without a tax increase, and while property values have dipped – would have meant deeper cuts to city services than many could bear.

Suhm foresaw as early as last year the coming collision between debt service costs and operating expenses. But she felt it was vitally important keep the bond program moving forward. In the mid-1980s, Dallas delayed a bond package with what many say were devastating consequences to infrastructure.

But Suhm also knew that keeping the current bond package moving forward meant increasing the debt payment costs, which would cause even more severe cuts to the city’s operating budget.

Her financial advisers came up with a plan. Instead of financing coming capital projects with bonds, they would do it with commercial paper, a form of short-term debt with much lower interest rates.

Making this change would allow the city to put off new debt costs until after 2011’s budget crunch. City leaders could keep the bond program going while holding next year’s debt payments steady. They would have until 2012 to issue long-term, higher interest rate bonds to repay those short-term loans. The city would then issue more commercial paper to pay for 2012’s projects, and so on.

City managers say the plan comes with added advantages, such as the flexibility that the short-term loans provide. Unlike bonds, which must be sold prior to the letting of contracts they are intended to fund, commercial paper can be issued as needed.

Council members, who have expressed approval of the plan, will vote on it next month.

Meanwhile, city managers are preparing for the city’s next bond election, which they expect in 2012. The city maintains a list of infrastructure needs and wants that stands at more than $7 billion and growing. The city’s storm drainage system alone needs 1.5 billion worth of improvements, Suhm said. That cost will be spread among the next several bond programs.

“We’re going to have to redo the storm drainage system completely,” she told council members recently.

Bland said the competition for businesses among cities is fierce, and city leaders face a tough task in trying to enhance infrastructure while keeping taxes down. “They want to have streets, they want to have drainage, they want to have parks, they want to have nice facilities for those businesses,” Bland said. “So it’s a constant struggle to try to balance capital investments with the cost of paying for them.”

 

http://www.dallasnews.com/news/community-news/dallas/headlines/20100919-Dallas-leaders-tout-capital-projects-amid-2466.ece

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