may alter its policies on long-term debt in order to increase the amount it can borrow without jeopardizing its AAA bond rating, the highest offered by rating agencies.
“[The rating] is an independent third-party look that tells you your strengths and weaknesses,” said Kevin Roddy of the firm Morgan Keegan at a work session Thursday. “It gives you a lower cost of capital and allows you to enter the bond market at the lowest possible interest rate.”
Listen using player above or download the podcast:
In order to maintain the bond rating, the city must have policies in place that govern how it manages debt, and how much cash is set aside for emergencies.
The city’s current rule is to have a debt service-to-operating ratio of 8 percent or less, a figure that satisfies analysts with both Moody’s and Standard & Poor, two bond rating agencies. In addition, the city’s policy is to maintain a fund balance equal to at least 12 percent of its operating expenditures in order to have cash on hand in case of an emergency.
In the current fiscal year, the city is paying about $8.9 million in debt service compared with an operating budget of $140.8 million, a ratio of 6.31 percent. Roddy said many projects are being discussed but are not yet in the current five-year capital improvement program, which could increase that ratio and potentially risk the rating.
The city school system is considering consolidating its two middle schools at a cost between $18 million and $36 million. Complying with the federally mandated cleanup of the Chesapeake Bay could also cost tens of millions.
“We estimated that if we drop one grade with our current CIP, the additional interest costs would be several millions of dollars,” said Aubrey Watts, the city’s economic development director.
However, if the city adjusts its policies to take on new debt, the risk to the rating may not be as high as feared. In the past year, Moody’s has recalibrated its ranking system, which Roddy said has made it easier for municipalities to get a better rating. The city could increase the debt service ratio, increase the fund balance target, or a combination of both.
said he did not want to commit future councils to having to meet a higher target, given Moody’s new ranking system.
“The criteria for being a AAA city was lessened this year, so it seems to me we could raise our debt ceiling without having to compensate somewhere else to keep the rating,” Brown said.
Acting City Manager
said he would come back to the council with options for them to consider.
Budget takes shape
Budget director Leslie Beauregard is projecting a $142 million budget for FY2012, assuming a 1.39 percent increase in overall tax revenues but a 2.2 percent increase in expenditures. The council will need to reconcile that difference as budget negotiations continue into the spring.
Employee costs are a big factor in increasing expenditures. Beauregard expects health insurance costs to increase between 7 percent and 12 percent, translating into an additional $350,000. The city has also proposed a 2 percent cost of living raise, a move supported by councilors.
“We think it’s necessary to help us stay competitive,” Huja said.
The council indicated it will decrease the amount of money placed in an economic downturn fund. This year, the city put $2.3 million in the reserve, which was started in fiscal year 2010 as a way to prepare for decreased federal and state revenues. There is currently $5.5 million in the fund.
The current draft CIP anticipates spending $100,000 on parkland acquisition, a figure the mayor would like to see increased.
“We’re looking for a spot for the City Market,” Norris said. “We may need to commit some funds to make that happen.”
All councilors also agreed to increase the amount spent on bike infrastructure from the $50,000 currently programmed for bike lanes and other amenities.
The next step in the budget process is the Planning Commission’s Dec. 14 public hearing on the $23.4 million capital improvement program. The council must adopt a final budget by April 15.
TIMELINE FOR PODCAST: