07/29/2022
From
councilwoman Belanger:
The city council met for five hours on July 19, 2022 and discussed a number of important issues, including further budget requests. In addition, the city council voted to authorize the publication of a notice of intention to issue certificates of obligation (debt) for $19,880,000 for -
1) Central Fire Station (replacing the downtown and E. Main stations) - $8,080,000
2) City-Wide Street Rebuild - $5,000,000
3) Storm System Reconstruction - $4,000,000
4) Storm System Repairs - $1,000,000
5) Parks Restrooms - $1,320,000
6) Parks Playgrounds - $480,000
I’ve been asked a number of questions. The procedure for issuing Certificates of Obligation is in Section 271.049 of the Texas Local Government Code https://texas.public.law/statutes/tex._local_gov't_code_section_271.049. The following are the answers I’ve found so far.
A. What is the difference between certificates of obligation and bonds?
From the Comptroller’s office…
While both incur debt and debt burdens for years to come, certificates of obligation were originally intended for emergency spending, allowing cities to circumvent voter approval. According to the Texas Comptroller’s Office “Texas state law generally requires our local governments to seek voters’ approval before issuing debt that will be repaid from tax revenues…One common form of borrowing, however, represents an exception to this rule: certificates of obligation (COs), which some local governments can use to fund public works without voter approval…COs provide local governments with important flexibility when they need to finance projects quickly, as with reconstruction after a disaster or as a response to a court decision requiring capital spending. But the way COs circumvent voter approval has made them controversial.” https://comptroller.texas.gov/economy/fiscal-notes/2017/january/co.php
B. How do other cities handle certificates of obligation?
Because certificates of obligation circumvent the voter approval process, some cities require an extensive public engagement process to outline, vet and prioritize capital improvements. The city of Sugarland, for example, has a clear set of policies and guidelines: file:///Users/kbelanger/Downloads/FMPS-Adopted-Version-June-2020.pdf. The city requires a 5-year capital improvements plan based on input from citizens, various city boards and their planning and zoning board. The recommendations, along with any citizen’s requests, “will be reviewed in conjunction with the entire capital improvement program and submitted to City Council for final consideration.” (p. 21) In other words, all capital improvements for the next 5-year period include extensive vetting and citizen input and consideration in relation to all other projects. See https://www.sugarlandtx.gov/DocumentCenter/View/24255/FMPS-Adopted-Version-June-2020?bidId=
After public consideration of capital improvements, the city outlines sources of income for projects, including joint capital projects and pay-as-you-go, etc. (p. 23-4). “The City will pay cash when possible for capital improvements within the financial affordability of each fund versus issuing debt when funding capital expenditures and capital improvements.” (p. 24)
All projects are “limited to the affordability limits identified in the long-range financial plans of the City .” (p. 25) In other words, they have to be affordable according to specified criteria. Only items that will last the entire length of the loan and beyond are considered for long-term debt, and items that will incur ongoing costs for support or maintenance must have those costs included in the yearly budget.
C. How does this relate to Nacogdoches?
Given these circumstances, we need to ask the following questions:
1) What kind of citizen involvement should be required for which projects? We may not need the same amount of involvement for storm system reconstruction and repairs or the street rebuild as for parks restrooms and the replacement and relocation of fire stations. In fact, several people have recommended that both of those items be considered in the comprehensive planning processes (the downtown plan and the general plan). They’ve asked about alternatives to reduce costs, safety and maintenance issues for restrooms, consideration of new designs (environmentally friendly, even transparent restrooms like one in Sulphur Springs).
2) Why certificates of obligation for items that are not considered an emergency? Why not a proper vetting and design phase?
3) Can we (the city and the taxpayers) afford these projects? What other costs will be incurred for utilities or other capital improvements? I have asked continually, both in the capital improvements discussions and in the budget meetings, for a draft balanced budget, including the proposed debt. I have not received a balanced budget draft, even excluding debt. I haven’t received an amortization schedule that outlines the annual costs for principal and debt.
4) Which items will not last the time of the loan? If they won’t last 25 years, they should be paid for with other dollars; otherwise we are incurring debt for next generations for our current use.
5) How much money will need to be allocated in yearly budgets for maintenance or ongoing support for these items?
While I have not yet received an amortization schedule, and using the data provided at the last meeting for a 25-year loan, these certificates would obligate the city for the next 25 years to:
· $440,000 PER YEAR in interest payments alone
· $800,000 PER YEAR for principal
· A total of $1,240,000 per year for 25 years for these six items
This only scratches the surface (only 10%) of the proposed capital improvements Perhaps we will be asked to fund certificates of obligation every year? This is your city. This will be your debt for years to come.
