Clinton Invests in Future with Streets, Development
(Editor’s Note: In this Clinton Herald news story, Brian Richman, director of the Hawkinson Institute of Business Finance, analyzes the city of Clinton's decision to sell bonds to finance economic development projects.)
Comparing an average wallet to that of a city can yield shock, confusion, and even anger. Add that to the constant stream of information on the debt ceiling, fiscal cliff, and general concern over federal government borrowing, and the comparison could even spur outrage.
However, a number as high as $89 million in city sewer and general obligation debt at the end of fiscal year 2012 falls far short of shocking the people involved in city finances daily.
“This is just a snapshot of a point in time,” City Finance Director Jessica Kinser said.
When broken down further by expense, the city of Clinton’s outstanding obligations at the end of fiscal year 2012 show a city purchasing items for operational needs of the police, fire recreation, and library. At the same time, they tell a story of a city that’s used its tax base to invest in streets and economic development.
Most of the city’s outstanding obligations—nearly $71 million—are in sewer revenue bonds, of the remaining amount, $18 million, is in general obligation bonds that paid for projects such as street repairs and Vision Iowa projects like the marina and stadium that were completed to increase Clinton’s visibility.
These projects, and other items that cities regularly borrow for such as police and fire department costs, are tied to the health of a community, city officials argue.
“It is a necessary evil, if you will. Like a small business. Cities are unique in that the lot of the projects they provide are services. Sometimes these can be very expensive,” Iowa League of Cities Executive Director Alan Kemp said. “Financially, there’s very few other options. It becomes very difficult for a city to compile it in a savings account and spend it.”
VISION IOWA, STREET DEBT
Vision Iowa debt accounted for a large portion of the city’s outstanding obligations. The Clinton marina, the recreational vehicle park and Riverview Park, a new skate park and band shell, and modifications to the Clinton Area Showboat Theatre, Riverview Pool, and a downtown pocket park were completed with help from the state and millions of dollars in funding from the city. City reports show that between 2006 to 2009, $8 million was borrowed for the project, which will mostly be paid off by 2018.
“I think that has increased our visibility and availability for events,” Clinton City Councilwoman Julie Allesee said. “It’s an investment in the quality of life. You can see the return on investment.”
In the past year, the riverfront has garnered Tractorcade and RAGBRAI, which alone pumped an estimated $1.3 million into the Clinton-area economy.
Unlike operating needs, pursuing economic development projects can carry more of a risk than standard city expenditures.
“Generally, the answer is there’s some level of risk in economic development projects,” said Brian Richman, a former investment banker and municipal financial advisor and now the director of the Hawkinson Institute of Business Finance at the University of Iowa. “Cities take those on to build their tax base. For instance, they might build a stadium with the idea that other businesses are going to spring up around it. Sometimes that works out. Sometimes it doesn’t.”
Richman said the level of risk involved with a city forgoing economic development investment is a matter of perception.
“Proponents would say the risk of not taking it is very high,” Richman said. “Opponents would say the risk is not as high. Sometimes they take longer than expected and when that happens the city and the taxpayers are on the hook.”
The upper floor of the amenities building at the Clinton Marina, for instance, sat empty for a number of years. Finally, in 2011, the Candlelight Inn restaurant moved in, giving the city more than $4,000 a month in rent and drawing people to dine on the riverfront.
“This pre-dates me by a number of years, but I do not think you would find a person who would say Vision Iowa and the projects that resulted were a bad thing,” Kinser said. “We want the riverfront to be a destination and an attraction and that requires investment to create that attraction as well as maintain it.”
Cities of similar size to Clinton all had debt lower than Clinton’s, but they also had a different objective when borrowing. The city of Burlington, with a population just shy of Clinton’s roughly 27,000, had $62 million in outstanding obligations at the end of fiscal year 2012 placing the city at 80 percent of its debt capacity. None of Burlington’s debt was for economic development projects. Their debt breaks down to $33.4 million in general obligation bonds for things like street maintenance and bridge replacement. Sewer Revenue Bonds totalled $18 million and urban renewal and TIF accounts for another $5.5 million.
“We’re borrowing for the things we have to,” said Stephanie Stuecker, director of administrative services with the city of Burlington.
Streets constituted another major portion of borrowing for the city. Of the city’s outstanding obligations, more than $6 million was originally borrowed for street improvement.
“You have to borrow for things at some point if you don’t have the money on hand or there becomes the decision of you have what you have or you need to improve,” Kinser said. “Streets are something your citizens are going to be using no matter what. What’s the cost of borrowing versus not improving them? What’s the cost of not completing Vision Iowa projects? It’s what is the cost of borrowing versus what is the cost of long-term improvement to the community?”
By law, the city cannot take out general obligation bonds for more than 5 percent of the assessed property values.
That doesn’t mean the city should bond for as much as it legally can, Richman said.
“Just like any individual, how much can you afford to pay?” Richman said. “It’s more of an economic issue than a statutory issue.”
Kinser has suggested the city restrict general obligation debt to 75 percent of the debt capacity. At the beginning of this fiscal year, the city was nearly 59 percent of its legal bonding capacity. The proposed $20 million bond the city is expecting to issue across fiscal year 2013 and 2014 in order to fund some of the projects mandated by the consent decree from the Iowa DNR and EPA, though, would push the city to 73 percent of its debt capacity, leaving just less than $4 million available for additional general obligation bonds. As the city heads into budget workshops, officials will examine the proposed plans will bring the city even closer to the suggested 75 percent limit.
Ultimately, the city monitors what it borrows, while paying close attention to what would happen without any borrowing.
“If you have good streets, you have good housing stock, you have good jobs, people are going to come and then the value continues to grow,” Kinser said. “It’s a risk, but it’s also a retention thing. If you have good streets are people going to stay here? If you have top-notch recreational opportunities and facilities like Vision Iowa, is that going to keep people in the community, spending dollars in the community? I think it is.”