City of Columbia facing tension over big-ticket projects, long-term debt

cleblanc@thestate.comJanuary 26, 2014 

  • Columbia’s financial picture

    A just-released city audit* shows Columbia on a firm footing. But long-term debt is weighing on City Council members and taxpayers as $750 million sewer system improvements, Bull Street commitments and other big-ticket projects loom.

    Long-term debt: $513 million, down $10.6 million from the previous fiscal year

    City spending: $279.5 million, up $7 million or 2.6 percent

    Water and sewer income: $121.6 million, up $9 million

    Water and sewer debt ratio: $967 million is the value of the system. It has $431.9 million in liabilities, which amounts to almost 45 percent of the value.

    Property tax collections: $47 million, down by $3.5 million

    Business license/permit fee: $30.5 million, up $2.2 million

    Meal-tax income: $9.5 million, up $665,000

    * The verified audit covers the fiscal year between July 1, 2012, and June 30, 2013

    SOURCE: Comprehensive Annual Financial Report

Many Columbia residents and City Hall leaders are wringing their hands over debt the city is facing because of a list of big-ticket projects that could approach $1 billion over the next decade.

Neither the city’s chief financial officer nor City Council members say Columbia is approaching a financial pinch like the one that socked the town seven years ago because of poor accounting methods.

“The city is very healthy in the eyes of the (municipal bond) rating agencies and the creditors,” CFO Jeff Palen said Friday. “We are paying our bills timely.” But the term “healthy,” he added, is subject to individual interpretation.

Still, several council members interviewed say the financial risks are weighing on them, especially as council prepares to decide whether to invest public money to build a $35 million minor-league baseball park in the proposed Bull Street neighborhood.

“I do not think, at this point, that we are overextended,” said council’s Budget and Finance Committee chairman, Cameron Runyan. “But I do think we have to be very careful.”

Councilwomen Tameika Isaac Devine and Leona Plaugh and Councilman Moe Baddourah agree that council must proceed cautiously.

Plaugh – who presents herself as council’s fiscal conservative – recently told a crowd hostile to Bull Street spending: “It’s probably nowhere near a correct statement that the city is broke.”

Mayor Steve Benjamin is council’s loudest cheerleader for the prospect of a stadium billed as being able to attract 500,000 visitors yearly downtown and to produce $411.5 million in taxes, wages and spending, according to the city’s feasibility study.

“We aren’t even coming close to testing the city’s fiscal limits,” Benjamin said Friday in an email to The State newspaper. “The truth is that the city has $400 million in treasury accounts and a AA-plus credit rating. Although so many folks love to try and present dire representations of the city’s finances, those representations are not based in fact.”

Audited finances

The city’s long-term debt at the end of last fiscal year was $513 million, down $10.6 million from the previous year, according to the auditor’s comment in the just-released annual audit.

Despite the $513 million debt figure, listed in the audit’s “financial highlights” section, deep inside the 131-page document, the auditors presented a chart labeled “Detailed notes on all activities and funds.”

In that chart, the city’s “total long-term obligations” figure is $589 million – which is $76 million higher than $518 million.

Palen said the $589 million reflects $76 million in additional obligations attributable to bond premiums and other costs, including obligations to future retirees – which are not contained within the $513 million long-term debt figure.

The debt translates to $3,891 for each person living in the city, the audit shows. That per capita figure is down by $125 from last year’s $4,015.

Palen said the per capita figure is misleading because it does not capture the large numbers of water and sewer service customers who live outside of city limits who pay toward the system’s debt. He did not have a more refined number available.

The audit covers the 12 months between July 1, 2012, and June 30, 2013, and represents the most recent financial data to be verified by a private accounting firm, in this case WebsterRogers.

The city’s spending rose by $7 million, or 2.6 percent, over the previous year, the audit shows. Total spending reached $279.5 million.

“The city’s overall financial position improved and net position increased by $31,008,436, or 3.86 percent, during the fiscal year ended June 30, 2013,” the audit states. “This increase is primarily the result of a 5 percent increase in water rates and a one-time gain of approximately $11 million resulting from the sale of a portion of the city’s sewer system.”

Bills and more bills

Still, residents and council members worry about facing new expenses.

The 800-pound gorilla is the $750 million projected cost of fixing Columbia’s sewer system, which is under a federal directive to stop pollution spills.

The city began pumping more money into sewer repairs four years ago, before the U.S. Environmental Protection Agency directive was disclosed last year, said utilities director Joey Jaco. Already, the city has met $160 million of the $750 million investment commitment, he said.

The focus of fiscal watchdogs last week was on whether residents can afford a $90 million-plus investment in the stadium and the city’s commitment to the Bull Street neighborhood, now called Columbia Commons, where the ballpark would be constructed.

Devine said she’s weighing the financial risks against the likelihood that a year-round ballpark that also would serve as an outdoor concert and community events venue will give the city an exciting new attraction, especially for young adults.

If the city doesn’t foot most of the cost, “Are we potentially going to lose a major attraction?” she said.

The rest of the city’s expensive to-do list also includes:

•  About $40 million annually to maintain the water system, a council commitment.

•  About $9 million to $10 million to refurbish Finlay Park, which has yet to receive a vote from council.

•  Undisclosed sums to upgrade public safety, including hiring more police officers and raising pay for them, firefighters and 911 dispatchers.

•  Undisclosed sums to conduct and carry out a study that would evaluate all 2,300 city jobs and determine how to adjust employees’ pay, to consolidate positions or to cut the workforce.

Income, out go

Columbia’s primary sources of income are its water and sewer systems, property taxes, business licenses/other permit fees and the 2 percent tax on prepared meals and beverages, commonly called a “hospitality tax.”

Revenue from the utility system grew to $121.6 million, up $9 million over the previous fiscal year, a comparison by the newspaper of the previous-year audit shows.

It cost $96.8 million to operate the system during the new-audit period, the figures show.

Property tax collections, however, dropped by $3.5 million to $47 million, the current audit shows. Palen said that about $15 million of the $47 million comes from the local option sales tax – not directly from property owners’ pockets.

Fees from business licenses and other municipal permits amounted to $30.5 million, up $2.2 million, largely because the city increased the fees.

Meal-tax income rose to $9.5 million, up by $665,000, as the economy began to improve from the Great Recession.

The city’s biggest fiscal engine is the water and sewer systems – mostly the water system, which is cheaper to operate and therefore more profitable.

The audit states the system is valued at $967 million. It has $431.9 million in liabilities, of which $376.5 million is owed to repay revenue bonds. That means liabilities amount to almost 45 percent of the system’s value, audit figures show.

Moody’s Investors Service reported in September that the debt ratio for Columbia’s system is “above average” at 49.5 percent at the end of the previous fiscal year.

“The city faces a choice of allowing debt service coverage to decline as a result of the new ($750 million) debt, or passing on the full incremental cost of the new debt to customers through rate increases,” Moody’s wrote late last summer.

Benjamin said Friday that Standard & Poor’s improved Columbia’s credit rating even after the city made its commitment to Bull Street, after the settlement with the EPA, after council approved an across-the-board pay raise for employees last year and after it announced the job-analysis study.

Tough choices ahead

The $11 million sale of the sewer system northwest of the city gave Columbia’s coffers for water and sewer a one-time injection of income. Often, those systems require a lot of upkeep, which means greater expenses.

That sale and other accounting moves resulted in a $25 million infusion, including $5.8 million worth of underground pipes that developers turned over to the city to operate, audit figures show.

Devine said that some of the proceeds of the $11 million were not reinvested into the utility system as initially planned, because of other city needs. Devine did not say how much or where the money went.

Further, council authorized moving $6.8 million out of the system into Columbia’s general fund – the account used to pay most city expenses, Palen said. The general fund also received $4.1 million of the $9.5 million the city received from meal and beverage taxes.

Critics say that in moving money from various pots into the general fund, council is making that account look better on the city’s books by robbing Peter to pay Paul.

Council has yet to discuss a new round of water and sewer rate increases. That’s likely to occur in the spring.

The sewer portion of the system is in such bad shape from years of neglect that Columbia has reached the agreement with the EPA that triggers much more spending. The agreement has yet to be finalized, Jaco said.

The EPA has not imposed a strict deadline for completing the replacements and repairs of underground lines and sewage treatment facilities. But the city has set itself a 10-year timetable. That allows the city financing options in smaller chunks rather than borrowing large sums all at once.

But as Runyan points out, interest rates are at nearly historic lows, and waiting may raise financing costs.

In the meantime, he and Devine said, water and sewer rates will have to rise. But neither would say by how much.

“For too long, they kept the rates artificially low because of the political risk,” Runyan said of previous councils. “This is not a revelation. It is the politics of running the system that got us into this fix.

“What they were doing was borrowing against the future. At some point, you’ve got to pay that.”

Runyan said he is studying whether to propose a water and sewer authority that would remove rate-making decisions from council to minimize political considerations.

Reach LeBlanc at (803) 771-8664.

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