City council examines borrowing policies

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City council examines borrowing policies
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By Erich Wagner (File photo)

City staff urged city councilors to reduce the amount of money Alexandria pays up front for capital projects to help deal with a projected $16 million budget deficit.

City budget director Nelsie Birch said at a meeting earlier this month that while councilors’ “very conservative” approach to paying for infrastructure upgrades has helped to preserve a AAA bond rating through the worst years of the recession, debt service and down payments on new projects are eating a bigger chunk of the city’s operating budget each year, to the detriment of city services.

Local leaders warn that the city will face a $16 million deficit — which doesn’t include mandates like paying for enrollment increases in city public schools — as councilors consider the fiscal 2016 budget in the coming months.

“We have very conservative debt ratios, but why do we feel like there’s such a squeeze in the general fund?” Birch said. “[Since] 2011, we have almost doubled the general fund support of the capital budget, going from $42 million to $80 million.”

General fund contributions to the capital budget stand at 12.6 percent of expenditures this fiscal year, and staff project it will rise to 13.4 percent in fiscal 2016 under the current policy.

Birch and other budgeters recommended that councilors reduce their down payments on projects, capping spending to the capital budget at 12 percent of the operating budget. Assistant budget director Christopher Bever said the 12 percent figure provides a balance, easing pressure on the operating budget while not dramatically increasing borrowing.
“If we go lower than 12 percent, we’d have to start looking at reducing our planned level of investments,” Bever said. “This would provide a sustainable level of general fund investment over the next five years.”

Birch said that by lowering the cash contribution to capital projects, the city could free up $9 million in fiscal 2016 to pay for city services.

But City Councilor Justin Wilson was not convinced that the city should borrow more to make up its budget deficit. He said he would rather see a “floor” on cash contributions — a percentage of the general fund council cannot go under — to the capital budget.

“I’m still uncomfortable with going and increasing debt,” he said. “But if we are going to do so, I would like to see some of that money used and realized by increasing our debt to increase capital investment as well. Not all of it should go into the operating budget.

“[We] have debt capacity if we do want to [increase borrowing], but there’s a cost to it. It’s a generational equity argument: Which generation should pay the cost of all of these capital expenditures that will benefit us for the next 30 to 40 years?”

But other councilors are more supportive of the 12-percent cap on capital spending. Councilor Tim Lovain said changing the funding ratio could be a good way to hold the line on spending until revenues improve.

“I kind of feel like, with the structural deficit on the operating side, maybe it’s time for cash [contributions to the capital budget] to participate in the austerity to some extent,” he said. “The way they laid it out, by changing the mix just a little bit, we could still do everything in our capital improvement plan but still stay well within our debt guidelines.”

Lovain said he isn’t concerned that the city could make its long-term debt worse in the long run with this shift.

“I’m not sure it digs us into a further hole,” he said. “[And] a good capital investment does help with economic development and city revenues in the long term. If your schools are overflowing or what have you, that won’t attract businesses or people who want to live here.

“So projects like Metro and other investments are going to be great for economic development, and that will help with revenues.”

Councilors likely will revisit the issue early next year. Staff will incorporate city council’s decision in the proposed fiscal 2016 budget, due out in early March.

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