Streets, bonds, and financial impacts

Posted on December 29, 2020

Streets, bonds, and financial impacts

On December 28th, 2020, the City Council held a Special Meeting to discuss and amend the previously adopted financial policies to include a provision regarding a minimum reserve or savings in the city’s general fund of 25% of the general fund’s annual operating expenditures.

This is a best practice for municipalities and adding this provision to our financial policy is simply putting our current system down on paper. Further, this will reduce our cost of borrowing money for fixing the roads.

During this meeting, several other items related to our financial policies were discussed by the Council and I was asked to briefly explain the process and consequences of issuing debt to repair the streets in New Fairview. The bonds will go on sale with a closing date of February 1st, 2021. At which time, the City Council will review the offers and vote to either accept or reject the proffered rates and terms of the sale.

  • If the Council decides to reject the bond sale, then the city will not have the financial resources needed to complete the streets project that has been under discussion for at least the last year.
  • If the Council approves the bond terms, the city will be responsible for their repayment. This means that the city may be compelled by the bondholders to maintain a tax rate high enough to ensure repayment of the bonds. The tax rate required to maintain current levels of service, as well as the streets project bond payments, is the current rate of $0.30 per $100 valuation.

Background and History

Almost one-year-ago the City Council asked our consulting engineering firm, Pacheco Koch (PK), to conduct a review of the streets and come up with scenarios for repair, as well as the estimated cost. PK came back to the Council with four possible solutions. Each of these solutions involved issuing small amounts of debt over three-to-four-years, depending upon the plan, and completing small sections of work each year.

This was recommended as an alternative solution by a member of the Council during the meeting but there are some issues related to this piecemeal approach. While this approach seems to make sense, taking it in smaller bites and taking a little more time to finish the streets improvement project it can have huge impacts on the actual cost of the project.

Street Project Costs and Potential Savings

  1. When a city is borrowing money, the first $1 million dollars is the most expensive, as they have flat fees associated with each issue. These could be as much as $80,000 per issue for anything less than $1 million dollars. By breaking the $3 million dollar project into small issues each year, we pay the highest fees possible:

    $80,000 X 4 issues = $320,000 vs. $80,000 X 1 issue = $80,000

    By combining the work into one project, the city saves potentially $240,000 that can be put into street repair instead of being eaten up by fees.

  2. Each time a municipality contracts for street repairs, the contractor will charge a one-time flat rate mobilization fee, that costs around $75,000. This means four small projects will also incur four mobilization fees from the contractor:

    $75,000 X 4 projects = $300,000 vs. $75,000 X 1 project = $75,000

    Again, by combining the work into one project, the city saves potentially $225,000 that can be put into street repair instead of being eaten up by fees.

  3. Further, streets have a sharp decline curve, as shown in the Pavement Condition chart below. If nothing is done to mitigate the damage to the road, the cost of repair increases exponentially, costing as much as 10 times more than the initial cost to undertake appropriate repairs. This means that the $3 million dollars will not fix as many roads when using the piecemeal approach to repairing the streets.
  4. Finally, each year the cost of construction, materials, supplies, etc., increases. There are several tools that municipalities use to track this inflation, including the Municipal Cost Index (MCI) and the Construction Cost Index (CCI), which is tracked by American City & County. Over the last year, MCI and CCI have increased by 1.04% and 1.90% respectively. This means that the cost of this project has increased by approximately 2% over what we would have paid twelve months ago. Using these trends, if the city broke this into four equal-sized street projects of $750,000, then the city would pay an additional $135,000 for the same amount of construction due to inflation.

When taking all of this into account, the city would face the following:

  • The city will spend $600,000 instead of $155,000, an increase of $445,000.
  • $445,000 represents 15% of the total project cost and a significant waste of resident tax dollars, spent on on one-time-fees and inflation.
  • The increased cost of the project due to the continued degradation of the streets that are not receiving appropriate maintenance measures could cost the city millions of dollars to repair or replace.
  • Regardless of the timing of the bond issues, whether one-time or several issues over multiple-years, the city will not require an increase in the property tax rate above the current rate of $0.30 per $100 valuationIf completed in a piecemeal fashion over multiple years, the number of roads that can be repaired will be reduced by approximately 15% due to the use of $445,000 in one-time fees and inflation.

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