On a cool fall evening, a couple dozen North Mankato citizens gathered over a couple nights at Neutral Groundz to brew up some coffee, I mean the budget. Citizens, business leaders, and city leaders gathered around small tables to share their ideas, passions, and expertise to help shape the City’s budget. With coffee and treats had by all, great conversations on how North Mankato can flourish began to brew up. There were ideas on preserving historic buildings and landmarks to expanding park features with dog watering stations, and all the way up to creating an entire park dedicated to various creative landscaping and placemaking features. These were all great ideas that aren’t huge expenditures that can hopefully be incorporated soon. But the big driver of how to brew North Mankato’s budget was what to spend $2 million dollars of new debt on. Many of the citizens expressed concern that this brew of the budget was a little too hot and should be put on the table to cool off. Ok, enough with the coffee talk, essentially they didn’t want to see the City issue any more debt, but use any extra money to pay off existing debt. Now before getting into details on debt, a little more context is in order.
No doubt that debt is everywhere. There’s consumer debt which includes student debt, credit card debt, car debt, and mortgage debt which as of June 2017 is $12.84 trillion (12,840,000,000,000) which is about $39,500 per person for every US resident, including new born babies. Then there is all the government debt. The federal government’s debt is nearly $20 trillion (20,000,000,000,000) which is about $61,500 per person, including those new born babies again. Then add in the state’s debt at $19.5 Billion ($19,500,000,000) or about $3,500 per person. Just look at all those zeroes. It’s no wonder we are scared of debt.
How does it compare to the North Mankato’s debt. North Mankato’s G.O. debt totals just over $19.1 million ($19,105,000) or $1,400 per resident. North Mankato’s is clearly the lowest share of all the possible debt that exists, but how does that compare to some surrounding cities? Mankato’s G.O. debt is $63.3 million or $1,520 per resident and St. Peter’s debt is $32.9 million or $2,800 per resident
Now back to the brewing up the budget conversation around the city’s debt. As shown in the chart below, the City’s debt has gone from a high of $25 million in 2010 to the current debt of $17 million and dropping as shown in the schedule below. What the City does is stagger debt to maintain a healthy level of debt in order to complete needed projects for older infrastructure or needs for a growing community.
While there was a healthy conversation during the brewing up the budget that encouraged the city to pay off the debt. It’s not quite that simple. Most bonds have a minimum of 8-10 years of payments to investors before they can be paid off. So our most recent bonds issued in 2016 will have to wait until 2024 before we can pay them off. But for the sake of simplicity, let’s just say that we are going to just continue to make payments on existing debt, but set aside the difference between what we have built for our debt service levy and the decreasing debt service payments. This difference would then be used to build a reserve to build up in order to start paying cash for projects. After looking at our forecasted debt service levy, compared to the principal and interest payments, with no debt issued in 2017, we have reached the point that if no debt issued, we will be able to put aside $200,000 in 2018, $220,000 in 2019, and so on until 2022 we would reach a tipping point where we will begin to save more than what we have for debt service payment.
At $21.8 million, our 2018-2022 is roughly $4.5 million per year. Of that amount, approximately $1.7 million is funded with cash. That means approximately $3.0 million each year is financed, funded with $500,000 in special assessments and $500,000 in miscellaneous grants each year to bring down the annual debt issuance to $2 million per year as outlined in the CIP. The chart above describes that it would be until 2034 where we are investing as much in cash as we are today in debt service payments. In addition, this scenario assumes new development that is supporting new infrastructure which is continued to be financed with special assessments until 2034. Waiting until 2034 would require increased costs by developers to meet debt payments as the development is completed. This is opposed to a current scenario for a development that is completed and the payments are not received project is nearly completed.
Take the swim facility for instance. With an estimated construction cost of $3.0 million in 2018, it would take until 2023 to save nearly $3.0 million, but with construction costs rising by an average of 5% per year a $3 million project in 2018, would be over $4 million in 2023 so we would need to push the project back another year until 2025 when we have enough saved up to offset rising construction costs.
With the current condition of the swim facility, it would simply need to be closed until we have enough funding to make the repairs. On top of that there are many aging streets, pipes, and sidewalks; demands for new amenities to attract new families, and demands for new infrastructure for a growing community. The period of time required to save for CIP projects will stunt growth and the attractiveness of the community. While the argument of interest cost savings is significant, our goals of resolving the community’s infrastructure needs would fall behind during this time.
Circling back to the city’s debt. For several decades the tools used to advance the strategic priorities of the city have been used with the general levy for general capital operations and a debt service levy to finance significant repairs, upgrades, or growth of the community. Over the last several years, this has resulted in a fairly steady tax levy, increasing only by the growth in the development or market value within the community. With the only exception to this pattern occurring during the impacts of the great recession.
As shown in the chart below, the City’s goal with debt is to issue modest amounts that fit within the city’s debt service schedule so the payments remain relatively flat while maintaining very modest overall debt loads that allows the city to be financially conservative while continuing to make the community a great place to live, work, or play.