The debate over restructuring the city’s approximately $40 million debt continues to rage. While restructuring can lower the city debt service for the next several years, the administration admitted for the first time in a public forum that the restructuring deal on the table will cost millions of dollars in the future.
Also Wednesday, the council announced that it will, for the time being, be dropping a $15 million capital improvements package that was proposed to be tacked on the bond ordinance.
Higher interest rates; longer term
Wednesday, the City Council introduced an ordinance that would approve the issuance of no more than $45 million in bonds to restructure the city’s debt. This was just the introduction and not the final approval. Before that happens, the state’s Local Finance Board must approve the deal. Its next meeting is scheduled for Sept. 10.
If it is given the green light, there could be a public hearing and final vote at the Oct. 1 City Council meeting.
The reason the administration wants to restructure is simple. Between the 2002 and 2003 fiscal budgets, the city’s debt service nearly doubled to over $6 million a year. According to City Business Administrator Robert Drasheff, by restructuring the debt, the city can lower the debt payment in fiscal 2003 from $6.3 to just over $4 million. Without this savings, which is already included in Mayor David Roberts’ preliminary budget, the administration would have to come up with an extra $2 million in revenue or make $2 million in cuts, which could come in the form of extra layoffs, said Drasheff.
The restructuring, according to Drasheff, will allow the city to make reduced debt service payments for the next 10 years, which gives the city much needed budget flexibility.
But according to new information that was disclosed Wednesday, the restructuring is not a panacea. Even Drasheff, who supports the restructuring, freely admitted that there “will be no net savings” from restructuring, and actually, it is going to cost the city money.
First, it extends the period of the bonds for seven extra years, which obviously means that the city is paying seven extra years of interest.
Another issue is the interest rates. One of the original reasons to refinance was the low interest rates of four months ago. Even in July, Drasheff said that the city could refinance for “4 percent and change.”
According to Dennis Enright, a consultant with NW Financial, the firm the city hired to handle the refinancing, the interest rate is now going to be “around 5.75 percent” annually.
According to the Ernst and Young’s June 30, 2002 audit, which lists the interest rates for all of the city’s loans, well over $30 million of the city’s outstanding bonds are currently financed at an interest rate of between 4.15 percent and 4.75 percent. In fact, according to the audit, only one $2 million bond that was financed at almost 9 percent is more than the 5.75 percent that Enright estimated the city would get as the rate for the proposed refinancing.
A third factor that would cost the taxpayers money is the professional service fees for the refinancing. According to Enright, it will cost $527,000 in fees and just over $400,000 in bond insurance, although he added that bond insurance improves the city’s bond rating and will lower the interest rate, thus negating most or all of the cost of the insurance.
Enright concluded that over the entire life of the bond, the refinancing will cost $20 million extra in actual cash, which he said equates to “about $3 million in today’s dollars.”
Councilwoman Carol Marsh, a critic of the mayor, complained that the city is willing to pay millions of dollars down the road for relatively minor budgetary relief today.
“Sure it lowers it the [city’s debt service] for a couple years,” said Marsh, “but you’re extending the bonds for many, many more years at a tremendous cost.”
Councilman Tony Soares, a mayoral critic, said, “Usually when you refinance your debt, your goal is to save money, not spend it.” Soares also noted that Enright, who will be paid $527,000 for the refinancing, was a generous campaign contributor to Roberts’ campaign and the Hoboken Democratic Party.
Soares said that the refinancing looked like a reward for a contributor, to which Drasheff responded, “That is absolutely not true, councilman.”
Hoboken resident Jon Gordon, who was the treasurer of Soares’ last campaign, also criticized the bond ordinance.
“It stinks. It’s a miserable deal,” said Gordon. “It makes no sense to go out to bond at a higher interest rate for a longer period of time.”
Roberts responded Friday morning by saying that he has recently presented to City Council a $57 million budget that calls for stable taxes and all but eliminated the city’s structural deficit. He added while the opposition readily knocks his fiscal policy, they have not yet come up with a plan of their own.
“There are council persons that are quick to criticize with witty one-liners and cute comments,” he said, “but when it comes to the bottom line they have no concrete ideas of their own. I have shown them my $57 million budget. Where is theirs?”
That budget is slightly higher than Roberts’ first budget two years ago.
Capital improvement money removed
When originally proposed, the bond ordinance was going to include an extra $15 million for capital improvement projects. The $15 million would have paid for a new central firehouse, the acquisition of public open space, and to relocate the antiquated municipal garage located on Observer Highway to a more appropriate location on the city’s industrial west side at 15th and Madison streets.
But after a meeting of the council’s Revenue and Finance Subcommittee, it was decided to take that money out of the ordinance.
“It is the feeling of the Revenue and Finance Subcommittee,” said subcommittee chairman Richard Del Boccio, “that each of these projects be looked at individually as separate entities and not as a package issue.”
He added that would give the administration more time to give more specific details about each project before the council allocates millions of dollars for them.
Drasheff added that another benefit of holding off for now is that the city will be able to use the proceeds from the sale of the land of the current municipal garage and the decommissioned firehouses to have the project pay for itself.