City Business Administrator Carlton McGee has come up with a restructuring plan for the city to make initially smaller payments toward its massive debt, which currently is projected to cost the city $681 million (including interest) over the next 30 years.
McGee’s new plan allows the city to pay $13.4 million toward the debt this year rather than $31.4 million, and changes the amounts of subsequent annual payments. However, in the long run, it will cost the city $200 million more. McGee said that it’s only $23 million more when adjusted for inflation.
McGee said that if the City Council doesn’t vote for such a plan, it may have to increase its budget this year to pay the $31.4 million. A similar restructuring plan was recently considered by Hoboken and became controversial because it would cost more in the long run. Municipalities are looking at restructuring their debt payments because of current low interest rates.
Likening the situation to what homeowners regularly face with mortgages and increasing bills, McGee said the plan makes more of the city’s cash available for whatever pressing needs may arise in the near future.
Otherwise, the city will soon find itself in a financial bind, he said. The budget would have to rise, and the city will be forced to tighten its belt and find other, less popular ways of making ends meet. Such methods generally include raising taxes, laying off workers, or selling city assets.
Regarding the current debt payments, which are rather hefty, McGee said, "It’s like trying to pay 60 percent of the cost of your house in 10 years. It would be a great idea if we had the money. But we don’t."
McGee, accompanied by financial adviser Charlotte Knight Marshal of the Chicago-based Knight Group, presented his plan to City Council members at a September meeting. But the council voted to table the issue until more information became available.
The issue remained tabled at last week’s City Council meeting, and now McGee is saying time is of the essence. Interest rates are slowly beginning to rise, and the inherent benefits of his plan will decrease.
"If I went to the marketplace now, the interest rates would still be beneficial to us," McGee said. "We’re at a 45-year low in interest rates. They will be higher next year. And it’s not like we’re creating problems for someone else in the future. I’m trying to be opportunistic here and flatten it out as much as possible. This is a fair deal."
Reached Thursday, Councilman Mariano Vega said the council members still have not been given needed details on McGee’s plan.
"Right now, I don’t believe we have something before us," Vega said. "We are waiting for additional information from the administration."
The numbers
The restructuring plan put forth by McGee aims at reducing the amount of the annual payments – referred to as the city’s "debt service" – to pay off the 28 bonds the city has taken out over the past 15 years.
There are five types of bonds that Jersey City has taken out:
·
To pay employees’ pensions;·
To finance the delivery of the city’s water;·
To support the school district;·
For general improvement; and·
For administrative adjustments when the state moved from using a calendar year to a fiscal one.The total amount of money the city has bonded for since 1988 is approximately $280 million, McGee said. That number is what’s known as the city’s "debt."
In paying that money back with accrued interest, the city is looking at spending at least $681 million, no matter how it structures the payment schedule. The $681 million, McGee said, is what’s referred to as debt service.
Under the current payment schedule, the city is obligated to pay its debt service as follows:
·
$31.4 million in 2004;·
$51.9 million in 2005;·
$57.6 million in 2006;·
$54.5 million in 2007;·
$52.8 million in 2008; and·
$50.7 million in 2009and it ends in 2033.
Under McGee’s restructuring plan, the city would be making its annual debt service payments as follows:
·
$13.4 million in 2004;·
$41.6 million in 2005;·
$41.1 million in 2006;·
$38.9 million in 2007;·
$37.7 million in 2008; and·
$35.7 million in 2009and it still ends in 2033.
The total cost of the restructured debt service would be approximately $881 million.
When council members initially heard the city would be paying $200 million more in total debt service at the end of the restructured plan, many expressed reticence at approving the plan.
But McGee said the figure of $200 million is misleading to anyone without a clear understanding of the nature of money.
Because of inflation and other factors, the actual value of money fluctuates with time. In order to get an accurate picture of the true value of that money, one must apply a formula to arrive at what financial professionals call "net present value."
The $200 million at the bottom of his plan is what that money would be worth in the projected financial environment of the year 2033, McGee said. After subjecting the $200 million to the adjustments necessary to put in today’s terms, the number is substantially less.
"It’s actually $23 million today," McGee said. "It will cost you more, but it’s affordable."
The benefit
According to McGee, the underlying problem with this issue is found in how previous administrations drafted their financial plans.
The emphasis in years past was on short-term goals, and debt service was structured in what McGee calls a "back-loaded" way. This means that after a few years of inexpensive payments, the debt service would then catch up with a significant "balloon" payment. After a few years of higher debt service payments, the price would then drop back down.
The city is on the verge of coming into the years where balloon payments are required, and McGee said it is infinitely wiser to avoid them if the opportunity presents itself.
"Clearly, if you have a five-year balloon payment and you can make it, it’s the cheapest thing you can do," McGee said. "If you’re going to do a 30-year mortgage, you’ll pay a lot more interest, but you won’t go bankrupt. You can live within your means."
The evidence McGee gives to support his logic is that the city, in the first 10 years, will save $120 million in debt service payments. This has a spillover effect that goes beyond the city’s accounting.
"Rating agencies will be very pleased with this," he said. "It will increase our ability to bond, and it would remove debt service from part of our structural deficit. This buys us time to work out our problems."
The ways in which McGee said the city could take advantage of the newly purchased time is enacting legislation to diversify revenue strategies, waiting for tax abatements to come off the rolls, and embarking on a campaign to increase the city’s ratables, or tax-paying properties.
All this, he said, is aligned with Mayor Glenn D. Cunningham’s commitment to not raise taxes. It’s about creating sensible fiscal policy that looks to the future.
"We’re not going to need state aid, we won’t have to raise taxes, and we have 10 years for our ratables to go up," McGee said. "The city is restructuring the debt in an active management way."
"We’re trying to make rational sense and do some long range policy for fiscal planning," he added.