CIP plan includes $30 million in new debt

A plan to address $32.5 million in necessary Newton projects relies on more than $30 million in new debt for the city.

Plans to finance projects included in a proposed Capital Improvement Plan come as the city continues to make payments toward $27.7 million in debt. Yet, even facing the prospect of increasing that debt, the city is still well below state rules for how much debt a city can incur.

As part of a $32.5 million Capital Improvement Plan (CIP) proposed in early April, Newton City Manager Todd Clark set forth a five-year plan to tackle needs that he said are among the city's most dire. Chief among those are infrastructure needs such as water and sewer lines (see related story). Some of those needs rely on "pay-as-you-go" cash payments of $1.85 million for capital items valued under $40,000 for fiscal year 2011-12 and under $50,000 for future years.

The rest of the projects included in the CIP will be financed through proposed borrowing $30.6 million during the next five years, according to a plan presented to Newton City Council on April 5. For the fiscal year starting July 1, CIP proposes borrowing $7.6 million.

Projects included in the CIP come from each of the city's separate funds, including the general fund and its enterprise operations, the water/wastewater fund and the electric fund. The general fund, which is supported by property tax collections, benefits from projects totaling $13.3 million, including $12.2 million to be borrowed. For fiscal year 2011-12, the city proposes to borrow $1.8 million for general fund projects.

At the same time, the CIP will complete projects for the water/wastewater and electric funds, which are not supported by tax dollars, but instead receive proceeds from utility billing for the city's water, sewer and power customers. In the electric fund, the CIP proposes $5.1 million in spending, with nearly $5 million coming from new debt, including $1.9 million for the fiscal year beginning July 1.

The CIP for water and wastewater departments sees the largest expenditures at more than $14 million, including $13.4 million that would be financed. CIP proposed financing in this fund totals $3.9 million for fiscal year 2011-12.

"Debt in those areas are supported by revenues" to the water/wastewater and electric fund, Clark said. "You could argue that we don't need to be borrowing that much money. The other side is that the (water/wastewater) system is in poor shape; interest rates are good; we have been getting good quotes on some of the things we are doing right now; and we have eager contractors out there and their pricing is good."

Further, Clark said he isn't concerned about the city's ability to make new debt service payments.

"We have recognized what we can afford within our budgetary constraints, without placing any further burden on our utility customers or taxpayers," he said.

Newton currently maintains $27.7 million in debt for all three budget funds combined. However, in years to come, some of that debt will be retired, Clark said, beginning with about $7.6 million that Newton Finance Director Serina Hinson said will be cumulatively reduced from the city's debt during the next two fiscal years, fiscal year 2011-12 and fiscal year 2012-13. Of that debt, $1.8 million will be retired from the General Fund; $3.8 million will be retired from the water/wastewater fund; and $1.97 million from the electric fund.

"That is the amount of funding that would be available to incur new debt and make new debt service payments," Clark said, adding that borrowing in the CIP proposes to stay within debt that will be retired, particularly during the first years of its implementation. "With the debt we are retiring, I believe we will be able to absorb that."

Clark said by retiring the debt, the city can avoid steep rate increases. As part of a five-year financial forecast included in the CIP, the city isn't planning a water/wastewater rate increase until fiscal year 2015 (3 percent.) A 1 percent electric rate increase is planned for fiscal year 2013, and a property tax rate increase of a half-cent (per $100 valuation) is also planned for that year.

"I have not done exhaustive studies, but I foresee the city having modest rate increases only to keep up with the cost materials," Clark said.

The city can also incur new debt without reaching limits set by N.C.
General Statutes, which stipulate a city can't incur debt higher than 8 percent of its assessed value of property subject to taxation. Newton's assessed value is $1.06 billion, making its debt limit about $85.5 million.

"We have capital needs. When a water or sewer line breaks, and it is not in the budget, you have no choice but to pull into a savings account and fix it. ... I can't keep suggesting to Council to take money out of fund balance for operational purposes," Clark said. "If you don't start addressing some of these things today, can you wait five to 10 years from now? Will you get the same interest rates you will get today?"