Mayor Darrell Steinberg’s dramatic plan to issue bonds using new Measure U sales tax revenue has raised sharp criticism and questions. How risky is it? Why do it?
Steinberg said he wants to jump-start community investments and that borrowing money through bonds in the way he is suggesting is common for state and local governments. The city has more than enough revenue to make the 30 years of payments on the borrowed money, he said.
Two council members have come out strongly against the idea, saying it could bankrupt the city, especially if another recession hits and as city pension costs sharply rise over the next five years.
Municipal finance experts told The Bee that the bond plan, though unusual, probably will not bankrupt the city, but it still probably is not the best idea from a financial viewpoint.
Steinberg’s proposal consists of issuing new 30-year bonds each year for the next five years.
Starting in fiscal year 2020-21, the city would borrow about $88 million upfront, which it would pay off for 30 years, similar to a mortgage, using $5 million in new Measure U money each year. In fiscal year 2021-22, the city would make the second $5 million payment on the first set of bonds and also issue new 30-year bonds, making the first $5 million payment on that set of bonds. That process would continue each year through fiscal year 2024-25, when the city will have received a total of $440 million and is paying $25 million for the next 30 years.
After 30 years, city staff estimate the city will have paid $750 million in interest and principal from receiving the $440 million, though that amount could be “vastly different” by the time the bonds are issued, said Brian Wong, city debt manager.
The city would have to put up collateral to issue the bonds — city-owned buildings not already being used as collateral for other bonds, Wong said. Some options are fire stations, parks and even the rebuilt Convention Center.
Steinberg said Friday that the city could issue new bonds for three years instead of five, meaning the total amount received would be about $264 million rather than $441 million, decreasing interest costs and collateral.
It’s the second time this month the mayor has toned down his bond proposal. He originally suggested the city receive $441 million right away, in fiscal year 2020-21 upfront, instead of building to that amount in fiscal year 2024-25.
The city could spend the upfront capital to invest in “catalytic neighborhood projects” — brick-and-mortar facilities like new business hubs or “badly needed affordable housing” that will increase the city’s tax base, according to a post on Steinberg’s blog Thursday. He wants to leave the specifics to committees formed to help decide what to do with Measure U revenue and to the rest of the council.
Steinberg said his current plan is not risky because it allows the council to decide each year whether to sell additional bonds. He also said the city’s bond ratio is well below what experts say is appropriate.
“If we don’t invest in Sacramento, we won’t have the tax base to sustain our public services,” Steinberg said in a statement Friday. “It’s more risky not to have a growth strategy, because without one, we will run out of money.”
Council members Jeff Harris and Angelique Ashby paint a vastly different picture.
“This scheme would expose the city to insolvency at the slightest economic downturn,” Harris wrote in a column published in Inside Sacramento.
Ashby’s column in the same publication also called the bonding proposal a “scheme” that could “put city assets at risk and possibly bankrupt Sacramento if the economy stalls.”
Economist Jeffrey Michael of the University of the Pacific said the mayor’s bond proposal is unlikely to actually bankrupt the city, but it could cause “big fiscal problems down the road.”
“It’s a risky plan, no doubt about it,” Michael said. “It would take another great recession to kick the city in to bankruptcy, so I wouldn’t necessarily predict that, but I think there’s certainly a pretty strong risk that 10 years from now, future mayors are slashing city services and might be looking back at the decisions being made right now as part of the cause.”
Michael Coleman, a local government finance expert and adviser to the League of California Cities, said Steinberg’s proposal is not necessarily risky, because the mayor does not want to use all of the new Measure U revenue for the bonds.
Bond sales make more sense, though, when cities want to build big projects they lack the revenue stream to cover. In Sacramento’s case, the city shouldn’t bond, in order to avoid the fees and interest, Coleman said.
Instead, Coleman suggested the city move some of the new Measure U money each year to its Capital Improvement Program, which pays for the city’s new buildings and infrastructure improvements each year, and forecasts for the next five years.
“It’s a much more efficient use of money,” Coleman said.
Michael agreed a “pay as you go” plan would be much smarter.
“I’d recommend laying out the agenda you want to do and going in to the annual budget process and fighting for it year by year for those priorities,” Michael said.
Fighting for it each year is going to get harder, though. In fiscal year 2024-25, the city’s pension payments rise to more than triple what they are now.
By then, the tax base will be much larger, largely thanks to the projects created with new Measure U revenue, Steinberg says.
Michael said that’s “definitely optimistic talk.” Coleman said he could see it working out that way but pointed out a larger tax base often comes with more expenses. He urged the mayor and council to listen to city staff in the coming weeks.
“This is why we have a good quality city manager like Howard Chan,” said Coleman, a former city employee. “He’s very knowledgeable, and the important thing is the mayor and council listen to the advice of the expert staff they have.”
Councilman Steve Hansen said he is preparing an alternative bonding proposal.
“I’m proposing a prudent path forward on a bonding package that protects the city’s fiscal health and allows us to make significant strategic investments in needed fire stations, recreational facilities, and libraries, while also funding thousands of new affordable homes and keeping our commitment to inclusive economic development opportunities,” Hansen said.
The City Council will adopt the fiscal year 2019-20 budget by the end of June.