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While keeping debt in line with or beneath current levels, the city aims to use short-term borrowing to help fund paving and other maintenance in the coming years.
When Harry Black began his job as Cincinnati’s city manager about a year-and-a-half ago he was met with an immediate assignment.
“The mayor charged me with coming up with an innovative way to help us accelerate our road re-paving,” Black said by phone in mid-January. “Day one, when I started work, he tasked me with that.” While Cincinnati’s streets are not in shambles, many could use some work. According to Black, if this maintenance is done sooner rather than later, it will be less expensive. This is because the longer a roadway deteriorates, the more costly it can become to fix.
There are over 3,060 “lane-miles” of pavement on Cincinnati’s streets. About half of that pavement is considered to be in good, very good, or excellent shape, according to the city. Another 29 percent is rated fair, 19 percent is either poor or very poor, and 1 percent is “failed.”
“We’re right at the margins,” Black said, referring to the condition of the city’s streets.
“If we don’t do something special in addition to what we’re currently doing, we can very easily slip from fair to good, to poor to fair,” he added. “You don’t want to get to that point, because it’s such a deep hole, it’s almost impossible to crawl out.”
Although the near-term price to repair the streets that have deteriorated is less than it might be in, say, a decade, it’s still not cheap, checking in upwards of $60 million.
To come up with a plan for footing that bill, Black assembled a team that included city finance and budget staff, and also an outside financial advisory firm he’d worked with during his tenure as the deputy chief administrative officer of Richmond, Virginia.
One way to pay for the road repairs would be to issue a large bond up front with a lifespan of 20 to 30 years to cover all of the costs, Black noted.
But he and his team decided to take a different tack. They settled instead on an approach that will involve securing a series of short-term loans over the course of five to six years. The city will access each of these loans as it tackles pieces of the overall street improvement program.
“The idea there is that we will use this short term vehicle, which will have a very, very, very low interest rate associated with it,” he said. “But we will use it in a ‘just-in-time’ financing manner.”
Black explained that if debt to cover the entire cost of the program were issued upfront, Cincinnati would be paying interest on that entire sum of money right away, even though the city would not necessarily be ready to spend all of it immediately on road projects.
“Why do that if we don’t need to?” he said.
The city’s approach to funding the road repairs is part of what they’ve dubbed the Capital Acceleration Program. As planned, it would provide about $60.5 million that would fund paving and other road maintenance, with the money borrowed in approximately five installments over fiscal years 2016 to 2020, according to a request for proposals the city issued on Dec. 29.
The plan is to “frontload” spending, with about $29 million becoming available during the first two years of the program.
Instead of interest payments on $60.5 million starting in fiscal year 2016, the city is instead only looking at borrowing costs for roughly $14.6 million. And, because the debt would be in the form of a shorter-term loan, the interest rate will be lower than it would be on a decades-long bond.
Over the course of the program, the borrowed money would go toward the cost of rehabbing about 900 lane-miles of the city’s streets, and performing preventative maintenance on about 500 additional lane-miles, according to a description of the program published by city.
Around 2022, Cincinnati would issue long-term general obligation bonds to pay off the short term debt it has accumulated, and then pay those bonds off over time.
Black said during the mid-January interview that it was still uncertain exactly what form the short-term financing would take. The request for proposals said the city was looking for either a bond anticipation note line of credit, or fixed rate bond anticipation notes.
Bond anticipation notes are pretty much what they sound like. An entity borrows money at a low, short-term interest rate, anticipating that it will be paid off in a few years with cash from the issuance of a long-term bond.
Michael Belsky, a former managing director of the public finance group at Fitch Ratings, and a lecturer and fellow at the University of Chicago’s Harris School of Public Policy, explained by phone recently that bond anticipation notes are not an uncommon municipal finance tool.
They’re often used in situations when a municipality will eventually issue revenue bonds, which would be paid off with a revenue stream that is set to start flowing after a project is complete. An example would be the expansion of a water utility system.
“What it does is, during the construction period of the roads and things like that, it keeps your costs down, because the rates are very low on them,” Belsky said, referring to bond anticipation notes. “God, in today’s market, it’s probably even close to less than one percent.”
“If anything it’s a good practice,” he said of using the notes.
The only risk with bond anticipation notes, that Belsky pointed out, would be that a municipality cannot access credit at the time they need to be paid off. But he said that with a city like Cincinnati, which has a solid credit rating, it’s highly unlikely this would become an issue.
Another aspect of Cincinnati’s Capital Acceleration Program, is that it is designed in a way that no new taxes should be required to pay for it, and so that it does not increase the city’s overall debt-level. By borrowing the roadwork money in installments, new debt will be taken on as old debt is paid off.
“We will not be increasing the city’s indebtedness with this program,” Black said.
“What we’re going to do is just layer in a little more debt,” he added, noting that even with the new borrowing the city would not be on track to not exceed its 2015 debt service levels. And as a result: “There’s no need to generate any new revenues.”
According to Cincinnati’s most recent available annual financial report, the city had about $318 million in net, tax-supported debt outstanding at the end of fiscal year 2014.
The Capital Acceleration Program also has a component that will help fund the replacement of aging vehicles in the city’s fleet with newer ones that are more reliable and fuel efficient. “We’ve got vehicles that are 10 and 12 years old,” Black said. “What we’re attempting to do here is right-size our fleet and modernize it at the same time.”
Rocky Merz, a spokesperson for the city said by email that the first of the new vehicles would be 53 police cars, which are now slated to arrive sometime around July.
He also said that, as of Jan. 29, the city was evaluating responses to the request for proposals for the short-term road maintenance financing, and that a final decision on which proposal to select could take place in the next few weeks.
Vice Mayor David Mann voted for the Capital Acceleration Program when it came before the City Council. “This was not controversial,” he said. “Obviously, one way or another, it's more debt. That’s the one thing that ever really gave me pause.”
“But,” he added, “when you look at the savings from an early rather than late attack of the street maintenance issues it seems to make sense.”
Why does Black believe it’s in Cincinnati’s best interest to take care of the road maintenance in the near-term, rather than putting off the upkeep? “I’ll sum it up in two words,” he said, “risk management.” The city manager continued: “You find a way to make the investment today or, if you don’t, the price down the road will be exponentially higher.”
Bill Lucia is a Reporter at Government Executive's Route Fifty.