(Reuters) - Houston-area schools want to borrow $1.9 billion to modernize most of the high schools, while Seattle says it needs $290 million to upgrade a seawall protecting the downtown waterfront so it can withstand an earthquake.
San Francisco wants to sell $195 million of debt to repair and improve worn-out parks and playgrounds that it says have been “loved to death”
Voters in these and a number of other big U.S. cities — some with already-high debt loads — will decide on Election Day whether to borrow even more or face prospects for reduced services or higher taxes.
The United States needs $2 trillion of infrastructure upgrades, according to a 2011 report by the Urban Land Institute and Ernst & Young. Many of these roads, bridges, dams, water and sewer plants serve major metropolitan areas, but the recession left many cities struggling to pay for capital projects and services.
Elected leaders are wary of asking voters to approve more borrowing.
“Politicians are very sensitive to the current economic climate and hesitant to go to the voters for anything that would incur additional costs for debt, but there’s also a recognition that revenues will not be enough to support our capital needs,” said Miguel Santana, Los Angeles city administrative officer.
Some cities are reaching levels of borrowing that fiscal monitors call critical, a no-go zone where high debt service costs can crowd out education, police and fire protection, or other priorities. A look at 10 prominent cities reveals markedly different debt profiles, according to data Moody’s Investors Service compiled for Reuters.
Many large cities, such as Boston, New York or Chicago, do not require voter approval to sell debt, relying on built-in policy safeguards. Boston, for example, limits debt service to 7 percent of expenditures. In other cities, voters must make the decisions on borrowings, as Seattle and Houston will do this November.
Voters have mixed records when it comes to taking on debt, with citizens in some cities more restrained than in others.
One measure used to assess whether a city or state has over-borrowed is debt service as a percent of operating expenditures.
“Anything between 5 and 7 percent is enough, as a general rule of thumb,” said Mark Tenenhaus, director of municipal research at RSW Investments, LLC, in Summit, New Jersey.
Seven out of 10 large cities have gone beyond that guideline, spending more than 7 percent of their annual budgets on repaying debt in 2011, according to Moody’s.
“Financial solvency has deteriorated significantly in seven of the 10 cities following the 2008 recession,” said Dan Flaming, president of the Economic Roundtable in Los Angeles.
Please see related graphic on the debt burdens of 10 large
U.S. cities: link.reuters.com/keq23t
Many states restrict how much debt cities can issue, by tying it to a set percentage of property revenue or the tax base, for example. A number of cities added their own limits.
The purpose of requiring voters to approve new debt is to minimize over-borrowing by politicians who are eager to avoid tax hikes. Seattle’s voters, for instance, have helped keep public borrowing in check.
The city has a top Aaa credit rating from Moody’s, partly due to its low debt burden. Its debt service as a share of spending is 6.4 percent - the third lowest of the 10 cities on the credit agency’s chart.
Seattle voters must approve new debt as well as the taxes to pay it off, officials said.
In November, Seattle voters will be asked to approve selling $290 million of general obligation bonds to upgrade the Alaskan Seawall to safeguard the downtown waterfront, utilities and transportation. General obligations are backed by a government’s full credit and ability to tax.
The improvements would cost the owner of a home worth $360,000 about $59 a year, according to the City Council.
Seattle pays for more of its capital improvements with cash than many of its peers. Michael Van Dyck, the city’s director of debt financing, said about 70 percent to 80 percent of general government capital improvements are paid for with cash.
Seattle’s home state of Washington, which ranks in the top 10 states with the highest debt per capita in the nation, is trying to become more tight-fisted. Washington will ask voters to cut the amount of debt the state is allowed to sell, aiming to keep debt service from rising to 7 percent of state spending from around 6 percent now, according to a spokesman for the state treasurer.
Voters in San Francisco - like all localities in California - have considerable power over debt. A two-thirds vote is required for sales of general obligation bonds, according to Nadia Sesay, director of the city’s Office of Public Finance.
November’s ballot includes a $195 million bond sale for parks and recreation. Voters have approved the past four bond measures, Sesay said.
Moody’s, which rates San Francisco at Aa2, cited its “conservatively structured debt portfolio.” The city’s debt service as a percentage of spending is 8.2 percent.
Only 813,000 people live in San Francisco but its capital needs are staggering. The 10-year plan totals $24.7 billion - including improvements planned by independent entities, such as the airport, which sell their own debt, according to Sesay.
San Francisco caps the total amount of debt it can issue at 3 percent of the assessed value of the property tax base, according to Sesay.
By policy, the city has kept its property tax rate at the 2006 level, she said. That has compressed total debt outstanding to about 1.09 percent of the assessed value, she said.
“We are mindful of how the debt affects the taxpayers,” Sesay said.
However, other taxing jurisdictions in San Francisco, such as the school district, have increased assessments. The tax rate has risen to $1.172 per $100 in fiscal 2012 from $1.141 in fiscal 2008, according to bond documents.
That compares with Seattle’s lower rate of $1.016 per $100 of assessed value, according to budget documents. That figure also includes overlapping tax districts.
Requiring voter approval has not shielded some other cities, such as Houston, from running up debt. This year, Houston-area voters will decide on more than $2.7 billion of debt for the city, the schools and community colleges.
“That’s a monumental year around here in Houston,” said Ronald Green, controller. “We are definitely behind on our infrastructure; I think every big city has that issue.”
Steven Craig, an economics professor at the University of Houston, said if the bond sales are rejected, local governments could try again in a couple of years. But delays could prove costly, increasing the amount of repairs that are needed later.
Some cities in the metropolitan area might have to borrow more if voters reject a referendum by the Metropolitan Transit Authority of Harris County - which includes Houston - to keep diverting 25 percent of sales tax revenue to cities for road improvements instead of spending it on the transit system.
“This would presumably increase bond requests by cities in the future to build roads for which they will not have current tax money if it passes,” Craig said.
Houston’s debt service is already 16.5 percent of total spending, more than double that of either Seattle or San Francisco. Houston’s property tax rates are the lowest of the three. They have remained at $0.63875 per $100 of assessed value from fiscal 2009 to 2012.
Houston’s debt service in proportion to spending had not gone up between 2007 and 2011, but Craig said “the fact that debt is relatively high suggests there is not a lot of room to fix the big problems to come.”
Still, Moody’s gives Houston the same rating as San Francisco: Aa2, which is considered high-grade. One factor that helps Houston is its policy of limiting the average life of its bonds, currently to about 11 years.
Paying loans off swiftly saves money because debt with shorter maturities carries lower interest rates and the bonds are repaid more rapidly.
“It’s seen as way of keeping our AA rating on our debt,” said Green.
Reporting By Joan Gralla; editing by David Gaffen and David Gregorio