Monday, March 26, 2007 | With the city of San Diego’s return to Wall Street now suddenly imminent, officials are contemplating issuing between $2 billion and $2.5 billion in debt in the next half-decade, a sum that would double its current debt load.
The city reported $2.2 billion in outstanding principal at the beginning of fiscal year 2007 on a wide series of loans dating back to 1991. It has accumulated a long list of financing needs in the two and a half years since its Wall Street banishment, causing a sizable backup in the bond pipeline.
Going to the Market
With the city’s receipt of the long-delayed 2003 audit last week, the accumulated projects now appear closer to a reality. Officials now hope to return to the public borrowing markets as early as the fall if the 2004 and 2005 audits fall inline and Standard and Poor’s reinstates the city’s suspended credit rating.
In the next five years, the Mayor’s Office is contemplating seeking loans of $218 million for buildings and facilities; $300 million for streets and storm drains; $493 million for the pension system; and $1.4 billion for the water and wastewater systems.
Officials caution that the infrastructure numbers are estimates and the pension sum might not be reached solely through borrowing.
But when taken together, the projects in the pipeline have the potential to more than double the bond debt currently carried by the city — and nearly triple the debt burden on the city’s day-to-day operating budget. The influx would provide the city with large injections of borrowed cash to complete street and building repairs, meet its pension obligations and comply with health laws.
It would also result in debt obligations taking up a larger share of the budget. This year, the city paid $187.2 million to finance its $2.2 billion in outstanding principal.
“That’s a lot of debt for an established city to add over five years, but if you add in the period of time the city was excluded from the debt market, it becomes a little more understandable,” said Amy Doppelt, managing partner with the credit rating firm Fitch Ratings.
She said San Diego’s debt burden from borrowing is viewed as relatively low, and says the city has the room to take on such a large infusion. The city’s debt per capita — which includes school district and county debt — is at about $2,400. At about three percent of market value of the total taxable property in the city, that figure is considered low.
The city could triple its debt ratio and still be considered in the moderate level for governments, Doppelt said.
Less focus is generally given to the impact of water and sewer bonds because they are backed directly by user fees. The city’s general fund bonds, however, are backed by the same day-to-day budget that funds such operations as fire, police and parks.
The city’s general fund debt load at the beginning of the fiscal year totaled about $510 million; it will spend nearly $50 million this year in payments on the debt. If the city goes forward with the maximum amount of general fund financing, it could add nearly $1 billion in general fund debt.
Each bond issuance tied to the general fund would force a larger share of the city’s $1 billion operating budget to go toward paying back the loans. For example, if the borrowing plans for buildings and streets go ahead, the city will be spending an extra $16.8 million a year out of its budget to pay back those loans, according to Mayor Jerry Sanders’ five-year financial forecast.
Jay Goldstone, the city’s chief financial officer, said he’s not concerned about the city falling out of line with industry standards or credit rating agencies. But the city will need to analyze its cash flow before each bond issuance to be sure it can absorb the additional costs of debt, he said.
“What’s the impact on the general fund? Can we afford it, can we absorb it?” Goldstone said.
Even when the city had access to the bond markets, it racked up what’s estimated to be hundreds of millions of dollars in deferred maintenance for its buildings, roads and other infrastructure.
City departments that have had projects put on hold for years are preparing their wish lists with the city seemingly edging closer to Wall Street.
“I think like your average homeowner, you put off remodeling your home until you get some equity or a loan. And we’re about ready to get that loan,” said Jeff Frazier, a deputy fire chief.
In recent years, he said, money has been available for only the most critical infrastructure needs.
“We’ve been having to do triage,” Frazier said. “We’ve had to patch up the bleeding wounds and ignore the scrapes and bruises for now. We’re looking forward to being able to make the work environment a lot more appropriate for them.”
Atop the department’s list: work on aging facilities such as the lifeguard station at Children’s Pool in La Jolla, fire Station No. 5 in Hillcrest and Station No. 17 in mid-city.
But outside of water and sewer improvements that need to be completed soon to comply with health mandates, there is no citywide list prioritizing the projects in the hopper. “We have a lot of street improvements that are going to be a high priority,” Goldstone said.
The costs of the city’s Wall Street freeze have been well-documented, including the stacks of consulting bills, higher interest rates for borrowing on private markets, and the inability to refinance its existing loans.
Now that officials are dusting off their building plans, they’re also finding the cost of business has risen. With the costs of such things as concrete and steel having jumped markedly, projects that were supposed to start years ago now come with price tags millions of dollars more.
In 2005, the Water Department planned to replace old, cast iron pipes in a connection between two of its water treatment facilities. The project was estimated to cost $14 million at the time. Now, with its construction pushed back to 2008, it is predicted to cost an additional $2.2 million.
Oscar Khoury, acting deputy director for engineering, said the city will have a better handle on the actual costs when it kicks back into borrowing gear. “We don’t have a good track record on costs because we have not been bidding jobs,” he said.
In his five-year forecast, which also serves as a blueprint for fixing San Diego’s financial problems, Sanders has identified eight areas that need significant funding. It is contemplated that a number of those areas will be dealt with through borrowing — at least in part.
His plan calls for spending $436 million on buildings and facilities, and getting 50 percent — or $218 million — of that through bonds over the next five years. And he plans to funnel $400 million to streets and storm drains. Seventy-five percent of that total, or $300 million, would come through borrowing.
City officials stressed that those percentages could change, and borrowing would be done in smaller amounts over periods of one or two years.
By terms of its labor contract, the city must also inject $493 million into the pension system by June 2008. Although city officials aren’t sure how much of that will be paid for by bonds, the city would be in violation of its labor agreement and could be forced to give back negotiated concessions if the payments aren’t made.
“Obviously at this point it is our intention to live up to the contracts, but whether or not it’s possible or if there’s ultimate support, I just don’t know yet,” Goldstone said.