Juneau's bond debt increasing

Impacts expected on property taxes, ability to fund new projects

Posted: Sunday, October 05, 2003

Juneau's bond debt soon will be at its highest level ever, which could increase property taxes and reduce the city's ability to borrow money for future projects.

Bonds already sold, plus those approved by voters in recent elections, total about $116 million, according to the city. Proposition 1 on Tuesday's ballot, funding close to $7 million in repairs at Floyd Dryden and Harborview schools, would increase the amount to about $123 million, almost three times the previous high.

Although close to half the debt, from school projects, will be reimbursed by the state, the total still will approach the maximum some consider healthy for a city government the size of Juneau's.

"With the economy the way it is it's not desirable to be in this position," said City Manager Rod Swope. "With the cutbacks in the state and the downturn in the economy, you want to have the least amount of debt possible."

Juneau's debt situation, however, was reviewed recently by bond experts and found to be in good shape, said city Finance Director Craig Duncan.

"The rating agency is comfortable with the city's financial position. They think we're managed well," he said.

Like other governmental entities, the city of Juneau sells bonds to raise money for public-works projects such as schools, parks, docks, roads and sewage-treatment plants.

Selling a bond is like taking out a loan, with principal and interest paid over a set period of time. Most bonds are paid off with property taxes, while others use the proceeds from voter-approved temporary sales tax increases. Still others are paid off with revenue from use of the facility they fund.

And in the case of school bonds, much of the amount is reimbursed by the state under the terms of legislation passed to encourage construction and repair of educational facilities. Of Juneau's projected bond debt of about $123 million, about $55 million is expected to be reimbursed through the program, Duncan said.

State contributions to bond debt payments have come through in the past, although not always in full. But there's no guarantee, said Deven Mitchell, executive director of the Alaska Municipal Bond Bank Authority, a state agency that helps communities sell bonds.

"There are a lot of individuals who believe there's an iron-clad commitment by the state to pay reimbursement and that's not the case," Mitchell said. "There's a possibility (the communities) could wind up paying the total amount because it's subject to annual appropriation."

Because much of the bond debt is paid off by property taxes, increased debt raises the mill rate, the measure used to determine how much property owners pay.

But an increase in bond debt doesn't translate into an equivalent rise in property taxes. City officials spread out bond sales so new loans are taken out as old ones are paid off.

"Rather than spiking the mill levy up and down it evens it out over time," Duncan said.

This year, property owners will pay about 1.2 mills toward bond-debt payoff, the equivalent of $120 for each $100,000 in assessed property value, according to city Treasurer Barbara Rolfe.

If recently approved bond sales go as planned and Proposition 1 passes Tuesday, the rate will increase to 1.68 mills next year, or to $168 per $100,000 in assessed property value. It will increase to 1.91 mills, or $191 per $100,000 in assessed property value in fiscal year 2008 before dropping.

But bond debt is only one part of the property tax bill.

About 90 percent of Juneau's property tax revenue is spent on day-to-day government operations, such as schools and police. That figure - now at 11.64 mills, or $1,164 per $100,000 in assessed property value - varies depending on a variety of factors, including a voter-mandated cap and the Juneau Assembly's desire to keep tax rates down. So the taxpayer impact of an increase in bond debt could be lessened by spending cuts or revenue enhancements elsewhere.

Beyond the property tax rate, the other major concern about a large bond debt is limits on future sales for additional community projects, such as the long-discussed Mendenhall Valley recreation center or the local share of airport improvements or transportation projects, said City Manager Swope.

"I think there are a lot of things out there that would be candidates," he said. "They just haven't come to the point where they are clearly defined projects."

Despite the growing total, experts say Juneau's increasing bond debt is not enough to cause problems for the city.

Duncan recently traveled to New York City to discuss Juneau's bond rating, a measure of financial management that affects the cost of selling and paying back bonds, and bond limits.

Working with bond adviser Lindsay Sovde of Seattle-Northwest Securities Corp., Duncan was told by Moody's Investors Service staff that the city had more flexibility than is often assumed.

Companies that arrange bond sales and rate the city's ability to pay the loan - which affects interest rates - often suggest a total bond debt limit of no more than 5 percent of the community's total taxable property value.

Juneau's total value is $2.63 billion, putting the 5 percent limit at about $131 million, not far above the approximately $123 million in debt the city may soon approach.

But expected state payback of close to half the bond debt, under the school construction reimbursement program, raised the limit, said bond adviser Sovde.

"The city's only going to have about 2 1/2 percent of assessed value," she said from Seattle. "That's well in line with the market and what the rating agencies would expect."

State reimbursement, combined with the community's overall economic health, led Moody's to tell the city it could accumulate a bond debt of 6 percent or even 7 percent - $158 million to $184 million - Duncan said.

But no one has any plans to increase the city's bond debt that much. In fact, it won't hit the $116 million to $123 million at any one point because new bond payments are slated to begin as old ones end.

"Craig tries as best he can to look at the situation and try to spread these out as best as we can so they have minimal impacts on taxpayers," said City Manager Swope. "And we try to take advantage of low interest rates if we can."

Juneau is not the only community in Alaska selling more bonds to build projects, said Mitchell of the state bond bank authority.

With declining oil revenues, the state has had less money to spend on community road, water and other projects, so some local governments are selling bonds to make up the difference, he said. Other communities are taking advantage of a limited window of opportunity for reimbursable school bonds. Low interest rates also could be a factor.

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