2017 Audit Report: The Good, The Bad and The Ugly
By Anne Scheck
When the annual audit for Independence was presented to the city council this past month, two financial watchdogs at last year’s meeting were missing from the room. One was the current city auditor, Kamala Austin, and the other was the former city councilor Ken Day. Though they couldn’t appear to be more different – Mr. Day has a booming voice and Ms. Austin speaks softly – they shared an intense concern over details of municipal spending. Last year, Ms. Austin gently warned councilors about the level of city debt, specifically money spent in the urban renewal district and the city’s debt for MINET, its municipal fiber-optic communications system. The debt was so troubling to her, she explained, that “I am concerned about it,” she said.
Ms. Austin noted that the books were balanced and “you are okay” but “ten years from now, five years from now? I don’t know.” She also pointed out that the water fund was “over-spent.” The water-and-sewer revenues were also a focus of Mr. Day, who had repeatedly pressed for more transparency.
This year, things were different. Gloria Butsch, the city’s finance director, delivered the audit, which showed little reason for worry. She noted that money from property taxes is growing “slowly.” And there is $1.5 million in unrestricted funds, an increase of close to a million dollars from last year.
Why the difference? “The auditor’s comments did not take into account the economic development and residential growth in the city,” she explained in an email forwarded earlier this year by city manager David Clyne “Nor did she perform a debt analysis. Her comments were simply pointing out what we already know -- MINET struggles to pay its debt obligations to the cities of Independence and Monmouth.”
As for the urban renewal debt, that will be covered by special property taxes dedicated to urban renewal. “The Independence Landing project, with
the property sales for private developments, will provide for the financial recovery (on the riverfront parcel), as was shown in the return-on-investment analysis,” she said, adding that the auditor didn’t take that into account. (Not all taxpayer-backed developments pay off, however, as public-private partnerships and inducements for sports facilities have shown, see the column The Civics Lesson on back page.)
“Certainly, I would prefer that our debt load was less, but the issuance of debt in a fast-growing city like ours is pretty much the only way to implement concurrency planning,” said Ms. Butsch, who observed that this can be attained through the timely development of public infrastructure to match private growth efforts.
The philosophy of current city management in Independence appears to be that public investment generally leads the way in advance of private investment -- and that there are few communities that can obtain significant outside development without first constructing adequate infrastructure to serve it.
“What should be pointed out is that every debt issue has a distinct purpose and a distinct revenue stream that supports it,” Ms. Butsch said. And the city has been “very successful at obtaining excellent market rates,” she added. It’s also true that city councilors are carefully informed about debt-issuance decisions before they are authorized.
The report to the council was not, in the words of Ms. Butsch, “an exhaustive examination of transactions.” The audit, by Merina & Co., includes a “doubtful account” of millions of dollars in MINET loans for which the city is responsible, including $2,469,980 from the water fund.
Last year, the city’s utilities consultant, Steve Donovan, observed that the city “is not alone” in the financial challenge of municipal broadband. In cities across the state, there are at least five others facing the same “struggle,” he said. Municipal telecom operations are difficult to pay for “unless there is a very broad customer base,” Mr. Donovan said.
Another uptick in debt is due to loans for Independence Landing, adding more than $4-$5 million to a previous debt of $14-$15 million in the Urban Renewal District (URD). This would have put the debt beyond the legally allowable limit for spending in the city’s URD. But, by special amendment, half of the previous debt was placed in the city’s general fund.
Asked about the URD debt limit, Shawn Irvine, the city’s economic development director, confirmed that the city cannot exceed the $17.9 million “cap” for the URD.
Per capita, residents of Independence carry $3,311 in debt per person from bonds – although service such as water and sewer reduce their actual debt through requisite utility payments. More than a year ago, the city's longtime contracted economist, Ray Bartlett, came out of retirement to offer a public forum on the water-and-sewer rates. The city's financial picture was better than it had been, when "pages and pages" of critique once could be found in the city's audit report. However, it's true, he added, that the building of MINET and the construction of the civic center occurred on the cusp of the economy crumbling, right before the great recession. Now the city's debt stands at $40 million, which local politicians have agreed is a lot of money.
Ms. Austin noted that the books were balanced and “you are okay” but “ten years from now, five years from now? I don’t know.” She also pointed out that the water fund was “over-spent.” The water-and-sewer revenues were also a focus of Mr. Day, who had repeatedly pressed for more transparency.
This year, things were different. Gloria Butsch, the city’s finance director, delivered the audit, which showed little reason for worry. She noted that money from property taxes is growing “slowly.” And there is $1.5 million in unrestricted funds, an increase of close to a million dollars from last year.
Why the difference? “The auditor’s comments did not take into account the economic development and residential growth in the city,” she explained in an email forwarded earlier this year by city manager David Clyne “Nor did she perform a debt analysis. Her comments were simply pointing out what we already know -- MINET struggles to pay its debt obligations to the cities of Independence and Monmouth.”
As for the urban renewal debt, that will be covered by special property taxes dedicated to urban renewal. “The Independence Landing project, with
the property sales for private developments, will provide for the financial recovery (on the riverfront parcel), as was shown in the return-on-investment analysis,” she said, adding that the auditor didn’t take that into account. (Not all taxpayer-backed developments pay off, however, as public-private partnerships and inducements for sports facilities have shown, see the column The Civics Lesson on back page.)
“Certainly, I would prefer that our debt load was less, but the issuance of debt in a fast-growing city like ours is pretty much the only way to implement concurrency planning,” said Ms. Butsch, who observed that this can be attained through the timely development of public infrastructure to match private growth efforts.
The philosophy of current city management in Independence appears to be that public investment generally leads the way in advance of private investment -- and that there are few communities that can obtain significant outside development without first constructing adequate infrastructure to serve it.
“What should be pointed out is that every debt issue has a distinct purpose and a distinct revenue stream that supports it,” Ms. Butsch said. And the city has been “very successful at obtaining excellent market rates,” she added. It’s also true that city councilors are carefully informed about debt-issuance decisions before they are authorized.
The report to the council was not, in the words of Ms. Butsch, “an exhaustive examination of transactions.” The audit, by Merina & Co., includes a “doubtful account” of millions of dollars in MINET loans for which the city is responsible, including $2,469,980 from the water fund.
Last year, the city’s utilities consultant, Steve Donovan, observed that the city “is not alone” in the financial challenge of municipal broadband. In cities across the state, there are at least five others facing the same “struggle,” he said. Municipal telecom operations are difficult to pay for “unless there is a very broad customer base,” Mr. Donovan said.
Another uptick in debt is due to loans for Independence Landing, adding more than $4-$5 million to a previous debt of $14-$15 million in the Urban Renewal District (URD). This would have put the debt beyond the legally allowable limit for spending in the city’s URD. But, by special amendment, half of the previous debt was placed in the city’s general fund.
Asked about the URD debt limit, Shawn Irvine, the city’s economic development director, confirmed that the city cannot exceed the $17.9 million “cap” for the URD.
Per capita, residents of Independence carry $3,311 in debt per person from bonds – although service such as water and sewer reduce their actual debt through requisite utility payments. More than a year ago, the city's longtime contracted economist, Ray Bartlett, came out of retirement to offer a public forum on the water-and-sewer rates. The city's financial picture was better than it had been, when "pages and pages" of critique once could be found in the city's audit report. However, it's true, he added, that the building of MINET and the construction of the civic center occurred on the cusp of the economy crumbling, right before the great recession. Now the city's debt stands at $40 million, which local politicians have agreed is a lot of money.
SIDEBAR: MINET.
Refunding the bonds in 2015 and 2017 decrease the annual debt service payment amount by about $200K per year. "That means our shortfall in 2017-18 will be less than 45% of what it was 4 years ago; it has been cut in more than half," said John Cooper, MINET finance director. But anticipated cable-rate increases lie ahead for MINET, due to large upticks in the cost-per-subscriber: MINET's cost for providing local channels increased 50-120% per channel effective in January. And, when WOU dropped cable, there was a loss of $7,000-$8,000 in monthly revenue from that source.
"The drop of cable services to the WOU dorms is why we are falling slightly under budget," Mr. Cooper said.
Such "cord-cutting" losses are expected to be replaced by data sales, he said. In fact, net operating income has increased significantly, he said. And, though net income to date is about $19,000 under budget, that
sum is considered relatively insignificant because the shortfall is on track to disappear by the end of the fiscal year. Over the past few years, the contribution to debt payments has continued to grow, and it's expected in 2018 to substantially exceed last year's payment. (see table below)
Total Payments by FISCAL YEAR
2014‐15
Total debt service $2,047,864
Total debt service shortfall $1,254,406
Total MINET contribution to DS $793,458*
2015‐16
Total debt service $1,964,332
Total debt service shortfall $1,228,110
Total MINET contribution to DS $736,222
2016‐17
Total debt service $1,977,024
Total debt service shortfall $854,836
Total MINET contribution to DS $1,122,188
2017‐18
Total debt service $1,907,777
Total debt service shortfall $659,906
Total MINET contribution to DS $1,247,871
2018‐19
Total debt service $1,806,198
*In 2010 MINET received funds from the refunding of our bonds. This amount reflects about $150K of the last of those bond proceeds that were not produced operationally. Prior to FY 2014‐15 the debt service was paid almost entirely with bond funds. DS = Debt Service
"The drop of cable services to the WOU dorms is why we are falling slightly under budget," Mr. Cooper said.
Such "cord-cutting" losses are expected to be replaced by data sales, he said. In fact, net operating income has increased significantly, he said. And, though net income to date is about $19,000 under budget, that
sum is considered relatively insignificant because the shortfall is on track to disappear by the end of the fiscal year. Over the past few years, the contribution to debt payments has continued to grow, and it's expected in 2018 to substantially exceed last year's payment. (see table below)
Total Payments by FISCAL YEAR
2014‐15
Total debt service $2,047,864
Total debt service shortfall $1,254,406
Total MINET contribution to DS $793,458*
2015‐16
Total debt service $1,964,332
Total debt service shortfall $1,228,110
Total MINET contribution to DS $736,222
2016‐17
Total debt service $1,977,024
Total debt service shortfall $854,836
Total MINET contribution to DS $1,122,188
2017‐18
Total debt service $1,907,777
Total debt service shortfall $659,906
Total MINET contribution to DS $1,247,871
2018‐19
Total debt service $1,806,198
*In 2010 MINET received funds from the refunding of our bonds. This amount reflects about $150K of the last of those bond proceeds that were not produced operationally. Prior to FY 2014‐15 the debt service was paid almost entirely with bond funds. DS = Debt Service
The CIVICS LESSON: Public Sports Poor Facility Investment
A compilation of data published in the “Regional Economist” more than 15 years ago showed that inducements to attract sports-team stadiums cost taxpayers big money for relatively little direct benefit. As a result, almost all experts in economic development agreed “that the rate of return a city or metropolitan area receives for its investment is generally below that of alternative projects" and that "cities and metro areas that have invested heavily in sports stadiums and arenas have, on average, experienced slower income growth than those that have not.” This trend persisted, according to the 2011 book, Sports, Jobs, and Taxes, by Roger Noll and Andrew Zimbalist. The authors couldn’t find any stadiums that showed a good return on investment. However, nearly all analysts who have examined this issue note that there are advantages for cities: New businesses pop up near stadiums, which often revitalize aging areas. And though town-side team spirit may not be a tangible asset, it has no chance of existing without the construction of sports facilities.
–AS
–AS
The INDY HOP: How Truly Blue is that February Moon?
It’s February. So stop calling that beautiful white orb in the night sky a “blue moon.” You may think it’s one due to its slightly bluish luminescence. But NASA wants you to know that, even in the mid-Willamette Valley, a blue moon cannot occur in February. It has nothing to do with your eyesight. It’s a case of simple arithmetic. The term “blue moon” refers to a third full moon in a season that has four of them. Since there are about 29.5 days between full moons, it is mathematically impossible for February to have a “blue moon.” On the other hand, there is no law against misuse of proper terminology. And, from the banks of the Willamette River, almost any full moon looks, at certain times from the water's edge ... well ... blue. –AS
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