Will Elk Grove City Council Issue Revenue Bonds For Soccer Facility? California Legislative Analyst's Office FAQ's on Bonds

July 15, 2015 | By some accounts , the Elk Grove City Council could decide as early as their August 26 meeting to proceed with plan...



July 15, 2015 |

By some accounts, the Elk Grove City Council could decide as early as their August 26 meeting to proceed with plans for the proposed 100-acre Grant Line Road soccer facility.

Should the city councilmen decide to proceed, one of the main questions it will need to address at that meeting, or in the very near future, is how to finance construction of the facility and on-going operations. While city officials were vague when asked about financing at Saturday's soccer workshop, it has long been suggested traditional revenue bonds could be issued.

From the perspective of the city council, this would be an easier and quicker route because unlike the issuance of general obligation bonds or a sales tax increase, revenue bonds under most circumstances do not require voter approval. Revenue bonds are issued based on the revenue streams from the projects which are being financed. 

In the case of the soccer facility, fees generated by youth soccer leagues, tournaments, and other fees, such as possible naming rights royalties, would be used to pay down the debt. Revenue bonds have several less appealing characteristics compared to general obligation bonds though. 

According to Morningstar, revenue bonds offers high returns for investors, and corresponding higher costs for issuers "due to the fact that the income from the projects they fund cannot be predicted with any certainly. This adds to the perception of lower safety."  

More risks for investors means higher costs for issuers.

Information provided by the nonpartisan California Legislative Analyst's Office offers a discussion of bond basics and costs. The information posted below in blue is from their website.

What Exactly Is Bond Financing?

Bond financing is a type of long-term borrowing that state and local governments frequently use to raise money, primarily for long-lived infrastructure assets. They obtain this money by selling bonds to investors. In exchange, they promise to repay this money, with interest, according to specified schedules. The interest the state has to pay investors on the bonds it issues for public infrastructure is exempt from their federal and state income taxes, which makes the state’s interest cost on the bonds less than it otherwise would be.

Why Are Bonds Used?

As noted above, the state often uses bonds to finance its major capital outlay projects such as educational facilities, prisons, parks, water projects, and office buildings. This is done mainly because these facilities provide services over many years, their large dollar costs can be difficult to pay for all at once, and different generations of taxpayers benefit from the facilities. The latter fact offers a rationale for spreading the costs of infrastructure over time, as bond repayments allow you to do. In contrast, funds to operate facilities or deliver services to the public are paid out of current revenues.      

Traditional Revenue Bonds. These also finance capital infrastructure projects, but are not supported by the General Fund. Rather, they are paid off from a designated revenue stream-usually generated by the projects they finance-such as bridge tolls, parking garage fees, or water contract payments. These bonds normally do not require voter approval.

Doesn’t Using Bonds Cost More?

Funding infrastructure using bonds is definitely more costly than direct appropriations due to the interest that has to be paid. This extra cost depends primarily on the interest rate and the time period over which the bonds have to be repaid. For example, the most recent GO bonds sold for an interest rate of about 4.4 percent and will be paid off over a 30-year period. Figure 2 shows that under these assumptions, the total cost of a bond will be about $180 million for each $100 million borrowed-$100 million for repaying the amount borrowed and $80 million for interest. However, because the repayment is spread over the entire 30-year period, the cost after adjusting for inflation is considerably less-about $1.2 million for each $1 million borrowed.



So, Given This Extra Cost, Why Use Bonds?

It makes sense to pay the extra cost of using bonds when this expense is outweighed by the benefits of having projects in place sooner than otherwise would be possible. This criterion is often met in the case of capital outlays, given the large costs of infrastructure projects, the many years over which they provide services, and the substantial increases in taxes or other charges that would be needed to pay for them up front. 

What are your thoughts?

Post a Comment

9 comments

Anonymous said...

Whatever it takes to be re-elected.

Anonymous said...

First, I am certainly no expert when it comes to this. That being said I do have many issues with the city going down this path without some expert advice...advice that we do not have on our payroll. Does it also change the facts that we're having hearings on land that is presently outside our city limits? Some questions I would have:

1. We have several projects in the hopper that would require major outside financing. Which is a priority since we can't finance all of them. Or maybe I should say "shouldn't."
2. Will they pay for themselves? What if revenues fall short, do we have a backup plan? Some know that sports facilities are a hugh gamble and rarely pay for themselves. By the time they're paid for they are usually obsolete, but that's another story. If something paid for itself, a private business would probably do it.
3. A Sports Facility, Olympic Aquatics Center, etc. needs high level management with the expertise to keep it afloat.
4. How will these facilities fare with bigger and better facilities withn 20+ miles of EG?
5. Is it in our best interest to go BIG or maybe better to build our youth some sports fields and an "Aquatic Center" and leave the Olympics & MLS/Entertainment Center to someone else to build.

Anxious to hear what some of our local experts have to say....and we have many!

Anonymous said...

Stockton, San Bernardino, Vallejo for starters are good examples of fiscal mismanagement.

Anonymous said...

True Anon. 12:42. However, our City Council thinks they are much better managers than anyone else and they have a problem thinking outside the box. It's all about "BIG" is better and taxpayer dollars are sooo easy to spend. Plus we taxpayers don't hold their feet to the fire when they're making these risky decisions.

Anonymous said...

I'm very concerned about the assumptions made that will be included in the math of this adding up. Will they include increased sales at the mall? More hotel nights? High end tournaments that never materialize? The city often times has fuzzy math. Remember those state workers for Prison Health Care buying cars during lunch? Or the Ice Rink breaking even. We start doing all these projects at the same time and if they don't pencil out then we're in trouble.

Lynn said...

I continue to say it....now some are not laughing; Corrupt as Bell, Bankrupt as Vallejo. Been saying it for awhile now....since of course you guessed it; Vallejo went bankrupt. Think Stockton; votes increased their taxes so they could have police....had to pay for the decisions of leaders. Will Elk Grove residents now and into the future be doing the same?

Connie said...

With the funding of the aquatics center and the Council's promise of a public private partnership which fell through when P3 International defaulted on the contract after they failed to secure the financing, it appears that bonds will be the only way to finance the youth sports complex. But which kind?

If the Elk Grove City Council is, as they say are, “sound fiscal stewards” of the people’s money, they will put it up to the vote of the people for “us” to decide on municipal bonds to finance the youth sports complex – municipal bonds at much lesser interest rates and risk. And if we go bust, then all of us are in the same boat.

In my opinion, the only reason the Council would opt for revenue bonds is because they honestly believe the voters won’t vote for the municipal bonds.

I also believe after the operating costs are paid from any revenue generated from the sports complex, there might be enough to pay the interest payments, but not the principle payments.

Therefore, the only option would be to make principle payments out of the general fund which is mainly fueled by sales tax revenue, which pays for our city services, such as our police department, waste management, and other administrative costs to run the city, including staff. EGPD is growing and contract renewals are coming up.

And if, in the future, revenue bonds are ultimately what the Council does, and they put our city in financial peril, then those Council members who voted for revenue bonds will be in the bankruptcy boat all by themselves, and they, and they alone, will be responsible.

Or . . . we could tax the 1%!

(And before I get nailed, that was a joke!)

Steve L said...

All these proposed city projects are starting to look very similar to a Ponzi scene. Sell this project to the public with promises of a world class facility for our kids, promise that it will pay for itself with hoards of out-of-towners coming here to stay weekends, spending their hard-earned monies here on food, shopping, shelter, and amusement here in EG; finance it through bonds, and then build out the next dream plan, the acquatics center, base the potential revenues on the new mall, the new hotels, the new ampitheater and stadium. -All EXTREMELY SPECULATIVE with no assurances of results.

Next, plan and fund the new city hall based on proposed revenues of all of the above. Next, the veterans hall. With all that proposed revenue plan next, the animal shelter. Next.....

If the first domino fails to meet expectations, the rest of the dominoes fall with it and we find ourselves unable to cover our debts and we are forced to declare bankruptcy.

Slow down. Plan and fund one project at a time. Seems no one on Laguna Palms has heard of proper fiscal planning.

Anonymous said...

FISCAL PLANNING? Out leaders haven't a clue what that is even about, it's all about them and the "Bells & Whistles"...not the kids! They get caught up in themselves and how they sound to the media, that don't have a nickle in the plan. We have been to many sports facilities over the years for games and tournaments and not once have we ever seen the need for a complex such as this. This is not the NFL, MLB or MLS...it's kids! All of us taxpayers have to leave town for our entertainment, might be better to spend it in that arena if you have to spend! Ever heard of RESERVES for rainy day spending...just ask us hard working stiffs about that one and we'll educate you.

Follow Us

Popular

Archives

Corrections




item