Farmington ponders new way to fund big projects

Tired of big interest payments on bonds sold to finance projects, Farmington officials have proposed a fundamental overhaul of their capital budgeting and the taxes levied to support future road work and other improvements.

Interim City Administrator Kevin Schorzman has proposed a plan to gradually pay off bonds and save up more money for road repair and other needs so the city will be debt-free in 33 years. The city's debt load totals nearly $38.6 million. That includes $10 million in bonds sold for City Hall two years ago and for a $3 million bridge for the slow-developing Vermillion Crossings housing and retail project.

Interest payments on the debt will total nearly $1.4 million next year, Finance Director Teresa Walters said.

"It's silly to pay interest," Schorzman said. "For every dollar you get from taxpayers, they may get 50 to 75 cents of value when you borrow money."

For example, he noted that the city sold $2.45 million in bonds last year for the Walnut Street reconstruction. Besides repaying the bond's face value over 16 years, taxpayers also will pony up about $800,000 in interest.

Schorzman said the City Council will vote Tuesday on a $9.6 million preliminary tax levy for next year, which would be nearly $1 million more than this year's levy. The levy and other fund sources would support a total budget of $10.4 million next year.

About $900,000 of the $1 million levy increase, he said, would go for future roadwork and equipment costs: $400,000 for street rebuilding, $350,000 for seal coating and $150,000 for equipment replacement.

It appears three council members support the plan, but Julie May and Terry Donnelly have opposed it.

"We'd all like to have plans to set aside funds for future needs," May said. "Our concern is we can't do it all at once. ... I am a banker. I understand saving on future interest costs. But maybe some things have to be delayed."

May said she favors minimizing the tax levy increase by setting aside the $400,000 for street reconstruction but nothing for other future projects. May said Farmington already has high taxes, and raising them more could deter investors from buying rental or other property in the city, which is plagued by a high foreclosure rate. Such non-homesteaded property already will have a significant tax increase because of a change by state officials that shifted more of the tax burden from homesteaded to non-homesteaded property.

Cities generally use operating funds to pay for seal coating and minor road repairs, but use bonds for more expensive road rebuilding that will last 20 years or more, said Bruce Kimmel, a vice president at Ehlers & Associates who has advised cities on financing for 14 years. He said the borrowed funds often are repaid with property owner assessments over time.

In today's low-interest rate climate with low construction bids during the economic slowdown, some cities may decide to bond for more capital projects while costs are down, Kimmel said. "There's no right or wrong answer. Some cities use cash financing pay-as-you go, others use pay-as-you-use debt financing."

The city portion of taxes on the average value homesteaded house are estimated to increase about $81 next year if the $9.6 million levy is adopted, she said. The same value property that is not homesteaded -- which includes rental homes or businesses -- would increase about $290.

Under Schorzman's plan, all bonds would be paid off by 2045, assuming future City Councils followed the plan to increase taxes for all but seven years until 2030, Walters said.