Schenectady up against debt wall

PHOTOGRAPHER: Kathleen Moore

For four years, the city has avoided paying for the massive Bureau of Services complex on Foster Avenue. But the cost of that project is about to hit the city hard.

At the end of next year, the interest rate on the city’s $20 million loan for the complex will jump from 1 percent to about 4.5 percent. The city’s payments will go up $800,000 a year at the end of 2013.

In the following three years, the interest rate will also increase on another $20 million in city debt, leaving Schenectady with even higher payments — possibly more than $1.6 million a year.

The big question: How will the city come up with that money?

The debt payments are so high that the city has put it off for four years because it didn’t have the money. Instead it took out an interest-only loan.

Now it can’t put off paying any longer, but there’s still no money. In fact, things have gotten worse, and the City Council is now talking about layoffs and service cuts simply to get through next year, before paying on the debt.

“We’re in deep doo-doo,” says City Councilman Vince Riggi.

There’s more.

Mayor Gary McCarthy is dealing with an immediate deficit that may be as high as $5 million for the 2013 budget. He hopes to fill that next year by selling more foreclosed houses and collecting more taxes from those who haven’t paid in the past. By such means he intends to finish 2013 in the black. But even if he gets the city out of the red by Dec. 31, 2013, the city will fall right back in on Jan. 1, 2014 if he can’t also find the money for the next round of debt payments.

Some critics say the problem proves their long-held belief that the city should not have built the $20 million Bureau of Services complex. The complex mainly houses the city’s trucks and equipment, but also includes a body shop and office space for the many departments within the General Services purview, from garbage pickup to water repairs.

“A pole barn type of building easily could’ve been done for half that,” Riggi said. “We didn’t need that mansion.”

Critic Roger Hull, who ran unsuccessfully for mayor against McCarthy last year, calls the complex the Taj Mahal.

“If you’re Saratoga, maybe you build that,” he said. “Look, you do what you can afford to do. That building shouldn’t have been built.”

Responsibility for that decision falls to the administration of former Mayor Brian Stratton, at a time when the city stored its trucks under the I-890 overpass off Edison Avenue.

Judgment and financing

The complex has achieved savings for the city, mainly by combining departments and reducing winter overtime costs. Vehicles can be stored indoors, so workers can load salt during their regular shift and it won’t freeze before the plows are needed in the middle of the night. Trucks that use hydraulics can be left indoors instead of being drained after each use.

But if the city can’t afford the debt payments on the building, Riggi said, the savings aren’t worth it.

“It was kind of easy to project what this would do to the city’s finances,” he said. “Yes, that facility is wonderful. If we were in great financial shape, fine. But we aren’t and we weren’t five years ago when it presented itself.”

Making matters worse, the city still owes the entire $20 million it borrowed in 2009. That’s because the city has mostly made interest-only payments on the loan.

City officials said they simply didn’t have the money to make principal payments. Since they did not have to, they put it off, making only the minimum interest payments. In essence, the city simply paid for the privilege of postponing large principal payments.

That’s because the city took out a BAN, a bond anticipation note. A BAN is a temporary loan intended for short-term borrowing, and usually municipalities only hold them for six months before converting the money to a bond. But the interest rates for BANs are about 1 percent now, while bonds are 4 percent to 4.5 percent. So it made sense to keep the loan in the BAN and save on interest costs.

Many municipalities use BANs because of that saving, according to the state Comptroller’s Office. But the savings only happen if the municipality makes principal payments — and Schenectady hasn’t.

Finance Commissioner Ismat Alam says she wants to make principal payments.

She makes a small payment on principal in the second year of every BAN, which the Comptroller’s Office said is required by law. After that she makes principal payments “sometimes.”

“I don’t want to accumulate a lot [of debt],” she said, and added that the best solution is a bond.

“Theoretically, you should have everything bonded,” she said. “Your interest rates are locked in. So the best thing is to bond.”

Rock v. hard place

City Council members are afraid that the financial situation will lead Moody’s Investors Service to downgrade their credit rating this year. That would cause the city’s interest rates to go up, so now might be the best time to get a bond.

But the city just doesn’t have the money to make the payments required in a bond.

Bonds are tightly regulated: Municipalities must pay them off within the lifespan of the expenditure. The interest rate doesn’t change and the bond lasts until the debt is paid off. BANs have to be bought once a year — there is a small cost of issuance — and the interest rate can change each time.

“If the budget permits, we are trying to bond the BANs earlier,” Alam said, before adding that she doesn’t think the budget will permit it next year. That means waiting until the very last minute, when the city is required to bond — whether the budget permits it then or not.

The state Comptroller’s Office and the city’s auditors say the best solution would have been to pay down some of the principal of the loan while it was in a BAN.

“Obviously, you don’t want to always just be paying off interest, kicking the can down the road,” Comptroller’s Office spokesman Brian Butry said.

An auditor from Cusack & Co., which audits the city every year, also said paying just interest on a BAN is a bad idea.

“Paying the principal, that’s the smart fiscal thing,” auditor Ken Claflin said. “You’re only putting off till tomorrow what you should pay today. Stopping that [payment] for five years doesn’t make sense.”

Both Claflin and the Comptroller’s Office said it’s good fiscal policy to keep the BANs for five years — if the principal payments are made. They said many municipalities are making the same payments they would have made to a bond, and simply making them while the loan sits in a BAN. Thus they get the advantage of the lower interest rates and eventually move a much smaller loan over to the bond.

City Councilman Carl Erikson said he wished the city had the money to follow that policy. But he said he finds the interest-only practice “reasonable” in the city’s tight fiscal straits.

“You have to float something — it’s like paying the cable bill two weeks late,” he said. “It’s really nominal interest. Just not having to raise taxes, it’s worth waiting. For a municipality in the economic situation we are in, it’s what you need to do.”

‘If we were flush’

Still, he agreed it increases the total cost of the Bureau of Services loan.

“Instead of a 20-year bond, it’s a 25-year loan,” he said. “If we were flush, you wouldn’t do it this way.”

The loan might get stretched out even longer than that.

When the loan is moved to a bond, the city is planning to make very small principal payments to make the loan slightly more affordable.

Currently, the city is paying $2 million in principal on $16.5 million in bonds. When the additional $20 million is added to the bonds, the city will keep paying $2 million in principal each year.

The situation is similar to a mortgage: The higher the principal payment, the sooner the loan is paid off. Increasing the size of the loan while paying the same amount in principal means it will take far longer to pay it off and will ultimately cost much more.

While the city has paid off many bonds within 15 years, the loan for the Bureau of Services complex will take much longer with such a small principal payment, former budget analyst Jason Cuthbert said. And the city will have to keep paying $800,000 a year in extra interest.

“What are you going to do, pay a million dollars a year for 100 years?” he said. “It’s like paying the minimum on your credit card.”

Cuthbert was fired Wednesday after publicly disagreeing with the action the City Council took over the county sales tax deal. That gave the city a bit better cut of those revenues, but not enough in the eyes of Cuthbert and others.

McCarthy said he wasn’t aware that the city was making mostly interest-only payments on the BANs.

But he objected to the comparison to a credit card.

“It’s an overly simplistic analysis when you have millions of dollars out there funding different projects,” he said.