A Tucson City Council member says the council needs to put some limits on how it takes out non-voter-approved debt.
Certificates of participation (COP) can be issued with a simple majority vote of the council. But because they lack voter approval, they are repaid from the same fund used to pay for police, fire, parks and other services.
This year’s operating budget includes $27.2 million to pay down about $260 million in COP debt, which includes $50 million in new COP debt to pay for the streetcar, debt restructuring and a natural gas renovation project.
Councilman Steve Kozachik will try to persuade his colleagues during today’s council meeting to make it harder to fall back on certificates of participation rather than seeking voter approval.
City officials say COPs are necessary to pay for projects the city doesn’t have money for.
“Municipalities need to have a way to issue debt, especially when they don’t have the cash to replace or build the assets that are needed,” said the city’s chief financial officer, Kelly Gottschalk.
Kozachik said COPs have become an expensive crutch that the council and staff reflexively fall back on when there’s a budget gap to fill. He said the city should put some controls on it.
“We’ve got a quarter billion dollars in debt that we don’t call debt, didn’t take to the voters and isn’t subject to our legal debt limit,” Kozachik said. “I want this mayor and council to hold ourselves and the finance staff accountable and put some controls on this stuff.”
While most voter-approved bonds are repaid from secondary property taxes, COP repayment comes from the general fund.
The city also can’t pledge sales tax dollars toward the debt. So the city uses the construction projects that the money funds as collateral.
And it packages all of those projects together in a single trust.
If the city were to default on one project, it would lose all of them. For example, if the city doesn’t pay on the Plaza Centro Garage, every project with outstanding COPs debt, including the crime lab, police helicopters, city golf courses and more, could be taken over by the trustee, in this case Wells Fargo Bank.
Gottschalk said bundling the projects in this way makes it more attractive to investors and ensures the city won’t slip on the payments.
COPs also aren’t counted toward the city’s legal debt limit set by the state.
The city’s current available debt sits at just under $600 million. The city has $214 million in outstanding bond debt, with another $60 million set to go out over the next three years as part of the 2012 road bond package.
But the state-mandated debt limit is moot because the city charter prohibits the city from taking out a bond debt that would push property tax rates over $1.75 per $100 in assessed value.
While the amount fluctuates from year to year, the city has about $100 million in additional bonds it could take out before reaching that charter limit. So that means the city has an actual bond debt limit of about $374 million right now, said city Finance Director Silvia Amparano.
Gottschalk said the city’s debt limit has never been an issue when deciding on whether to issue COPs.
“We’ve never issued COPs because we were worried about the debt capacity,” Gottschalk said. “It’s about the expense and the time associated with an election.”
Kozachik will propose some guidelines and changes to how the city issues COP debt.
Two suggestions would require at least two public hearings before a final COP vote takes place, and separating any future COP projects from being lumped together in a single trust, Kozachik said.
He will also suggest setting a limit for COPs that the council can’t exceed without a supermajority vote.
That limit would be tied to the city’s actual bond debt limit of about $374 million. With its current COP balance, the city could issue about $110 million before reaching that threshold.
While Kozachik has to persuade at least three of his colleagues on the council to go along with his proposals, at least one other is open to change.
“COPs are the least desirable municipal debt there is,” Councilman Paul Cunningham said. “Limiting its issuance and creating a process and checklist for how we take out new debt is a fiscally responsible decision.”