Del Mar may consider bonds for city upgrades

DEL MAR — Improvements to city facilities and infrastructure are inevitable, necessary and costly. Funding the upgrades can be especially challenging for a small community like Del Mar, which has limited revenue sources and is essentially built out. 

To avoid financial risk, city leaders have historically avoided borrowing money, opting instead to wait until sufficient funds were in city coffers before beginning any major capital improvement projects.

The upside to this financial strategy is that Del Mar has no debt and is one of about 30 cities in California with the highest bond rating.

The downside is projects take longer to complete, are done piecemeal or never started at all.

That may soon change after council members received a 30-year financial forecast at the Sept. 16 meeting indicating it could afford to borrow an estimated $7.5 million.

Staff presented three methods of revenue projections using conservative, historical and most likely forecasts.

In the conservative model, property and transient occupancy taxes, paid by hotel visitors, would increase 4 percent annually, and sales and use taxes would go up 1 percent in the current and next fiscal year, 2 percent in the two following years and 3 percent annually after that.

In the most likely scenario, property and occupancy taxes would see a 5 percent hike, while sales and use would be the same as the conservative model.

In the past 25 years, however, property taxes went up about 7 percent a year, TOT increased 8 percent and sales and use taxes saw similar increases outlined in the conservative model.

The financial forecasts include money set aside for debt service of approximately $440,000 annually during the next 30 years.

The new forecast was prepared to reflect an additional $520,000 annual payment to eliminate the city’s $9 million pension liability in the next 15 years.

Tom Johnson from Fieldman/Rolapp and Associates, recently named one of the top five California financial advisory firms, said his company reviewed Del Mar’s finances and “independently arrived at a $7.5 million figure.

“We’ve determined that the city can afford approximately $500,000 per year, accounting for all of the other needs of the city,” he said.

“Within that number we believe that the city could net approximately $7.5 million in available proceeds … for capital needs,” he added.

Johnson was referring to tax-exempt lease revenue bonds, which aren’t considered debt so voter approval isn’t required. They would be backed by the general fund.

City leaders have long discussed building a new City Hall, estimated to cost $8 million, although they didn’t say the bonds would be specifically used for that project.

With interest rates rising, Councilwoman Sherryl Parks asked if the city had to have a project ready to obtain the bonds.

“Under federal tax law there needs to be a reasonable expectation that you’re going to expend 85 percent of the funds in three years,” Johnson said. “They don’t want you borrowing money needlessly because they’re tax exempt. … The best time to borrow money is when you know what the project is and what it is actually going to cost.”

He said there could be penalties for paying off the bonds within the first 10 years.

“We’ve talked for years about doing this,” Councilman Don Mosier said. “We knew we were in an era of historic low financing rates and construction costs and it looks like we’re finally getting going just when that window is starting to close.

“That’s unfortunate, but we can’t change the past,” he added. “I think we do need to move with all due speed forward before the cost of financing goes even higher. … It’s sobering to look at opportunities lost.”

“I don’t think we necessarily missed the boat,” Councilman Al Corti said. “We’re still in a good low rate.”

Corti said the report helped him better understand what the city can afford.

“I feel comfortable that I know that we can sleep at night (knowing) that we can afford to do some of the improvements that the community wants,” he said. “Now we need to decide which ones and move them along.”

“It indicates to me that we need to move swiftly,” Mayor Terry Sinnott said. “The forecast … gives us and the community a good picture of where we are and what our revenue looks like in the future.

“We maybe owe it to the community to look at this and consider using a financing tool to improve the community,” he added.

 

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