Financial Implications: Pandemic complicates city bond picture

Financial Implications: Pandemic complicates city bond picture

By Wayne Schutsky

As Scottsdale city leaders grapple with the financial implications of the coronavirus crisis, they also are weighing whether or not to delay infrastructure projects connected to the $319 million bond approved by voters last November.

The city has already approved some smaller bond projects—including some needed fire department expenditures—but was planning to spend the bulk of bond proceeds over the next five years.

But during a hearing on next year’s city budget, Councilman Guy Phillips suggested delaying bond projects amid the economic uncertainty created by the COVID-19 pandemic.

An early draft of the city’s next budget presented to City Council on April 7 showed it allocating $241.5 million from the 2019 bond between 2020 and 2025—including about $36 million over the next 12 to 18 months to fund portions of 30 projects.

Then the coronavirus hit, forcing the city to reckon with potentially devastating economic consequences as it confronts significant drops in major revenue sources like sales tax, which comprises about 42% of the city’s general fund revenues.

The pandemic has devastated the city’s tourism industry, which accounts for around one-third of the city’s economic output, Mayor Jim Lane says.

Lane says there have been discussions on how the current economic downturn will affect bond spending but that “there hasn’t been a final line on this.”

Scottsdale City Engineer Dave Lipinski said that budget presented on April 7 had been prepared prior to the pandemic and could be changed in the coming weeks.

“As staff works forward over the next few weeks to refine the budget and to make adjustments in reaction to the current situation, all projects will be reviewed for timing and impact,” Lipinski says.

Delaying bond projects could make sense if the city takes a significant hit to revenues so that city can avoid taking on additional debt.

“Issuing a bond means committing to making expenses … When you talk about committing to additional expenses that you don’t have absolutely have to do right now, that may not make sense,” says Akheil Singla, an assistant professor at ASU’s School of Public Affairs.

Scottsdale officials will have to weigh whether or not the cost of delaying bond projects—some involving essential infrastructure—outweighs the risk posed by spending in the face of an economic downturn.

“Are any of those things essential to the point where not doing them could be more costly than doing them?” Singla says.

Singla says Scottsdale is heavily reliant on sales tax revenues, like many other Valley cities, meaning it will likely be hit hard by the current economic downturn that has been driven by the shuttering of businesses that generate that tax revenue.

“COVID-19 basically changes the revenue picture for all governments, but where that’s most significant is at the state and local level,” Singla says.

Cities like Scottsdale will have to balance maintaining critical services like police, fire and water while also grappling with that lost revenue.

“Choices will have to be made,” says Singla, noting that cities can choose to delay capital expenditures in order to stave off layoffs, furloughs or cuts to city services.

The city will also have to look at how the current economic uncertainty is affecting the market for borrowing, which, despite low interest rates, may actually work against cities looking to fund bond projects.

Singla says many people think “well the (Federal Reserve) dropped rates, so now’s a good time to borrow; it doesn’t necessarily work that way for municipal governments.”

Singla says it was probably actually cheaper for cities to borrow money in February before the coronavirus took hold in the United States than now, because the number of institutions willing to give cities loans has fluctuated over the past six weeks due to the current economic uncertainty.

“The cost of borrowing went up in some cases as high as three and four times as high as six weeks prior, but the last couple of weeks that stabilized,” he explains.

“But it’s not like you’re going to get a great deal if you want the money right now,” Singla says. “You just may not be paying a premium like you were four weeks ago.”

But Lane says there are reasons the city may decide not to delay projects, including the potential to save on construction costs during the downturn.

“There are two things that could happen and we haven’t substantiated this completely at this point in time,” Lane says. “And that is that cost of construction, and particularly materials, could take a significant drop, or at least it’s anticipated if it hasn’t already been seen to some extent.”

Rising construction costs over the past decade have driven up capital project costs for local governments.

In May 2019, the City Council approved a $4.2 million contract for the construction of Fire Station 603 funded by proceeds from a bond passed in 2015. The price exceeded initial projects by $1.5 million due to increased land and construction costs.

According to the City Council memo “from 2014, when the estimate was created until the time of bid, the Valley has seen a rate of inflation within the construction industry between 18% and 23% and a current shortage of labor within the Phoenix Area Market.”

Thus, Lane says, “There’s an opportunity to actually reduce even the final element of cost below what was estimated.”

Finances may not be the only factor the city considers as it looks at whether or not to continue with 2019 bond projects, which were approved by around 70% of voters.

“And that gets not just meaningful in terms of you don’t want to anger your residents,” Singla says. “Governments exist to provide services to their community, and the community voted pretty overwhelmingly in favor of these services.”