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Managing city debt

Excerpt from the AWC Small City Resource Manual

When city officials decide to build capital projects, they face a number of financing options, including different ways to borrow. Going into debt to finance a large project can make sense, and spread the project’s financial burden out over many years so future users help pay for the project. Borrowing can also prevent depletion of a city’s reserves. Projects can be built as they are needed and the benefits can be received sooner without waiting for funds to accumulate.

Long-term borrowing

General Obligation Bonds are backed by full faith and credit of the city. There are two types:

  • Councilmanic bonds are issued by a vote of the city council, backed by general fund revenues when voters have not been asked to pay increased property taxes. These may be used for any city purpose; they do not have to be for capital projects.
  • Unlimited General Obligation Bonds must be approved by 60% majority of voters. This option raises property tax to pay for projects, and is only used for capital purposes.

Revenue Bonds finance projects for any city enterprise that is self-supporting (water/wastewater/golf courses). Payment comes from user fees; so the debt is not backed by the full faith and credit of the city. Investors consider these somewhat less secure than general obligation bonds.

Debt capacity

The amount a city can borrow using general obligation debt and the purposes for which a city can borrow are governed by state laws and the State Constitution. A city’s debt limitations or debt capacity are subject to two sets of restrictions. First, debt limits set the maximum about of general obligation debt that a city can have outstanding at any one time. Second, debt limits restrict how much of this capacity can be used for various purposes. There are no debt limits for revenue bonds.

City debt can be used for three purposes:

  • General government (both voted and councilmanic capacity)
  • Municipally-owned water, sewer, or electric facilities (voted debt capacity)
  • Providing open space and parks (voted debt capacity)

In certain circumstances the state will allow cities to access debt through state programs such as the Treasurer’s Local Option Capital Asset Lending (LOCAL) program or the Public Works Trust Fund.

Cities can borrow up to 2.5% of assessed property valuation, minus the amount of debt already issued, plus certain net assets available for debt service funds. But just because your city is allowed to borrow a certain amount doesn’t always mean those limits should be used to their maximum extent.

Questions Every City Should Consider

From A Debt Primer for Washington’s Cities and Towns, MRSC

  • What are the acceptable uses of short-term debt?
  • How much does your city want to rely on “pay as you go” versus “pay as you use” financing?
  • What is the appropriate term of bond or loan?
  • What should nonvoted debt be used for and when?
  • What consideration should be given to operating costs?
  • What should the overall debt structure be?
  • How should self-supporting projects, like utility projects, be financed?
  • How much coverage should utility bonds have?
  • What policies should be set for selling bonds with a negotiated versus a competitive sale?
  • How much general obligation debt can a city safely issue?