Analysis shows Victoria's debt stands at manageable level
April 28, 2013 at 10:02 p.m.
Updated April 28, 2013 at 11:29 p.m.
With Victoria facing a debt of $167.5 million, the City Council races are split into candidates who say the deficit is part of running a city and others saying the city is digging itself into a financial hole.
While most people are aware cities have debt, the dollar amounts, payments and reasoning are often lost to financial jargon.
Victoria Finance Director Gilbert Reyna equates city debt to household debt.
"A city has to continue to evolve," Reyna said. "Debt is part of the ingredients of the city's financial tools."
The city's debt is comparable to a person taking out a home mortgage loan, Reyna explained.
While most financial experts recommend a 30-year mortgage, cities typically borrow money on a 20-year period.
According to the U.S. Federal Reserve, in 2012, the average American put 15.7 percent of his or her income toward debt.
Of the city's $133.4 million, about 12.3 percent went toward debt in 2013.
Rather than get caught up on dollar amounts, the ratios of debt to revenue tell the story of any city's financial health.
Given that old debt is paid off and the tax base grows, a city's debt typically increases because the tax base does.
The ratio of debt to the city's appraised value has stayed relatively constant during the past decade.
According to the city budget, under state guidelines, Victoria could take on $51.5 million in debt annually, but it would have to raise the tax rate. The City Council did not issue any debt for 2013.
Since 2007, the City Council has spent about $203 million on streets, according to Victoria's financial records. Of that, less than half, $83.3 million, was funded with debt, while the remainder came from grants, other government agencies and the Sales Tax Development Corp.
City Councilman Tom Halepaska, who is running for re-election of Super District 6, said the debt is reasonable.
"We've addressed some of the grievous issues of this town," Halepaska, 63, said. "Laurent (Street) had been bad for 25 years, and Sam Houston (Drive) was bad when I was in high school."
Russell Pruitt, a candidate for Super District 6, said the debt is uncomfortably close to being too steep.
"There's no such thing as healthy debt, but there's reasonable debt," Pruitt, 69, said. "We're getting into that unhealthy debt description."
While Pruitt disagreed with one mayoral candidate's allegation that the city is "mortgaged to the hilt," he said he sees the city heading that direction.
He wants to use the city's reserve funds to help finance infrastructure projects and pay down the current debt before adding to the deficit.
"The mind-set is to go ahead and get it and incur the debt," Pruitt said. "The interest is still more than the principal in the maturity of those bonds."
According to the city's budget, the interest payments have never exceeded paying down the debt.
However, Pruitt's opponent, Halepaska, said dipping into the reserves is like spending your savings.
The same idea, in terms of mortgaging a house: "If you put 20 percent down, you'll pay lower interest," Halepaska said.
City governments have three basic options when it comes to running a community: save and pay cash, issue debt or do nothing.
The folly to saving and paying cash, Halepaska said, is that city councils would change before a total project is funded. If a new council has a different intent, the cash might be spent elsewhere, and the original project may never get finished.
Previous city councils passed the buck on several high-dollar projects, Halepaska said.
"Downtown should have been done 30 years ago," he said. "It got to be such a hot potato issue, and it finally fell in our laps."
Issuing debt locks in a price and addresses immediate needs, he said.
Unlike the federal government, which pays for daily operations with debt, Victoria uses debt for one-time-only expenses, such as fixing streets.
"We always have a balanced budget," Reyna said. "We're going to make sure our first priority is to take care of the debt."
To take on debt, Victoria, like many cities, sells bonds. Anyone who purchases municipal bonds basically lends money to the city in exchange for interest payments and the return of the original investment or "principal," according to information from the U.S. Securities and Exchange Commission.
Reyna said the city uses "a 50/50 mix" of combining cash with debt.
National rating agencies gauge the city's financial state and let bond buyers know if investing in Victoria or another city will pay off.
Standard & Poor's and Fitch Ratings say Victoria's debt is stable and manageable.
Victoria is in the top 5 percent and among 49 Texas cities with populations less than 90,000 that have an AA or higher bond rating.
New Braunfels, which has a population of 57,740, along with two major metropolitan cities, San Antonio and Houston, have AA bond ratings.
Bob Henderson, Victoria's outside financial consultant, called the AA bond rating "very substantial."
According to a report from Standard & Poor's, the city "is considered to have very sound financial management practices and planning."
"Stuff is paying off," said Henderson, managing director of RBC Capital Markets. "Even though we have $98 million worth of (general obligation) debt, 70 percent of that is going to be paid off in 10 years."
Cities either move forward or backward. There is no way to stay still.
While growth is considered positive, it comes with increased needs and expenses for streets, thoroughfares, larger volumes of treated water and quality of life projects.
After the May election, the new council can decide to move forward with planned projects or wait and pay down debt.
Victoria's officials are expected to vote whether to issue $17.5 million in utility bonds in January 2014 for a new wastewater treatment plant off Hand Road.
As finance director, Reyna said the city's utility debt service will eat up a third of the total water fund budget once the bonds are issued for the new plant.
"If there's a need for future capital improvements for the utility side, we need to look for other places for the revenue other than bonds," Reyna said.
The other two funds - general obligation and sales tax - will not be affected by the wastewater plant's bonds.
As a City Council candidate, Pruitt said he is against the way the city has so far gone about the new wastewater treatment plant.
Councilman Halepaska said the council is up against comparisons to the federal government.
"Everything Washington brings in just covers the interest and doesn't pay down the debt," Halepaska said. "They're borrowing to keep day-to-day operations going. We only borrow to fix the infrastructure the public says it wants done."