K.C.’s financial future is on rocky road

By Gene Hanson

More than three years ago, then City Auditor Mark Funkhouser warned the City Council of the city’s growing debt.

He wasn’t just talking about the city’s spiraling tax-increment-financing obligations, but about the city’s willingness to sell city-backed general obligation bonds, most of which went for downtown redevelopment.

He preached that what the city needed was an official policy on indebtedness that would act as a guideline in the future.

His idea was met with sharp rebukes, that any policy must be flexible enough so it does not impair the city’s ability to support economic development and redevelopment.

Now the city has “flexed” itself into a heavy debt debacle. It has issued roughly $230 million in city-backed general obligation bonds for development of the entertainment district. In all, it has nearly $550 million in bonds, roughly 37 percent of its debt portfolio.

These are variable interest bonds, and in what has become an extremely volatile bond market, the interest rates reset every week, if not every day.

The money to make the debt service payments on the bonds is supposed to come from revenue generated in the entertainment district. But the opening of the district has been delayed twice, and now is only partially open.

So who gets stuck with the payments? The city, of course. That means the money comes out of the General Fund, and reduces the amount of money available for basic services, something Funkhouser has been railing about for years.

Enter Moody’s Investors Service that recently revised the city’s bond rating from stable to negative. The ratings reflect the city’s heavy bond debt — its reserve fund is at 4.5 percent, well below the benchmark level of 8 percent. And its budget shortfall is widening.

What does all this mean?

Right now, the city has little idea of how much it will owe when the debt service payments come due because of the widely fluctuating interest rates in the bond market.

It wants to sell additional bonds for capital improvements, particularly sewer and water bonds. But interest rates will be higher. They would have to be sold without insurance, since there is no longer insurance available in the bond market. That means the interest rate will go even higher.

The city is currently in a vulnerable financial situation, and it needs to move quickly to assure the bond market that it intends to put its house in order.

It needs to restructure its bonded indebtedness from a variable rate to a fixed rate. It needs to ensure through policy enactment that its reserves get back up to a minimum of 8 percent. And it needs to adopt a budget that brings spending into line with revenue projections.

There is nothing the city can do about the volatile bond market. And there is nothing it can do about the economy as a whole. But both will play heavily into the success or failure of the redevelopment of downtown, among other things.

In the months ahead, there should be plenty of anxiety for everyone in a period of uncertainty.