City’s $2 billion debt comes to a head

With nearly $2 billion in long-term debt, the city can’t afford to borrow any more money. This is the message that the city treasurer will deliver to the Sacramento City Council at Tuesday’s meeting.

"The city’s tapped out," said City Treasurer Russell Fehr, who will be presenting an hour-long report on the topic. "We have very large, long-term liabilities and we have to be very cautious about assuming any new ones. That’s the essence of the message."

According to the report, the long-term debt and interest must be paid over the next 30 years, which passes the financial burden onto future generations. However, the debt is at a fixed rate, so it won’t increase and there are "no time bombs that will go off," Fehr said. "Because we had such a significant decline in revenue during the recession, our debt burden is too high. So we shouldn’t borrow any more."

This $823 million in city debt is just part of the bigger picture – $2 billion in long-term liabilities that the city must repay

Passing the buck onto future generations, however, poses a policy issue and concern over inter-generational equity, the report states. It went on to explain that the city will soon issue water revenue bonds to be repaid over 30 years, which will be used to rehabilitate the Sacramento Water Treatment Plant. However, the public employee retirement system – PERS – is spreading its investment losses from 2008-2009 over 30 years as well.

"In looking at inter-generational equity, the benefit to the future residents of clean, safe water from the Treatment Plant is clear; however, the benefit of paying on other liabilities is difficult to establish," the report states.

"As the economy starts to pick up, we’re going to want to borrow money for economic development," Fehr said. "If we don’t do something about this, it’s going to be a problem."

For a breakdown of where the debt comes from, read the full report.  

City Debt Report by KarenLWilkinson

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January 8, 2013 | 10:06 PM

How do we compare with other municipalities? I find it tough to contextualize numbers this large. It just seems crushing.

January 9, 2013 | 8:49 AM

Sacramento was not on that Oct’12 list of California cities that were under consideration for a credit rating downgrade. To see the current credit ratings for the city, go to:
http://www.cityofsacramento.org/treasurer/public_finance/credit_ratings.html

January 9, 2013 | 9:29 AM

To summarize: A+ from S&P (“upper medium grade”), Aa2 from Moody’s (“high grade”), and AA- from Fitch (“high grade”). http://en.wikipedia.org/wiki/Bond_credit_rating

That’s a bit better than I expected. I’m glad the Treasurer is presenting all debts in one package, to help everyone understand our commitments. I only skimmed the report, but I’d be curious how dangerous and “unfair to future generations” a 30-year bond (at a fixed, very low rate) actually is. There may be a good case that to be made that borrowing cheaply and investing intelligently is more equitable than, say, leaving the next generation with rotten pipes and a water treatment plant spewing pollution into the river. But that’s complex value that depends on one’s values and commitments, some complex actuarial math, and whether the city will get its act together in the future.

That said, the clinically depressed elephant in the room is not a commitment to infrastructure, but unfunded pension liabilities, which make up about half the future obligations detailed in the report. This is scary in the sense that (a) we as a city can’t get a return on this investment, the way we potentially could with more efficient infrastructure or a cleaned up railyards and (b) costs are not as predictable as bonds, as pension fund returns can disappoint and health care costs can inflate. The upshot is that there is some low-hanging fruit on this issue, because, compared to state workers, I believe most of our local-level employees contribute little to their pension or retiree healthcare costs. (Correct me if I’m wrong.)

January 9, 2013 | 3:40 PM

So, really, we need to be talking about controlling health care costs for our society – otherwise our social commitments are untenable.

January 10, 2013 | 1:20 PM

Ben, aren’t you overstating it a bit to label a bloated city employee pension and medical plan (that is far above the benefits received by the rest of society) as a “social commitment”. This is result of corrupted political process, plain and simple.

These benefits packages were a costly bad deal for the residents when times were good just as they are now.

Also note that the city is now in it’s 6th year of tight budgets, this is by no means a “new” problem. And now in 2013 the city is finally getting around to taking a holistic look at the long term debt situation?

This kind of data should have been available to the public prior to contract re-negotiations with the various labor unions. The fact that it wasn’t disclosed in a timely manner simply highlights that city hall continues to be controlled by the same corrupted union forces that got us into this fiscal mess in the first place.

January 9, 2013 | 9:37 AM

Regionally, including Roseville and Amador, the area brings in about $75 billion in effective “GDP”, putting the Sac Metro region somewhere between the Dominican Republic and New Zealand in terms of revenue. $2 billion hurts, but it isn’t fatal, even if it is just for one city in that region.

The real problem is that the City of Sac (rather than the region) has experienced continued GDP declines over the past several years. In my opinion, the Sac City Council has been fairly impotent in dealing with this issue. Their solutions have always been to try and bring in established money to bolster our economy, but in reality what we need are more businesses *headquartered* in Sac proper, where they will pay their taxes. Essentially, the City government needs to make it easier and less costly (both in terms of dollars and in terms of time) for startups to incubate inside Sac City.

I am thinking that the trick behind that is for the city administration to change its tack on how it deals with small businesses, and make itself more responsive and transparent. They also need to take advantage of technologies to integrate their responses to customer requests. I’ve seen some of this happen, but not enough for people wanting to start their own businesses to *prefer* the City of Sac over, say, West Sac or Rancho. And I’m also not saying that Sac should bend over further to accommodate businesses on taxes- just be better at making the process of dealing with government and regulation easier by taking more responsibility on their end.

Another pet peeve of mine is the idea that the City Council has embraced in the past that by supporting the charging of premiums for business property leases/rents (especially in downtown), that somehow this will engender a flow of businesses to their doors. This does NOT attract startups, and it doesn’t even attract much outside business. It does attract businesses whose sole purpose is benefitted by paying a premium in an economically depressed area with a high closure rate, but Sacramento can support only so many lobbyists, bail bonds people, and criminal defense attorneys.

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