Chapel Hill’s First Budget Meeting of 2010

I want to quickly respond to Chapel Hill Mayor Mark Kleinschmidt’s comments this evening.

First, spending $8-12M on the Lot #5 project, building luxury condos and enriching a private developer, is not the same as “protecting our Town’s infrastructure”.

The Lot #5 (West 140) project is discretionary – the push to keep it going is not based on sound economic fundamentals.

Putting Lot #5 on par with filling potholes or expanding the Library is a great political speaking point – but certainly not grounded in reality – suggestions otherwise does the public a disservice.

At the same time, other probable debt-related outlays aren’t included in the analysis. Mark suggesting the lump of general obligation (G.O.) debt covers the whole gamut of obligations minimizes the challenge before us.

Beyond that bit of misdirection, Mark knows (or should know) that our Town’s current reserves are low compared to historical reserves on a percentage basis.

That $1.9M increase Mark bandied about sounds big but isn’t considering the $55M hole we’re in. No matter how hard fought the battle to get that $1.9M last year, weighed against future operational and capital demands – like trying to expand the Library – the percentage improvement in overall reserves was slightly better than negligible and doesn’t position us any better to deal with MAJOR outlays (if you use a more reasonable debt ceiling).

To use the credit card example several Council members relied on this evening, there is a qualitative difference between the following two scenarios:

1) Your credit card limit is $10,000 (set in the heady days when the good times rolled). Expecting blue skies everyday, you run up $9000 in debt. You plan to add another $800 ($9800 overall) and set aside $500 to service that debt “just in case”.

2) Your credit card limit is $10,000. You run up $5000 in debt. You set aside $1000 for future payments and plan to take on another $400 for a total obligation of $5400.

Case number one is what Mark is arguing for when he continues to push for the Library expansion, Lot #5, $3.7M in greenway bond debt, etc. (“the whole enchilada”) using the existing debt load as a baseline.

Case number two, which gives the Town much more flexibility in meeting its core needs and is more akin to where we were before the recent massive debt run-up, is what Council members Jim Ward, Laurin Easthom, Matt Czajkowski and Ed Harrison spoke to (in one way or the other).

Council member Gene Pease was right about the wisdom of creating separate budget “silos” for debt and operations. This was something I lobbied for 5-6 years ago and was happy to see implemented.

Yet, as Matt pointed out, Council didn’t discuss the current debt ceiling (and tax rate associated with paying it off) as a maximal point. As history shows, the current ceiling was expediently set based on all the allocated and accumulated debt at that time rather than a careful forward analysis of our residents ability to pay.

It is this kind of thinking that led to the recent big tax increase (which I had predicted 2 years before – based on the “simple math” Mark said I was using this evening).

Part of separating that part of our budget out was to get the kind of visibility we need to “right size” our tax revenue allocations to various core necessities (thanks to Laurin and others for putting it plainly – balancing “needs against wants”).

So, our debt ceiling – which leapt rapidly to handle 2003 to 2009 debt increases – based on extraordinary expenses like the new Town Operations Center – was not set based on a fiscally prudent assessment of our community’s ability to pay (“living within ALL our citizens means”) but on a hunger for stuff which could only be fed by running up our Town’s credit card.

Clearly, our debt load, twice what it was 6-7 years ago and the current debt ceiling are both not sustainable in this economic environment (or with the currently lopsided commercial/residential tax-base). On top of this, we’re also not even close to the reasonable reserve levels we held 5-7 years ago (let alone what we will need to handle predictable jumps – like Lot #5 – to our capital outlays).

As far as future debt not appearing on tonight’s docket, while Laurin and Matt did a good job outlining some probable impacts in the next 3-4 years of capital budgets (like the possibility of repairing/replacing the Police Department) the “elephant in the room” – Lot #5 – once again didn’t get appropriate attention.

When approved, the expectation was that the Lot #5 debt could be paid from parking revenues. The type of debt and method of repayment – certificate of participation (COP), tax incremental funding (TIF, taxing Peter – our local Downtown business folks – to pay for Paul’s profits), paying from parking revenues – remains a bit fuzzy.

If you run the numbers, make a more realistic assessment (I was on the Downtown Parking Task Force and reviewed those numbers carefully) the debt associated with the West 140/Lot #5 taxpayer giveaway will NOT be paid off by the parking revenues (heck, the negative feedback from raising parking rates which will decrease revenues hasn’t been worked out).

Every penny not coming from the variable parking fees revenue has to come from funds earmarked for other purposes – staff raises and benefits for instance. Besides the predictable shortfalls, that revenue variability, in and of itself, is a major concern.

In any case, even if we can make the debt payments out of parking revenues (quite debatable), adding another $8M-$12M of obligations on top of everything else carries its own significant financial impact – including limiting our Town’s ability to borrow for more core needs.

The question isn’t if we’re in a pickle but what is this current Council going to do about it?

I disagree with the suggestion that the Town couldn’t find qualified volunteers to help analyze the budget with fresh eyes and make some reasonable suggestions over the next 4 months.

Given the unique pool of successful local entrepreneurs and talented business folks, professionals from UNC’s Kenan-Flagler institute and business school, CEO/CFO’s living and working here, UNC and other government administrators, former Council members and other concerned citizens with relevant expertise and interest, claiming that we can’t seat a review board now is just a stalling tactic.

The Council did it before and the resulting budget was stronger for it.

Finally, I’m quite disappointed that Mark led the charge to cut-off this valuable source of public input. As Laurin, Jim and Matt argued to various degrees, the budget is the wellspring for everything our citizens want and, more importantly, need. It’s hard to argue any other area needs as much public attention and review as this year’s budget.

The political downside of a citizen review board, of course, is that an independent analysis might upset some folks established agenda, like trying to juggle the discretionary Lot #5 project, expansion of the Library, increased demands on services and responsibilities for maintaining qualified staff.

Here’s the outline I used for my remarks this evening:

5-6 years ago I started asking Council to prepare for some new fiscal realities – flattening revenues and taking on a lot of new bond debt.

Council didn’t move fast enough so I continued to raise the alarm several years ago – participating as a citizen on the Town’s Citizen’s Budget Board.

Every run for Council meeting these coming and existing financial challenges was core to my platform.

What makes this year different?

– Cupboard is bare
– Reserves are still down significantly compared to 3-5 years ago
– Debt-load is historically high, at $55M double what it was 5-6 years ago
– Citizens can’t take on more of a tax burden
– Economic prognosis still very shaky
+ Even though the State – through UNC and UNC health- care – dominant local employers – and other University-related spending has shielded us from some of the worst effects, macro-economic issues – like local sales tax decline, county/state/federal budget problems – which shift costs to the Town – can’t be ignored or underestimated.
+ Chapel Hill is not immune to historically high unemployment, foreclosure rates, default rates on personal/commercial debt

– 18-24 months before a substantive turnaround if we’re lucky.


Expand scope – adopt a 2-3 year planning horizon because of:

+ Multi-million dollar impacts like Library expansion, Carolina North, Lot #5 – if we still do it, transition from pay-go retirement health-care funding, repairing or building new Police department facilities, cost increase due to shipping waste to Durham, etc.

+ Many other projects on horizon – MPO and transit-related Hwy. 54 corridor improvements, Jordan Lake compact, etc. which come with unknown fiscal consequences

+ Other planned and anticipatable budgetary issues all are within that horizon

Must evaluate all probable impacts prioritized by need – for example:

+ “Needs or must dos” – Obligations to current and former staff, shift from pay-go retirement health-care funding

+ Not on the radar – I’ve lobbied for doubling human service related resources to $500K to meet some of the rising tide of needs caused by this terrible economic downturn (NC reduction in mental health facilities, etc.)

Required but not firmed up:

+ Police Department repairs or new facility

+ Anticipate fiscal equity Carolina North
– Required infrastructure improvements, other obligations
– Planned improvements – like connector
– Reserve to be able to take on multi-modal transit opportunities when state/federal dollars become available

Discretionary or “want to dos”:

+ Desired – Library expansion – hopefully next year

+ Unneeded anymore
– Lot #5 riskiest, largest discretionary liability – if you don’t pull the plug on Lot #5
– The cost of borrowing $8-10M, reserve for open-ended environmental fund

Any budget plan must evaluate the costs of our wants and needs tilted towards the worst case.

Public participation

– Citizens Budget Advisory board
+ Fresh perspective from talented and knowledgeable citizens
+ Tap UNC expertise

– Carolina North public advisory process now
+ fiscal equity component – short-term plan

– More public forums on budget to educate folks, increase public input

– Leverage website with better charting of expenses, capital outlays, debt service – including range of options/scenarios/trade-offs

– Don’t sugar coat the financial numbers, present best and worst case scenarios show all impacts planned, anticipatable, probable and possible so we can choose the most prudent path


5 responses to “Chapel Hill’s First Budget Meeting of 2010”

  1. jcb Avatar

    Will, it has never been clear to me when they talk about the parking revenues from Lot #5 paying for the debt: are they talking about net *increased* revenues or are they just ignoring the existing parking revenues from that space which will be supplanted by the new garage and thus reduce another income source?

    Thanks for continuing to work this so hard!

  2. Administrator Avatar

    Existing parking revenues used to go directly into the general fund but now go into the “Parking Fund” (before excess is transferred to the general fund). The Downtown Parking Task Force recommended making parking nearly revenue neutral and ear-marking funds exclusively for Downtown parking/infrastructure needs. Council has discussed this but not adopted the proposal.

    The Town has been netting about $145K per year from parking. Taking Lot 5 off-line will reduce in-flow of $149K+ in direct revenues and require additional expenditures for replacement spaces.

    According to the 2009-2010 budget, “In addition, the Council has approved a plan to borrow funds totaling between $7 million and $8 million to pay for underground parking on the current Parking Lot 5 as part of a mixed use development. We currently project that the first debt service payment of about $770,000, or 1.1 cents on the tax rate, would come due in 2011-12.”

    Missing is the open-ended cost of environmental remediation. The quite optimistic assessment is $250K, which is what the Lot $$$5 project was originally going to cost taxpayers (at $8M now, look how that turned out!).

    Parking revenues from the Parking Fund (derived from all our parking assets and fees) will end up being redirected to paying off the $45+ K per parking spot cost of the underground lot. The exact percentage is undetermined. Consequently, the impact on our ability to pay for other parking improvements or even keep rates stable (or even lower) is unknown.

    By my estimation, we’re going to run a significant deficit which will hurt existing infrastructure.

    Funny enough, Mark was trying to make the opposite case last night. Clearly, running a deficit in the Parking Fund to support the Lot #5 boondoggle will not protect our existing infrastructure (more bizarro-world thinking).

    The revenue stream will eventually encompass the underground parking on Lot #5, which, presumably, will be more than the existing +$149K but, of course, far short of the $770K debt + cost of environmental cleanup debt payments.

    The projections were tailored to meet the revenue requirements for paying off the debt, not historical reality. Ken Pennoyer (Town’s finance director) is reworking the numbers to make the projections more honest and realistic (which, I fully expect, will show running deficit).

    In general, utilization of those spaces though are optimistic, especially in light of research that shows folks prefer ground-level and above-ground parking over underground. And, of course, Lot #5’s replacement parking will be in competition with the 300+ new spaces at University Square.

    From the Town’s puff page for Lot #5 “Revenues from property and sales taxes, and parking estimated at $1.06 million in the project’s fifth year.”

    That revenue stream, presumably, could be used to reduce the debt. Again, the property taxes that are redirected only serves the good of the developer, not the public (in other words, no net financial gain for the community).

    Documents, including the extensions and modifications of the agreement here.

    One thing that keeps getting missed by the local media is that the fiscal responsibility has been shifted to a RAM holding company, not RAM itself. RAM maintains it is responsible but as anyone that knows how LLC’s work, if we ever have to go to court over a default, etc. – moving liability one-step away from RAM proper serves their interest not the citizens.

    The 2009-2010 parking fund projections are here. Expected direct revenue hit from taking Lot 5 offline is $149,000. In addition, there’s the additional cost of finding replacement spaces – costs detailed below.

    Some links to the loss of revenue on Lot #5 during build-out and new metered spaces created to expand parking.

    2008 Replacement Parking Plan for Lot 5

    New metered spaces.

  3. zabouti Avatar

    Chris Fitzsimon had an op ed in the N&O the other day (“Lobbying up a storm – but why?” – no link because Google finds it only in cache – the N&O’s website is so useless).

    Fitzsimon wrote about how local governments, cities, counties, states, etc. all have hired lobbyists to talk to other governmental bodies. Kind of strange.

    But that gave me an idea: I want Citizen Will to be my lobbyist to the CH Town Council!!

    — ge

  4. Administrator Avatar

    Thanks Zabouti, I’ll do what I can!

  5. Administrator Avatar

    This is a really long comment I made over on this post (“Chilton: “No way, no how” will Carrboro pay for CH library”) at the Chapel Hill New’s OrangeChat ‘blog.

    I’ve moved it here to make their site a bit more readable.

    Truncated comment here.

    Full comment:

    I’m concerned that the CHN continues to report the fiscal impact as solely $40 a year for a “typical” home owner.

    Yes, you did underline that was due to the increase in operational expenditures but you continue to parrot the low-ball figure used by the Town Manager instead of digging deeper to see if that’s a reasonable estimation or determining what that increase looks like 3-5 years out.

    Beyond the operational increase, though, is the rather significant new debt, $20.1M in all for Spring 2010 (carrying a 2011 mandatory debt payment of $8.3M, $2.1M being the new issuance). The Town finance director showed a $700K deficit in managing the debt in 2011 using revenue coming from the supposedly “fixed” tax rate ear-marked for debt service.

    That $700K has to come from somewhere. Right now the plan is to dip, once again, into the reserves (putting off, again, rebuilding them to the comfortably safe level we enjoyed just 5-7 years ago.)

    Beyond that, issuing the Library bond now pushes our debt load to a level that if the economy doesn’t rebound, sales revenues don’t pickup, the Town is faced with an unplanned or extraordinary expense (Police Dept. repairs, parking revenue shortage which doesn’t pay for the ridiculous Lot #5 project, etc) the Council will have to raise taxes.

    Here’s a short narrative, using the credit-card example the Council – sans Mark K. – is fond of, to set the framework for that discussion.

    Imagine Joe Dough has a credit card with a self-imposed maximum debt limit of $70000 (because he wants to make sure he can prudently managed your payments). He knows, from experience and the wise of counsel of his elders, that $70000 is really the maximum debt he can sustainably carry.

    Given what he knows of his future needs – a growing extended family, for instance – he feels that he shouldn’t take on more that $50000 in debt except for extraordinary investment opportunities or unusual, possibly emergency, demands.

    Over the years, he runs up $26000 paying for a new driveway, improving the family garden, etc. His salary is great and he continues to make his debt payments easily. Times are good – real good. Without having to ask his boss for more money she almost magically increases his pay year to year. This goes on for 5-6 years.

    One day he decides he “needs” a new fancy garage and “wants” to improve the garden’s walkways and build a lap pool for the backyard – all priced at $48000.

    That pushes his debt way over the $50000 he thought he could comfortably manage given his income but these seem like great opportunities to improve the ole homestead. Not emergencies, opportunities.

    He calls the credit card company to see if running his debt to $74000 works for them. They say “Hey Mr. Dough, you’ve been a good customer, you’ve always paid on time and in full. You definitely have enough money coming in to handle that additional $48000. Sure, go ahead.”

    Unfortunately, part way through implementing the projects, he finds he underestimated the cost of the garage and the 10′ tall Manneken Pis for the front-yard. New cost for all projects, $59000.

    Now he owes the credit card company $85000 instead of $74000.

    Though they know he’s been the best of customers they are a bit concerned.

    Sure, he has a pretty good salary (subsidized partially by the State) and his prospects, unlike a lot of his fellow colleagues living nearby, looks relatively good even in a worsening economy. Still, though, the times, they are a changing.

    To make sure he can pay his current bills – which are rising rapidly – and maintain the credit card company’s confidence in his ability to repay that new debt, he decides to hit up his boss for a %11 raise.

    Turns out she has to pay – she has no choice in the matter – he has her over a barrel.

    As far as future, he knows he “wants” to expand his family den to accommodate some new bookshelves and new computer desk.

    He has the choice of setting aside a few bucks yearly to prepare for that day or that he can continue to spend as usual hoping that his boss will be paying him even more at that time. The boss does have a habit of bumping his income up almost magically year to year – maybe it will work out, Joe thinks and, when the day comes, he can cover the cost of expansion out of pocket.

    For all that, Joe deep down knows carrying a $85000 debt isn’t very healthy – and even occasionally recalls the days when the “old Mr. Dough” preferred to carry a “healthy” $50000 debt. It does bother him, just not enough to change his spending habits. In the end, Joe has succumb to a pretty modern malady. He wants it ALL – NOW.

    His friends and family are a bit worried about Joe’s new found willingness to buy what he can’t quite afford so, to calm those fears, he calls the credit card company and asks “How much debt can I carry before you guys get nervous?”

    The credit card company, ever willing to let folks have the maximum amount of rope to hang themselves by, says, “Mr. Dough, you’ve been a great credit risk year in and year out. You know a lot of folks you can tap for funds if push comes to shove. Let’s say $95000 but no more. After that we’re going to have charge you a higher interest rate and limit your ability to borrow – no matter how dire the need.”

    Armed with the $95000 number, knowing he has $10000 more to play with, that he’ll be paying the $85000 debt down soon, he tells his concerned friends and family – “No worries, I have plenty of wiggle room!”.

    Of course, $85000 is $15000 above what Joe used to think as his self-determined maximum, $35000 over what he originally thought he would be comfortable with.

    Though there’s a small niggling doubt, he once again convinces himself that the cash will be there when he needs it. He does make himself a little private promise (as valid as any New Year’s resolution) – even writes a little note and attaches it to the refrigerator – “I promise not to drive my credit card up above $95000 no matter what!”.

    As time goes on he chips away at that $85,000 – reduces it down into the $70K’s.

    That debt is still awfully high. He’s vaguely aware that if his boss has to cutback his salary he’ll be in a world of hurt. But, Joe thinks, look at all the great stuff I now have because I took a risk, ran up that debt – a fancy statue, a nice garage, a lap pool. Joe loves to brag about that statue.

    The day finally comes for expanding the den. Joe’s wife and kids are complaining that its so crowded with stuff they can’t hardly use it. The pressure is on to do something.

    Joe whips out the old credit card, looks at how much the expansion cost, calculates how fast he is retiring his existing credit card debt and decides to go for it.

    He realizes the expansion will push his debt up towards the credit card company’s limit of $95000 but convinces himself that if he continues to pay his current debt off its just doable (you can’t let the family down!).

    Though he had to hit your boss up for a %11 raise and got a big windfall bonus (the company he works for gives everyone a big bonus every 4 years), he did it before and, dang gum, he’ll do it again!

    There’s just a few issues that continue tickling Joe’s conscience.

    The economy sucks, he knows his boss doesn’t have a lot of money to bump his salary – even if she wanted to – and, while he has been a good customer of the credit card company, all credit card companies are a bit wary of customers taking on a lot of new debt.

    Oh, one more thing. Joe met a guy who wants to build a fancy hotdog stand Downtown.

    Joe’s new buddy, Rama, found out that Joe owns some Downtown property he rents parking on. This side-business didn’t cost a dime to operate and brought Joe a modest income.

    Rama convinces Joe that there’s a great need for expensive hotdogs Downtown and, initially, says he’ll do a deal where it won’t cost Joe a dime. Sounds almost too good to be true but since Joe is meeting a supposed public demand for expensive hotdogs, since the new partnership won’t cost you a dime, since the partner promises it’ll produce great revenues – eventually – he tentatively agrees.

    A few weeks later, Rama comes back say he needs a few bucks from Joe to make a go of it (something about the figures not working out in Rama’s favor).

    “No worry, you’ll be making money hand-over fist and, anyway, the public really wants these expensive hotdogs, it’s your civic duty! The best part? No money down. You can wait until I start building my stand to pay. That will give you a few years to scrape up that modest investment”.

    Salivating at the prospect, given the low cost of entry and a couple years to scrape up a few bucks, Joe agrees (even though Joe is excited about the deal, when describing it to his wife he tends to puff up the benefits and be a bit vague on the potential pitfalls).

    One thing leads to another and, a few months later, Joe’s new buddy o’pal Rama “wants” a huge chunk of bucks from him to build that fancy hotdog stand. Joe’s a bit drunk on all the attention the original deal brought him and is loathe to back out at this point.

    Still, several other folks have either built or are planning to build stands that not only will sell expensive hotdogs but modestly priced hamburgers and downright cheap tacos so the financial justification for a competing stand offering less seems shaky but our stubborn Joe decides to stay the course – no matter what!

    Sure, he could walk away from the deal – trouble free – because Rama keeps delaying the project over and over, but by now Joe feels he has a reputation for being a “decider” and “deciders” don’t change their minds.

    So, Joe “wants” to expand his study. Joe “wants” to be a partner in Rama’s fancy Downtown stand selling expensive hotdogs and, Joe, being a good and decent family man, also knows that he must first address his extended family’s rising “needs” during these troubled times.

    What does Mr. Joe Dough to do?

    Swallow his pride and walk away from the hotdog stand deal? Wait until he pays down his credit card to $60K or less before running it back up paying for the family den expansion? Prioritize his spending to first take on his family’s “needs”, using the savings that will come from reducing the overhanging existing debt to handle some new challenges and put a little money back into the rainy day jar before taking on new projects?

    Or is it “mission accomplished” all speed ahead?

    If anyone reads this far, I know that I’m no great writer and that Joe’s story is a bit tongue-in-cheek, yet Joe’s scenario roughly parallels the reality of where we are today.

    Even though it wasn’t clearly broken out in the budget, it seems like some prior Councils – for whatever reason – had a debt limit pitched more towards what folks could comfortably pay as part of their taxes than what was demanded by covering the cost of needed and discretionary capital improvements.

    The Town did issue a number of bonds and COPs to pay for required facilities – like the Town Operation Center – and discretionary additions – the Aquatics Center – and then set the current debt limit accordingly (like running your credit card to $10K and then calling to have your debt limit raised to $12K).

    In other words, the ceiling bandied about by Council was set not based on a careful evaluation of the ability of this community to live within ALL of our means or the goals for maintaining a diverse, thriving community but by the de facto amount of debt taken on funding those new projects (and the guidelines for maintaining our Town’s AAA bond-rating even if only by a whisker).

    Issuing $20.1M in new debt for the Library expansion and other discretionary uses DOES REQUIRE dipping into reserves, at least initially.

    And, finally, the Lot #5 project does present the riskiest discretionary expenditure before the Town. Our ability to pay the $8-12M debt associated with it is based on parking revenue and other related revenue projections which make very optimistic assumptions not supported by historical realities.

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