Mayor Jose “Joey” Torres discussed a plan to borrow $35 million to rebuild 170 primary roads during the city council workshop meeting on Tuesday evening.
Torres’ borrowing will increase the city’s overall debt and cost $11.4 million in interest payments over a 15-year period, according to bond counsel Glenn Scotland. The estimated interest costs is determined using a 2-percent interest rate.
The mayor’s plan will also result in the city putting in a down payment of $1.75 million out of the city’s capital improvement funds and funds from unused bond proceeds, said Scotland.
In actuality, the road repair plan will cost $36.75 million.
The city has the capacity to borrow 3.5-percent of its three-year averaged equalized value of all the taxable properties, said James TenHoeve, interim finance director. With the city currently being valued at 7,000,184,884 or $7 billon, officials can borrow a maximum of $251.7 million.
Council president Julio Tavarez said that $7 billion figure is inflated. Tavarez wanted to know how the property revaluation will impact the borrowing. “It doesn’t hurt your borrowing capacity for today,” said Scotland.
“Our current net debt is $99.5 million,” said TenHoeve. As of the end of the fiscal year 2014, the city has used 1.38-percent out of the 3.5-percent maximum.
Variable interest rate
Although the city is using a two-percent interest rate for planning purposes, the real interest rate will be a variable number determined by the invisible hand of the market, according to Scotland.
2nd Ward councilman Mohammed Akhtaruzzaman expressed his reservation about borrowing on a variable rate, comparing it to sub-prime mortgages that resulted in the collapse of the American housing market few years ago.
“I’d never go with a variable rate it’s like swimming in the ocean,” said Akhtaruzzaman.
“We don’t have an option,” said Morris.
James TenHoeve, interim finance director, said the three years of short-term financing is estimated at 2-percent. After the three years, the long-term financing plan kicks in where the interest rate is estimated at 4.5-percent. “When we switch to the long term financing, permanent financing, there’s usually an interest rate of 4.5-percent but that’s relative to the market conditions of today,” said TenHoeve.
To alleviate the councilman’s concerns TenHoeve said in June the market interest rate was less than one-percent. Torres too re-assured council members stating that the city is using interest rates that are “on the high side” to be on the safe side.
Paying the debt
Torres wants to pay the debt incurred by diverting the current annual road maintenance money and directing it to debt service payments. “What they’re suggesting is that we take the existing money that we normally appropriate on an annualized basis for road resurfacing and dedicate that money to pay down the debt service,” said Kenneth Morris, councilman at-large.
In 2009, the city spent $2.2 million on road resurfacing, said Morris, chairman of the finance committee. In 2010 the city spent 2.6 million; in each 2011 and 2012 the city spent half-million on road resurfacing, said Morris. “So the money is there to certainly pay down the debt service,” said Morris.
“When I first heard of the mayor’s plan to bond $35 million for resurfacing of the streets, my first reaction was suspect at best,” said Morris. Known for being a fiscal conservative, Morris said he was solaced when the mayor’s plan showed the city would not take a hit by borrowing such a large sum because debt service payments would come out of the budgeted annual road maintenance funds.
Increasing road life
Out of a total of 320 roads the city will build a new 170 of them so will the city neglect those non-primary or secondary streets because it will be making debt service payments using the budget amount dedicated to road repair?
“Are you saying we’re completely erasing the road maintenance budget?” asked Tavarez. Torres said the city could still repair those old roads using a state grant the city receives every year for road repair.
Historically, the city receives $400,000 to $500,000 in grant money from the New Jersey Department of Transportation for road repair which will be used to repair older roads, said Torres.
In 2013, the city received a grant amount of $564,000 from the state for road resurfacing. Tavarez asked wouldn’t the newly built road require maintenance after a four year period?
Before responding to the council president, Torres said he will work in tandem with the county. The county will give priority to county roads that run through the city and the city will resurface the non-county or city roads.
Torres suggested he expects the roads to have a 15 to 20-year life without maintenance. The mayor isn’t just hoping for longer life of the roads, but he will take steps to ensure roads are not damaged as quickly as they are now.
“We will move away from traditional rock salt and we will go to the brine system,” said Torres. “It doesn’t create the damage that rock salt does.”
Morris said he wants to put in a five-year moratorium on road tearing by utility companies so as to increase road lifespan.
A great deal hinges on variables from hoping the newly resurfaced roads last two-decades to praying the market interest rate is cooperative in the long-run. “We’re hopeful it will be close to one-percent,” said Morris of the variable interest rate.
Andre Sayegh, 6th Ward councilman, asked when exactly the city will issue the bonds. “Bond issuances will occur probably three years after the bond anticipation notes are issued,” said Scotland.
The council must approve the bond ordinance before the end of this month for the administration to take it to the state’s Local Finance Board for approval by mid-August. Torres is pushing hard to get all the necessary approval from the governing body before taking it down to Trenton.
“There is a time issue, but it’s not the typical gun to your head,” said Morris. “We need to have this stuff in before the weather changes.”