The city council held an emergency meeting on Tuesday evening to avoid potentially defaulting on $18.5 million debt that will reach maturity or come due on June 3rd, 2015.
The city has $23.47 million in one-year general obligation notes due in two weeks. City’s acting finance director James Ten Hoeve said the city has $5 million in the budget to cover payments, but lacked the rest: $18.5 million. “We don’t have the ability to pay those bonds,” said Kenneth Morris, councilman at-large.
“The consequences of it not passing can be dire,” warned Morris, as the council took up measures to authorize the issuance of emergency notes. He said the city would be in default if the measures borrowing $34 million to refinance the outstanding notes was not approved.
Out of the $34 million, $18.5 million will be used to refinance the city’s debt, and $11 million will be used for the first phase of mayor Jose “Joey” Torres’ road reconstruction project, and $4.4 million to cover ever increasing healthcare cost, mostly for prescription drugs, for city employees. The emergency came about after Moody’s Investors Service downgraded the city’s credit rating, effectively “pulling the rug” from under the city, said Ten Hoeve.
Business administrator Nellie Pou said there has been changes to control the skyrocketing costs of prescription drugs. She said city employees were being issued too many brand name drugs which are often much more expensive than generic drug though they have the same properties. She said there is a state law that requires employees to use generic brand first before moving on to anything different, a fact that was communicated by the administration to its employees.
“There is no way of anticpating what healthcare cost is going to be on utilization,” said Morris. City officials said healthcare cost analyses are performed by the city every budget year to ensure its not paying more than it would if it tagged onto the state healthcare plan.
The credit rating agency cited the city’s poor finances and reliance on state aid when it announced the downgrade on May 4th, 2015. “The rating also incorporates the city’s large, but declining tax base with a below-average and weakening demographic profile characterized by high poverty and unemployment rates,” read that announcement.
Morris said if the council failed to pass the emergency measures which required two-thirds vote, the state would come in and appoint an emergency manager stripping both the council and the administration of their power to govern.
Normally, the city would go to the markets and solicit bids, said Morris. With the downgrade in credit, if the city did that, it may return empty handed, without a buyer because its rating is near “junk,” said Morris.
“The feeling is if you were to solicit bids on these BANs (Bond Anticipation Note), we’d probably not get anybody bidding on them,” said Morris, chairman of the council’s finance committee. The city will instead go through a consultant who will negotiate deals with borrowers to gather the $34 million.
Save for two council members Ruby Cotton and Julio Tavarez, the rest of the seven members approved the emergency measures. Morris said he knew what was at risk and was confident in voting to avert a potential default. He urged some of his confused colleagues to speak to the finance director to get a thorough understanding of the issues at hand.
He said the approval vote serves to signal to the markets that the city is serious and is responsible when it comes to keeping its promises to creditors.
“One thing is for sure: We can ill afford to default,” said Morris.