CAPITAL IMPROVEMENTS COMMITTEE

200 E. Wells Street City of Milwaukee Milwaukee, Wisconsin 53202 Meeting Minutes CAPITAL IMPROVEMENTS COMMITTEE ALD. NIK KOVAC, CHAIR Ald. Robert Bauman, Ald. Michael Murphy, Ghassan Korban, Martin Matson, Mark Nicolini, and Mariano Schifalacqua Staff Assistant: Linda Elmer, 286-2231 Fax: 286-3456, lelmer@milwaukee.gov Fiscal Planning Specialist: Kathleen Brengosz, 286-3926, kbreng@milwaukee.gov Wednesday, March 20, 2013 9:00 AM Room 301-B, City Hall Meeting called to order at 9:03 a.m. 1. Review and approval of the February 28th meeting minutes. Minutes were approved as written. 2. Discussion of Debt Targets. Individual appearing: Richard Li, Comptroller's Office Mr. Li presented a PowerPoint on General Obligation Debt & Debt Service (please see the attachment "General Obligation Debt & Debt Service PowerPoint" to Council file 121406) and discussed trends in the City's debt. Mr. Li said that there is a lot of annual variation in the amount of debt issued. He said those variations relate to the types of bonds and the timing of the issue. He said that overall, from 2006 to 2011 general obligation debt that is outstanding for tax levy purposes has been relatively stable. Mr. Li said that most of the projected growth in debt service is related to the expected increase in interest rates. Mr. Li said that with a 15 year level principle payout policy, the City pays roughly 85% of its debt in 10 years. Ald. Kovac asked how that compared to other cities. Mr. Li replied that most other cities are closer to 60% or 70%. He added that they tend to borrow on a 20 to 25 year level debt service basis. Mr. Li said that if the City targets the amount of tax levy supported debt issued to the amount that is retired, the program will be stable. He said that continuing to issue around $70 million a year will lead to increasing pressure on the debt limit and debt service. Ald. Kovac asked what the amount should be. Mr. Li suggested an amount between $60 million and $65 million. Mr. Szopinski said that the latest iteration of the capital improvements plan has numbers that are a little higher than Mr. Li’s presentation, but the Budget Office is very cognizant of the need for stable debt authorizations. He added that the capital plan is intended to show the City’s capital needs as well as financing. City of Milwaukee Page 1 CAPITAL IMPROVEMENTS Meeting Minutes March 20, 2013 COMMITTEE Mr. Li said that in 2012 the City created an extendable municipal commercial paper (EMCP) program. It replaced the existing commercial paper program, which was a general obligation debt secured by a letter of credit which expired in 2012. The new EMCP is not general obligation debt. Mr. Li said that there are often one or two year lags or accelerations in total debt based on the type of debt issued. He emphasized the trends over individual years. Mr. Li said that short term rates are approximately 0.25% and long term rates are about 2.5%. Ald. Kovac asked if the City has borrowed more money while interest rates are low than it otherwise would have. Mr. Li said that the borrowing program has not been accelerated because of the low interest rates. He said that the City typically borrows on a reimbursement basis, meaning that it borrows after the money has already been spent. He said that there are restrictions on how fast money has to be spent. The IRS has a spend-down period of three years from the date of the borrowing. The State has a spend-down period of four years from the initial authorization. These restrictions make it more difficult to borrow money in anticipation of expenditures, especially if there is a chance that a project could be cancelled or delayed. He said that programs like streets, sewers and the City’s fleet have relatively stable and predictable expenditures and it would be easier to accelerate debt issuance for those programs. He added that there is a cost to issuing debt early in the form of additional interest paid, even if interest rates are. Mr. Schifalacqua asked how much more the City would pay in interest if it borrowed for 20 years instead of 15. Mr. Li replied that the difference right now would be around $25,000. He added that 20 years is the maximum term for City debt. Mr. Froh asked if the Comptroller’s office has looked at the other taxing units that impact the City’s financial position. Mr. Li replied that they do look at overlapping debt. He said that the other taxing bodies are relatively conservative in the debt issuance. Significant increases in borrowing by any of the taxing bodies would require coordination to avoid large spikes in debt service to the taxpayers. Ald. Kovac asked if overlapping debt included the State. Mr. Li said no, because state debt service is not paid with property taxes. Mr. Li discussed the debt service coverage for the Sewer Maintenance Fund. He said that, assuming the sewer system issues roughly $30 million of debt each year and increases their rates by 4.7% each year, the debt service coverage will go from 2.74 in 2011 to 1.79 in 2014. Projecting out just a few more years will bring the ratio 1.25, which is the minimum allowed. Mr. Li said that debt could have a similar impact on the Milwaukee Water Works. He said that issuing debt for the Water Works is more complicated than for the Sewer Fund because the Public Service Commission is involved. Mr. Matson said although the City has a relatively conservative approach to debt he is concerned that the City’s debt per capita is too high . He also emphasized that the increase in the City’s use of its debt limit is largely driven by the drop property values and not significant increases in borrowing. He said that he didn’t think the City’s rating would increase in the near future, but that overall because the City repays debt aggressively and our population is essentially stable the ratings agencies view Milwaukee in positive light. 3. Discussion regarding the City’s alley paving program and cost recovery ratio. Individual appearing: City of Milwaukee Page 2 CAPITAL IMPROVEMENTS Meeting Minutes March 20, 2013 COMMITTEE Mary Dziewiontkoski, Department of Public Works Ald. Kovac said that prior to 2008 the alley assessment rate was 90%. He said that the percentage of total costs actually recovered between 2004 and 2007 varied between 39% and 66% percent. He asked why there was such a large discrepancy between assessment rate and the costs recovered. Ms. Brengosz replied that some portions of alleys are non-assessable, either because of the configuration or the ownership. If an alley has a large property that is non-assessable a lower percentage of costs would be recovered for that alley. Because the City has paved so few alleys recently, individual alley projects could skew the annual cost recovery level. Ms. Dziewiontkoski said that if there is an H alley and people are on two sides, they only pay for the short side. She said that all non-profits, including churches, are assessed. Even DCD owned properties are sent a bill. Generally only schools and firehouses are not assessed. She said that every alley is a little bit different but everybody in the City pays the same rate to have their alley paved. The City just doesn’t always recover the same percentage of costs on each alley. Ald. Kovac said that one of the motivating factors for lowering the assessment rate is just how few alleys were being paved. One factor was the reductions in the budget for the alley program. The other factor is that property owners were opposing the projects at public hearing because of the cost. Ms. Brengosz said that part of the argument for increasing the assessment rate is the localized nature of the benefit that the alleys provide. An alley generally serves only the properties that it abuts, typically for garbage collection and access to their property. That localized benefit would warrant having a higher assessment rate. Ms. Brengosz also said the increasing the size of the alley program could be a neighborhood revitalization tool. Currently, the alley projects are scattered throughout the City, which limits their ability to have a neighborhood-wide impact. If the program were to be focused enough that the results are noticeable on a neighborhood level, the overall benefit to the area may justify a lower assessment rate. Mr. Szopinski said that alleys are competing with other infrastructure that the City must maintain for a stable or dwindling amount of financing that is available. He agreed that the lower assessment rate will increase the alley approval rate. But he said that paving more alleys at a higher city cost is going to crowd out other projects and infrastructure from the City’s budget. Ald. Kovac asked Mr. Szopinski if he thought a 60% assessment rate was too high. Mr. Szopinski said that 60% is probably too high and 30% is probably too low. Ald. Bauman said that he believes the 30% rate should be permanent. Ms. Brengosz said that getting more alleys approved at public hearing is not the same as getting more alleys paved. She said that lower assessment rates will get more alleys approved but will limit the number of alleys that the City can pave with any given level of funding. Ald. Kovac suggested that DPW review the memo provided by Ms. Brengosz and develop a proposal for their preferred assessment rate. Ald. Kovac asked how many alleys the City would have to pave each year to maintain a 50-year replacement cycle. Ms. Brengosz replied that 80 alleys would need to be paved. She added that a 75-year replacement cycle would require 54 alleys per year. Mr. Matson asked how long an alley can be expected to last. Ms. Dziewiontkoski said there is a high degree of variability, but typically an alley will last about 50 years. Mr. Korban said that DPW has revised design standards to improve drainage under the alleys to help prolong their life. Ald. Kovac asked why only five alleys were paved in 2011. Ms. Dziewiontkoski said that eight alleys were approved in 2011 and some were carried over into 2012. She said that if alleys are approved in mid-summer, by the time the contract is let, it is not City of Milwaukee Page 3 CAPITAL IMPROVEMENTS Meeting Minutes March 20, 2013 COMMITTEE unusual for them to be constructed the following summer. Mr. Schifalacqua said that considering the way the City approves the program and the gap between approval and construction, one almost has to look at a two-year cycle. Ald. Kovac asked why the actual assessment rate changed in 2000 even though the recovery percentage stayed the same. Ms. Dziewiontkoski said that prior to 1999, the 90% recovery rate was just for the concrete in the alley. It did not include design engineering, drainage, overhead and other project costs. After 1999, those costs were included and the assessment rate increased to reflect the full cost of the project. Ald. Kovac asked if we still use that methodology. Ms. Dziewiontkoski said yes. 4. Discussion of the 2014 Capital Request Process. Ms. Brengosz said that the Capital Requests will be distributed to members. She will also distributed a summary sheet and write-ups before the April 11th and April 15th meetings. 5. Set next agenda. The next two meetings will be for the discussion of the 2014 Capital Budget Requests. Meeting adjourned at 9:48 a.m. Staff Assistant Tobie Black This meeting can be viewed in its entirety through the City's Legislative Research Center at http://milwaukee.legistar.com/calendar. City of Milwaukee Page 4