This story is about debt, specifically Town of Normal debt; what’s healthy and what’s not. It’s a campaign issue in this year’s mayoral and city council contests.
The Town of Normal has about $81 million in bonded debt. But is that a healthy or unhealthy level of debt?
"I think there is a healthy level. I think we are past it," said Marc Tiritilli, who is challenging Mayor Chris Koos in the April 6 election for the second time.
Incumbents in the council and mayoral races in Normal maintain the debt level is healthy. Koos said you don't have to take his word for it.
"It's proved by the fact we have the highest credit rating you can get by people that analyze municipal debt. There are less than 3% of the communities in the United States that have the credit rating we do. These are financial professionals who deal with people in the municipal realm. I take that as a strong affirmation that we know what we are doing in terms of managing debt," said Koos.
The AAA designation is from Fitch Ratings. Moody's is another firm that also rates the Town of Normal highly. In its latest assessment last month, Moody's said "the town's very healthy financial profile is characterized by strong and stable reserve levels." Moody's does say the town has "above average long-term leverage," but qualifies that by saying it "becomes more moderate relative to operating revenue."
Average is difficult to define.
"Some communities may have a lot of debt because they've decide to invest in infrastructure. That's where most of the bond funded debt goes to," said Illinois Municipal League head Brad Cole.
The Town of Normal's per capita debt is now about $1,500. Cole said each city is different.
"It depends on the type of community, where they are, what they're involved with, and in some cases the age of the community. Older communities may have to do more infrastructure repair where newer communities do not. And as debt goes on and comes off, it impacts the per capita amount," said Cole.
Normal's per capita bond debt is higher than Bloomington, about the same as Peoria, and lower than Decatur.
And when you factor in other long-term obligations such as retirement, the numbers can change a lot. Springfield, for instance, is low in bonded debt, but surges way ahead in total per capita debt because it bonds for its city-owned electric utility.
The challenger in the Normal mayoral race maintains debt in general is not great for cities. Tiritilli said it's OK to take on debt for infrastructure projects such as water and sewer modernization, but he believes a lot of it could have been avoided in Normal.
"So the $100 million that was borrowed over the last 20 years here will wind up costing us nearly $150 million when it's all done. And what could have been done with those $50 million dollars over those couple of decades? To me that is a very significant question," said Tiritilli.
A better question, Koos said, is what has been done with the money. To decide whether a debt is justified you also have to look at why it's there. Koos said the choices he and the council have made over the years have helped the town create more than $1 billion in outside investment.
"When we borrow money it is not to spend it because we don't have money, it is to strategically invest in our community. So it is opportunity investment," said Koos.
Koos said the town has not taken out bonds lightly. The town has identified revenue streams to support the bonds after deciding a project is worth stimulating.
"One, is it good for the community and two, can you afford it? You look at your debt in that regard. What is affordable? What is a reasonable amount of debt. And we have set a number, or a policy on that and we have maintained that," said Koos.
That metric is debt service payments each year should not be more than 10% of annual revenue. Tiritilli thinks that's not an altogether reliable metric. He said you can make the percentage look better simply by increasing the town budget. The town uses another measure as well--debt compared to total assessed property value--that has stayed stable for more than a decade.
Tiritilli said there's an opportunity cost to the money, too.
"The cash flow that we have set up for our debt runs us $5-7 million a year. So, if we can afford that kind of flow towards projects, then if it wasn't going toward debt repayment you could save $5-7 million a year for two or three years and then you could pay for the projects up front," said Tiritilli.
Tiritilli said most projects should be, as the phrase goes, "pay as you go," which was a favorite of Kent Karraker, the mayor before Chris Koos.
Koos said the timetable of projects for which the town has chosen to take on debt required commitments that prevented pay as you go. He also said Karraker agreed with that.
"He was the one that recognized that for Uptown to be the project it was going to be required bonding. He's actually the first mayor to start the bonding process," said Koos.
There's a subsidiary argument from Tiritilli about interest. He said the town is not paying down principal fast enough.
"The majority of it is just going to interest. That's the real problem. We are wasting a lot of that money. Half our general obligation bonds are interest only," said Tiritilli.
That's not the right way to think of bond interest, according to Koos, who said you can't pay down principal unless you pay off the entire bond issue because payments are prescheduled to go to interest or principal.
"A bond doesn't function like your house mortgage. A bond has interest-only payments often built into it for a period of time because the person who buys that bond wants a certain guaranteed stream of income," said Koos.
The town is moving to pay off bond debt early--about $8 million in the next several years. Tiritilli said the town has chosen not to take some opportunities to go faster. Koos, most council members, and town staff say they also want to maintain adequate reserves.
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