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City anticipates bond issues in draft capital improvement plan

(Aug. 16, 2013) The Town of Ocean City this week rolled out its first draft of a new Capital Improvement Plan, a detailed financial and economic roadmap that anticipates a grand total of $127,748,930 in capital spending over the next five years.

But despite the plan’s level of chronologic and fiscal rigidity, it remains to be seen where the gap will fall between what the city wants now and what it can afford later.

The new five-year plan begins with the current 2013-2014 fiscal year and ends with 2017-2018.

“That’s not to say at the end of five years that we’re done and closed out,” City Engineer Terry McGean said. “This is a living document.”

The CIP features projects that, according to McGean, consist of high-value, long-life physical assets that present a significant benefit to the community.

Such projects can be paid for through a multitude of funding mechanisms, some of which present less of a fiscal challenge than others. In a number of cases, the city will be able to support specific improvements by paying with the user fees or taxes associated with those improvements, or borrowing against the projected future income from those fees and taxes.

For instance, the renovation of the convention center to include a theater space, slated to begin this fall, includes $5.7 million of state grant financing and $8.3 million of bond money borrowed against the projected future income of the city’s food tax, which is authorized by the state to finance the convention center.

Other work, particularly in the water and wastewater departments, will be financed with bonds scheduled to be repaid with the fees levied by those departments.

According to city Finance Director Martha Bennett, user fee and tax proceeds have been consistent enough to more than fulfill these obligations, meaning these projects are much easier to deal with fiscally.

Other projects, however, will require the city to pay directly out of its general fund, which is supported almost entirely by property tax revenue, or issue bonds to be repaid through the general fund.

The current draft of the CIP calls for roughly $7 million in general fund-backed bonds to be issued in the coming year for projects including the expansion of the skate park and downtown recreation fields, the construction of a new Ocean City Beach Patrol Headquarters, roof replacements at the Public Safety Building and the municipal garage and service center at 65th Street, as well as the next two years’ worth of canal dredging work to remove silt from the city’s bayside waterways.

Adjacent property owners could pay for canal work, although that would be up to the council’s discretion. The skate park and recreation area expansion should be done to coincide with next year’s rebuilding of St. Louis Avenue if it is to be done at all, McGean noted, although this would depend on the city settling issues with its lease of part of the property, owned by the county.

“There are some coordination issues there…if you recall, the plan for the recreation complex spans both sides of St. Louis Avenue and we would be making some pretty drastic changes to the road as part of that project,” McGean said.

By the end of 2018, a total of $14.6 million in general fund bonds is slated to be issued, according to the draft CIP. This will bring the city close to its self-imposed bonding limit, but not over, McGean said.

The town’s longstanding policy has been to limit its annual debt retirement payments to no more than eight percent of its total annual spending. The current year’s margin stands at 6.9 percent.

“That’s the number that if we’re approaching any sort of limit, that’s the one we would run up against,” McGean told City Council.

Also of particular concern are the city’s roads. A 2007 study indicated that the town had $40 million worth of road repair work to be done over the next two decades. Under the draft CIP, $25 million will be put into roads in the next five years.

“We’ve talked about highways and streets as our largest need, and this plan reflects that,” McGean said. “Streets are clearly the highest cost at $25 million over the next five years.”

However, $1 million per year of this money comes from stormwater utility fees, the so-called ‘rain tax’ that Maryland has authorized but Ocean City is not yet required to implement.

If the city declines to raise money for its drains beneath its roads by charging recurring fees, the money will still have to come from elsewhere.

“If a stormwater utility is not the decision of the Mayor and Council, you still will need that million per year as part of the street improvements,” McGean said. “If we drop the stormwater utility, it doesn’t mean that the streets budget drops from three million a year to two million. You still have to make up that million.”

When combined with other street projects, however, the city’s annual general fund contribution for roads rises far above the $2 million in general repaving work that is budgeted.

The 2014-2015 budget will require $4.8 million to be paid out-of-pocket for roads – nearly quadruple the contribution of $1.17 million that the city struggled to make this year.

That number will rise to over $5 million for 2015-2016, a burden on the general fund that the city has no guarantee it will be able to make.

“That’s the number that’s in the plan, but it doesn’t mean that’s the number that will be in the budget when that year comes around,” said City Manager David Recor.

Also of immediate issue is the beach patrol building, which involves a property swap in which the town will give the Ocean City Development Corporation the old beach patrol property on Dorchester Street for the development corporation’s model block project – if the development corporation surrenders its property on Talbot Street, one block north, as a new beach patrol site.

The city’s Parks and Recreation Commission discussed this week possible ways to bring the project’s cost down from the projected $2 million. Councilman Dennis Dare asked if the city could wait to issue bonds until after final costs for the project were determined, so as to not borrow more than needed. The beach patrol headquarters project could begin as soon as this fall, but bonds would not be bid until the end of the year.

“You can’t pay for something with bond proceeds without legislative action before you start the work,” Bennett cautioned.

However, the council could vote to forward-fund the project, paying expenses out of the city’s operating reserve and reimbursing it once bond money has been borrowed.

“I think the issue then becomes how much we’re comfortable spending before we go out to the bond market,” McGean said. “You’re not spending all the costs at once, but if you wait until spring when you get the bond money, we’re going to be down the road a bit having put a lot of money up, up-front.”

The council moved to forward-fund the roof replacement projects, but not the $165,000 in design costs associated with the beach patrol.

“I have that RFP [request for proposals] for architects out on the street, but you all have not approved funding yet for that work,” McGean said.

The construction of a new beach patrol headquarters is likely one of the city’s most dire needs, given the poor state of the current building, which was considered unfit for use by the Ocean City Police Department in 1993, spurring the construction of the 65th Street Public Safety Building. The Dorchester Street complex is rife with mold, peeling paint and water damage.

Development Corporation President Bob Givarz read a letter to council asking to go forward with the land swap process.

The beach patrol is vital to the non-profit group’s mission of revitalizing downtown, Givarz said.

“The building hasn’t gotten any better over the past 20 years and probably much worse,” he said. “The time to act is now. We all knew that the beach patrol facility needed to be relocated for this long-term plan. Let’s make it happen now rather than later.”

City leaders were generally optimistic about the city ability to accommodate the projects, despite goading by local landlord and frequent council critic Tony Christ that the city’s debt was understated due to its unseen commitment to capital projects – similar to bankrupt cities such as Detroit.

“While Detroit’s bonds may be junk, ours aren’t,” Dare said, noting that the city has been able to maintain an “AA-” bond rating from S&P.

“Aren’t these the same agencies that rated mortgage-backed securities ‘AAA’ until the financial collapse?” asked Councilman Brent Ashley rhetorically.

“I’m not saying we can’t borrow money for certain things, I’m just saying that we can’t rely on the rating agencies as justification or to make these decisions for us,” Ashley said. “We have to use our own knowledge.”

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