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Janesville councilman warns: Get financial house in order

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MARCIA A. NELESEN
December 5, 2010
— Janesville is $127.7 million in debt and counting.

Councilman Tom McDonald is alarmed at the number, and he and some other council members have expressed concern about the recent practice of borrowing for street maintenance.


McDonald likens it to borrowing to pay your heating bill. It is an ongoing expense that the city shouldn’t borrow for, he said.


McDonald said past councils have accumulated debt and acted like irresponsible homeowners spending with unlimited credit cards.


Unless something changes, the city will have the kind of deficits that hound other government entities, he warned.


McDonald suggests the city council establish policies to cap borrowing and to limit transfers from the city’s undesignated cash balance.


A study session on his suggestions will be scheduled early next year so staff could incorporate any changes into the 2011 budget.


McDonald’s suggested changes would be a major shift in how the city does business and would—at least initially—result in the city collecting more money in taxes or fees or spending less by reducing services.


“There are definitely some financial issues that need to be worked through,” said McDonald, who has a master’s degree in accounting. “Sometimes, a recession can be a good thing. You hit the reset button on the economy. A lot of times, people come out stronger at the end.


“But it hurts for a few years.”


Of the $127 million, the city must use property taxes to pay $32.5 million in interest and principal. About $5 million of that is due in 2011.


The rest of the debt will be paid with fees and other revenue sources.


McDonald said the city’s borrowing for street maintenance is especially worrisome.


In 2011, for example, the city will borrow $975,000 for street work.


McDonald registered the sole vote against the 2011 budget and proposed instead of borrow for street work that $500,000 be found in other departments and that another $475,000 in street maintenance be delayed.


He suggested a combination of employee furloughs, hiring freezes, property tax and fee increases and cuts in services.


The city traditionally borrowed only for capital projects. But beginning in 2007, it started borrowing for street maintenance and reconstruction.


McDonald and council member George Brunner in 2008 warned of the fiscal dangers. At the time, acting City Manager Jay Winzenz said the borrowing was necessary to shift the cost away from the operating budget so the city could maintain service levels and still meet state-imposed levy limits.


Winzenz said in 2008 that many communities borrow to pay for such projects. Janesville had been fortunate that it was able to pay for street repair in its general fund, he said.


“Unfortunately, if everyone else’s ship is sinking, that doesn’t make it right,” McDonald said. “If you look at governments—whether local, state, federal—people started to realize these past practices don’t work.


“What people don’t understand is that, every year, we fall farther and farther behind.”


The city eventually will be paying more for past borrowing—paying off principal and interest—than for what it borrows each year for street maintenance, he said.


For instance, the city will have paid $497,723 in interest by the time it retires all the debt borrowed for street maintenance from 2007 through 2011. Money is borrowed for 10 years.


McDonald wants the council to:


-- Keep the city’s reserve fund to at least a 15 percent of the general fund.


A city’s reserve fund is important because agencies use it to establish credit ratings. They like to see a reserve fund that is at least 10 percent of the general fund, which is the portion of the city budget funded by property taxes.


The 2011 budget puts the city reserve at 10 to 11 percent, McDonald said. That’s still a strong rating, but there’s no room for error, he said.


“If some unforeseen event happens in 2011, like a flood or a snowstorm, we may not have the money to cover it without dipping below 10 percent of our reserves,” he said.


At the end of 2010, the fund balance was about $6.7 million, McDonald said, but the council will withdraw $900,000 to balance the 2011 budget.


-- Cap borrowing.


The city in 2011 will pay $5 million in interest and principal for debt service included in the city’s general fund.


“If we only had to pay half of that—if the city hadn’t borrowed so much in the past—we’d have another $2.5 million in this budget,” McDonald said.


“We wouldn’t have to borrow for street maintenance, we wouldn’t have to have any tax increase, we wouldn’t have to dip into our reserve, and we’d still have money left.


“I think for years the city has just said, ‘If we can’t fit it in the budget, we’ll borrow for it,’” McDonald said.


A borrowing cap would force councils to prioritize, he said.


“Right now, it’s like we have a blank checkbook or a credit card with high limits. We borrow what we want and don’t worry about the consequences.”


Council member Frank Perrotto at a recent council meeting agreed that borrowing is an “easy fix” and has been an “unfortunate trend.”


But it is also a way of life for a city to survive and keep the tax rates at a somewhat realistic level, he said.


Perrotto said he would support looking at ways to resume paying for street maintenance out of the general fund.


“It is a problem that has escalated, and we need to address it,” he said.


Council member Russ Steeber in a recent interview said the council must do something, but he advocated a gradual approach.


“I think you wean yourself off over several years,” he said. “It gives you time to adjust rather than going cold turkey.”


City Manager Eric Levitt said staff will present a variety of options at a January study session.


For 2011, the council wanted to maintain street maintenance, and borrowing was the only way to do it without bumping into the levy limit or increasing taxes more, Levitt said.


Levitt, too, has warned that plugging budget gaps with the undesignated fund is not sustainable. A depleted fund also earns less interest money.


Levitt said he believes the city previously budgeted to use reserve money but never had to because of year-end excesses in the budget. Recent budgets, though, are tight and have produced little excess.


“I think it’s a very valid discussion,” Levitt said. “I think it’s a discussion happening in a lot of places right now.”



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