If city officials move forward with a new multimillion-dollar police headquarters, it's likely to trigger some red flags about the city's debt level.
A recent City Hall report projects that a $28 million bond issue for a new police headquarters building would cause the city to exceed two of its debt guidelines and would push several more to the edge.
City officials are quick to note that the guidelines are voluntary and don't create a legal limit on the city's ability to issue debt. But the guidelines were created in 2002 to serve as an "early warning mechanism" about when the city's debt levels rise to the point that its credit rating could be downgraded.
A risk, the report states, is that the bond rating agency Moody's could see that the guidelines have been exceeded and lower the city's credit rating. That, in turn, likely would raise the interest rates the city would have to pay on future debt.
"Moody's will do their own calculations," city Finance Director Ed Mullins said. "I can't speak for them, but this might be a factor they would look at. Hopefully, there would be enough other positive factors to offset it."
City Commissioner Bob Schumm said the issue may spur discussion about whether the price tag of a headquarters should drop.
"We don't want to disturb our bond rating," Schumm said. "It is a very good bond rating. I think this pushes the question of what the total cost of the project should be."
Architects have estimated an approximately 100,000-square-foot facility will cost about $28.5 million to build. Land is expected to cost another $1.5 million. The city has already put $1.5 million into its current budget for land costs, although officials are considering sites the city owns.
As proposed, the building would be large enough to accommodate the police department for the next 20 years. But some commissioners, notably Schumm and Commissioner Mike Dever, have questioned whether the city should build a smaller facility that could be easily expanded when the need arises. Architects and some other commissioners have expressed concern that the city may regret building the facility too small.
Commissioners have said any plan to build a new police headquarters almost certainly will be subject to a citywide vote to provide either a sales tax, property tax or a combination of the two to pay for it.
In that case, voters may be asked to decide whether the city's debt levels are within healthy ranges. The new report examined how the city's latest spending projections would fit within the guidelines.
• One guideline seeks to keep the city's debt levels at or below 60 percent of the legal debt limit the state imposes on the city. The police headquarters project is expected to push the debt limits slightly above that threshold. Mullins said he recommends that the city change the guideline by redefining how debt is measured. He recommends removing from the debt calculation the amount of temporary notes the city issues for water and sewer projects. Those notes, when converted to bonds, are backed by water and sewer rates rather than property taxes. Under state law, the city can exclude such debt from it debt limit calculations.
• A guideline that seeks to keep the city's debt total at or below 1.5 percent of its property tax base also is projected to be exceeded. The projected total would increase to 1.83 percent. Mullins notes the city may come back into compliance after 2016, based on how the city's debt is structured. Mullins does not recommend a change in that policy because a change could risk a ratings downgrade from Moody's. Mullins said he could not predict how Moody's would react to the city temporarily exceeding the guideline.
• Another guideline seeks to keep the city's annual debt payments at or below 15 percent of the city's general expenditures. The figure is projected to be at 13.6 percent in 2016.
• The guidelines strive to have debt per capita at or below $1,500 per person. The city's projection for 2015 checks in at $1,417. But the city uses its own population estimates rather than a less aggressive one provided by the U.S. Census Bureau. If the city used the Census Bureau's estimate, the per capita figure would be $1,490.
• The city has a guideline that calls for debt among the city, county and school district to be at a level no greater than 3.5 percent of the combined tax bases of the entities. In the latest projection, the number grows to 3.3 percent, though Mullins said the projections don't account for any future debt being issued by the county or the school district.
The City Hall report did not examine the amount of debt being added through the city's water and sewer system. That debt is paid through water and sewer rates, rather than property taxes, but city officials said they recognized that in many cases ratepayers and taxpayers are one in the same.
City Manager David Corliss said that, even factoring in that additional debt, he thinks the city is well-positioned financially, in part because the city has been able to add to its cash reserves even during times of economic downturn.
"And one of the other key things is whether we feel optimistic about the economy in the future," Corliss said. "I am optimistic. The South Lawrence Trafficway is under construction, and that's continuing to draw additional interest in our community. I'm optimistic about the short-term and long term growth prospects."