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How much debt should a city risk? CEDAR RA

Published: Monday, May 21, 2012 11:36 a.m. CDT

CEDAR RAPIDS — Little gets more talk on the national political stage than debt.

Republicans call for spending cuts by the federal government, while opposing tax increases on wealthier Americans. Democrats support such revenue-increasing taxes, while opposing spending cuts.

“The federal government is using debt to pay for operating expenses in a lot of cases,” said Cedar Rapids City Council member Kris Gulick, an accountant and business consultant and current president of the Iowa League of Cities. “That would be like us going out to borrow money for the Police Department to operate. That’s a bad business practice, but that’s what the federal government is doing.

“And it hurts from a perception standpoint. The perception is that all debt is bad.”

In Iowa, cities must balance their annual budgets, and little or none of the borrowing they do pays for the operation of government.

Instead, municipal debt helps cities invest in streets, bridges, water and sewage plants and other capital improvement projects, plus economic-development incentives and big-ticket equipment purchases like firetrucks.

Brian Richman offers a caution to cities, though.

He’s a former financial adviser for cities and other public entities, mostly in California, and now a lecturer and director of the Hawkinson Institute of Business Finance at the University of Iowa’s Henry B. Tippie College of Business.

Cities, he said, are no different from people when it comes to debt. Some are reasonable and responsible, others more speculative. By speculative, he said, he means communities that have invested in what can be reasonable-sounding economic development projects that come with the hope of increasing a city’s opportunities and tax base.

“You pick up the newspaper here, and you don’t have to read very long to see that there are governments in Iowa that tend to take on riskier projects,” said Richman, not specifying any one government.

“Economic development projects — whether it’s a hotel or a convention center or a stadium or an industrial park, whatever — are inherently more speculative and therefore somewhat more risky than what are called essential services — water, sewer, roads, schools,” he adds.

Where the line is between safety and speculation, Richman said, is hard to know.

“Those are really policy decisions,” Richman said. “How much debt is a particular city comfortable with? And more importantly, what is the vision for the city? What is the citizenry’s vision? What is the City Council’s vision? What do they want the city to be? And when you know where you want to be, how do you get there and how do you pay for it? Then the question is, how much can you actually afford?”

Richman points to the Iowa State Treasurer’s website, which shows public debt in Iowa is up 6.6 percent in the past year and up in nearly every category — city, county, community college, school district — over the past five years.

He said the trend could mean good growth in those local communities, so government has needed to provide more services, but it also could show how local jurisdictions have turned to borrowing to fill gaps in their budgets.

A city that used to buy police cars each year with annual revenues, for instance, may now borrow to buy them, he said.

He adds that cities also have pension and related obligations, which are an additional kind of debt.

A look at the financial reports of some of Iowa’s largest cities shows that debt is on the rise. For the fiscal year that ended June 30, 2011, overall outstanding debt for Des Moines rose 10.3 percent; Davenport, 13.5 percent; Dubuque, 43.2 percent; and Sioux City, 16.6 percent.

In Cedar Rapids, the total outstanding debt increased by 3.2 percent, while Iowa City’s debt rose 1.4 percent and Waterloo’s dropped by 1.2 percent.

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(c)2012 The Gazette (Cedar Rapids, Iowa)

Distributed by MCT Information Services

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