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Town of Grand Island budget: Interest rate spike driving factor behind tax cap override

Sat, Dec 3rd 2022 07:00 am

By Alice Gerard

The proposed town tax cap override in the 2023 budget is being driven by a large increase in interest rates on $24 million borrowed by the town over a number of years. This includes $12 million borrowed to eliminate sanitary sewer overflows, explained Pam Barton, supervising accountant for the Town of Grand Island.

The municipality has “borrowed over the years for the order on consent with the state Department of Environmental Conservation (DEC). We’ve done probably $12 million in improvements over the last seven or eight or nine years. It’s been a continuing process,” Barton said.

The goal of the consent order is to eliminate sanitary sewer overflows, said Supervisor John Whitney in a Dispatch article dated Oct. 29. “What occurs when we have weather events is water infiltrates into the town’s sanitary sewer system, either by leaking pipes or leaking maintenance holes in cross connections between storm and sanitary sewers, sump pumps, or down spouts into house laterals. We have been tasked with eliminating those issues, and it has taken a lot of time and money, probably up to $2 million per year of town dollars.”

“We have made great progress of reducing sanitary sewer overflows,” Whitney added. “When we began, we had eight points of overflow in the town, and we have now reduced that to four.”

To pay for this reduction in sanitary sewer overflows, the town has borrowed funds in the form of bond anticipation notes, a form of short-term financing.

“Going out and borrowing on a municipal bond is a fairly expensive and somewhat lengthy process,” Barton said. “Ratings are involved and more lawyer fees and financial advisers and whatnot. What municipalities tend to do is a few years of bond anticipation notes. Then, when you’re ready, you convert them into a bond. Bond anticipation notes have a considerably lower interest rate than bonds. The rate is only good for one year.

“It sounds almost like a revolving credit, and it’s a little like that. We might borrow $10 million in year one and, in year two, we might have some more projects and now we’re up to $12 million. In year three, maybe we borrowed more than we needed for something in year one. We pay a little more of that down. You can use it like revolving credit, because nothing is permanent on it yet. In an actual bond, the principal is set, and it can’t be changed. We’ve done bond anticipation notes the whole 22 years I’ve been here.”

She said, “Interest rates were fantastic up until this year. Last year, in this time, we closed on our bond anticipation note of $27 million. We were paying an interest rate of .19%. So, not even a fifth of a percent. The interest rate repayment cost on that $27 million was $52,000. We borrowed $27 million for, in theory, a year, and all we had to pay them back was $52,000. It’s all a one-year deal. We’ve been doing this for my whole career and before.

“This year, we had some projects that were closed. We’re done paying on them. We had only one new project. We didn’t add a big water project, because of what we were anticipating was going to happen. All we did was some paving, and we borrowed $24 million. In theory, we paid down $3 million. The $3 million we didn’t have to pay for anymore. They were done, closed. So, our new borrowing is $24 million. Our interest rate is 2.88%.”

The expense of borrowing this money is reflected in the sewer tax. According to Barton, “There is a local law for sewer debt, for example. It says, ‘sewer tax equals sewer debt.’ ”

That increase in interest rates, from .19% to 2.88%, was the result of several economic factors, including the Federal Reserve raising interest rates “five or six times already, which is unheard of. Every time they raise interest rates, it trickles down to everything else,” Barton said. “It’s not tied, dollar for dollar, but, as a matter of fact, we scrambled, and it was helpful that I have been training Korin Frantz (the town’s chief accountant). Between the two of us, we got everything we needed a week early.”

According to Frantz, taking care of the town’s financing ahead of schedule saved the town $263,000 in increased interest rates.

“Over a quarter of a million dollars just by rushing everything along and getting the lawyers and accountants and everyone lined up a week early, because the interest rates went up again in just that week,” she said. “We’re working our butts off to do everything we can to save the taxpayers of Grand Island as much money as possible. But it is what it is, and the rates are what they are.”

The unanticipated increase in interest rates has resulted in the necessity for the town to pay more on interest than is permitted under the tax cap.

“Each year, when I pay a little of this down, we refinance to a new BAN,” Barton said. “We have a new principal amount and a new interest rate. And that’s due the next year. This is solely the balance of the sewer projects with the Dec. 31 balance. Of the $24 million we’re borrowing, $13.7 million is sewer. So, of that $690,000 interest, half of that or $345,000 is for sewer. We’ve got to pay that next year, and that’s just interest on debt.

“The way the tax cap works is that, in any given year, you have the previous year’s tax levy as your base. And then, you are not to, without following some rules, go over what’s allowed. That total was $11,236,277. So, that’s our starting point for the tax cap. The first thing that affects what you can raise in taxes is the growth factor. Every town, village, city and county has a growth factor, and it’s decided by the state. The Town of Grand Island’s growth factor this year is less than half of a percent, at .44. I believe that the growth factor is affected by how well we stay up to date on our assessed valuation, on our revals. We just did a reval a year ago. Already, we’re down to only 90%, so the state whacked 10% off our valuation.

“We went from $11,236,277 (2022 tax levy) to $11,511.000 (proposed 2023 tax levy). It’s not a whole lot of space and, as a matter of fact, it’s only 2.45%, which might seem like a lot of money, but it’s only a little bit over $200,000.

“The Town of Grand Island has $26 million in budgets, and all we’re going to get extra, if you will, is a little over $200,000 across all those funds to do everything we do. Increased cost in fuel. People get raises. Other utilities go up. The cost of materials has gone crazy ever since COVID. All we’re going to get (as an increase) is $200,000 on a $27 million budget. That’s a lot of money, but that’s tax cap.”

“So, therefore, we have suggested, and the supervisor agreed, that we need to exceed the tax cap. The sole reason is the rates on our $24 million short-term financing and the increased cost to the sewer portion of that, because that is more than half of that financing. It’s debt that we’ve had over the last 10 years and are paying on it, and we still have 10 more years to pay. Perhaps in a year or so, those interest rates will level out a bit. But it’s necessary.”

The anticipated increase in sewer and water tax for the average household in a sewer district is $79.83. For homes outside of the sewer district, the anticipated increase will be $21.

“This is a one-year rate,” Barton said. “My hope is, a year from now, things will calm down. It’s not just the fed lowering rates. It’s the economy in general calming down.”

Next: How the anticipated increase in sewer and water tax was calculated, as well as more information about the town’s 2023 budget.

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