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Published Sat, Feb 09, 2013 08:00 PM
Modified Mon, Feb 11, 2013 09:57 AM

Town discusses how to deal with debt

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- ajames@newsobserver.com

CLAYTON -- After making several large investments in recent years, the town is clamping down on its debt and limiting new big expenses.

At last week’s council meeting, a financial analyst made a presentation to the council about how the town is managing its debt.

Ted Cole, with Davenport & Company, also compared the town’s debt ratings with other towns.

Cole’s presentation was intended to provide a road map for the town to use to decide which projects it can pursue in the future.

Right now, the town has $23.5 million in debt. That equals $1,537 in debt per person for 2012. The rate at which the town is paying off its debt puts it in the same category as Hillsborough, Zebulon, and Knightdale, according to Cole. That’s signficant, because all three of those towns have smaller populations on which to rely for debt payments.

“The debt is currently paying off at a pretty rapid rate,” said Cole.

The town council decided last year to bring in a financial analyst to offer advice on how to handle future projects. Council members also want to improve the town’s bond rating. The town undertook several costly projects in recent years. That includes the building of the Clayton Center, the $11 million law enforcement center and the street improvement project. During that time, there was also less revenue coming in to the town’s coffers due to the recession. The combination of higher expenses and lower revenue has put the town in a position to focus on paying off the debt. Town leaders also want to avoid taking on large amounts of debt in the next couple years.

Town policy states the town’s debt can only take up 15 percent of its general fund budget. The policies also require the town to pay off at least 55 percent of the principal on an investment within 10 years of making the borrowing the money.. According to the analyst, the town is at the edge of both of these limits. The debt is currently taking up about 16 percent of the budget.

Cole said he would not see a big problem with the town exceeding those limits when it comes time to apply for future bonds. But he said the overages would require some explanation to bondhouses. The explanation, he said, would be the recessionary budget cuts, and expensive capital projects.

But Town Manager Steve Biggs said the town wants to come in under its self-imposed limits so that it can improve its bond, or credit, ratings. That would mean managing the debt so that it would take up less than 15 percent of the budget.

“We are not trying to look at our maximum debt capacity.” Biggs told council members. “We want to look at continuing to improve on that over the next several years.”

He reminded the council that the purpose of the discussion was to find ways to improve its financial standing. Determining how to manage the debt the town currently has also helps them determine how much new debt they can take on. The town is currently paying $300,000 in rolling stock needs each year, which goes toward needs such as replacing aging vehicles. According to Cole, the town has the ability to pay for $1.325 millionin rolling stock needs from 2014-2018.

Cole provided a couple of options for the town to use as road maps going forward. Biggs recommended to the council that they use the pay-as-you-go plan. With that plan, the town would not incur any new debt. “The pay-as-we-go for rolling stock option gives us the most advantage,” Biggs said. “With the pay-as-you-go plan, all of the ratios that we are evaluated on look better and it’s essentially cost-neutral to us in the long term..”

In a related action, the council approved a refinancing plan that will save more than $90,000 on the Clayton Center project. The refinancing options that Cole presented for paying back the Law Enforcement Center and Parks bond debt could save another $700,000 or more over the life of the loans.

James: 919-553-7234

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