Sunday, October 05, 2008

Bonding

Bonding seems to come up frequently here in Waterbury, as if it were the magic solution to many problems. I wonder how many city residents understand what bonding is. For example, the Mayor has proposed purchasing the Wachovia building for $5 million through bonding. What the newspaper left out is the explanation of how much debt the city would accrue in doing this. How many years will it take to pay off the five million and how many millions more will we have to pay in interest?

When a city makes major purchases through bonding, it's not much different than an individual person making major purchases on a credit card. Given what's been going on with the economy recently, it seems like now is a good time to be much more cautious and frugal.

There have been times when I have had to rely on credit cards to cover my necessary expenses. I learned early on that you have to be careful about how much debt you accumulate--if you have too much debt, you won't have enough money to cover your monthly payments. This could happen to Waterbury with bonding. Too much bonding, and we won't have enough money to make our payments and keep up with other expenses. As I understand it, the interest rate paid by the city is variable. Which means monthly payments could get larger. Can a city declare bankruptcy?

The way I see it, there has to be a limit to how much debt Waterbury can afford, while it seems there is no limit to the number of things the city could spend money on. If the Wachovia building can be acquired without increasing the city's expenses (compare the bonding costs to the rent money saved, then factor in the lost taxes and any ongoing maintenance costs), then it's probably a good plan.

3 comments:

Anonymous said...

Credit cards are a bad example. Capital bonding, for a hard asset like a building or a road is the preferred method for governments to construct or acquire assets.

It's more like a mortgage. In this case it would be a fixed rate bond issue -- estimated at about 5.5 percent, with a total payout of $8.3 million over the life of the $5 million issue.

The move to purchase the Wachovia building would save taxpayers about $150,000 per year in rental costs.

The city has a relatively low bonded debt service line item. It's been so low that the rating agencies have been urging the city to start bonding to address infrastructure needs.

Waterbury Girl said...

Informed information!

How much does it cost to heat and cool the Wachovia building? Given that the walls are glass, I would assume that there's a pretty steep A/C bill in the summer and possibly a high heating bill in the winter.

What about building maintenance? The City Hall building suffered greatly from "deferred" maintenance. It's flat out irresponsible to not conduct regular maintenance on a city building. How much will regular maintenance and upkeep of the Wachovia building cost? Is that cost built into the projected expense of purchasing the building? After all, this is something normally paid for by the landlord when you rent.

Anonymous said...

Deferred maintenance was a huge issue in the city for decades, no doubt. That was then.

Even with the utilities, which the city already is paying on Leavenworth Street, the purchase will be revenue positive to the taxpayers.

If it's just a dollar less than what we're paying in rent, the long term value is there because eventually that annual rental expense will disappear.

The complete analysis will be complete shortly.