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Hogsett's plan to issue debt for road, bridge repairs draws some concern

August 13, 2018

Indianapolis Mayor Joe Hogsett’s plan to have the city take on additional debt to dig its way out of infrastructure funding problems has early support from both political parties, but experts say it could carry some financial risks.

Hogsett, in introducing the 2019 city budget on Monday night to the Indianapolis City-County Council, presented a plan to issue $120 million worth of debt over the next four years to help fix the city’s aging roads and bridges, some of which Hogsett said were “built at a time when automobile travel was an emerging technology.”

“There are roadways that haven't had meaningful repair or replacement since before I was born,” he said.

Before coming up for approval by the full council in October, Hogsett’s budget will need to be approved first by several council committees. The bond issuance proposal will need to be approved both by the council’s Public Works Committee and the full council.

If the plan is eventually approved, citizens should expect to see “major increases” in spending on bridges, sidewalks and streets, Department of Public Works Director Dan Parker said.

But Hogsett’s plan to bond against future gas tax revenue increases could eventually harm the city’s credit rating if the road maintenance projects don’t hold up over time, an Indiana University public finance expert said. And a Purdue University economist expressed to IBJ “some concern” that future gas tax revenue would be unreliable because of the increased advent of fuel-efficient electric and hybrid cars.

City officials believe the gas tax increase passed by the Indiana Legislature last year will put $361 million into the city’s coffers over the next four years.

The gas tax hike, which lawmakers raised from 18 cents per gallon to 28 cents per gallon in 2017, is slated to increase by a maximum of 1 cent per gallon per year through 2024. The city plans to bond against the per-gallon annual increase.

Ratings agencies like Moody’s and Standard & Poor's will likely “care a lot” about the city’s decision to increase its debt level, said IU School of Public and Environmental Affairs associate professor Craig Johnson, and will eventually “determine if at all it should impact their credit rating.”

The city could experience a credit downgrade if ratings agencies determine the city’s debt-to-assets ratio is too high or that the use of debt to pay for certain infrastructure projects is inappropriate.

“When you take on substantial additional debt, you may end up being downgraded,” Johnson said, especially “if you’re on the borderline of that threshold.”

The city of Indianapolis currently has a AAA rating from Moody’s but it has a negative outlook.

“AAA is our highest rating but the negative outlook indicates some downward pressure and a higher chance of a downgrade over the next year or two,” said David Jacobson, Moody’s vice president of communications for its public finance group.

Jacobson said the agency doesn’t comment on proposed public initiatives until they are finalized, but noted it “is not uncommon for municipalities to issue debt for infrastructure needs and capital improvements.”

Johnson said issuing debt to pay for infrastructure could be appropriate in same cases, especially because “the city’s road infrastructure probably needs a major overhaul.”

“In general, if the intention is to rebuild it, long-term debt is fine,” Johnson said. “If it’s just small maintenance or repairs, generally, that should come out of current revenues.”

City Controller Fady Qaddoura said the city does not expect a change in the bond rating on its transportation debt issuance. After the issuance of the proposed bonds, the revenue streams available for the repayment of Indy Roads bonds, known as the debt service coverage ratio, are expected to be five times the amount of the required payments.

The projected annual debt service on the bonds is expected to be $8.8 million, Qaddoura told IBJ.

“Our coverage substantially exceeds our bond covenants and we have a very healthy fund balance in transportation,” he said in an email.

DPW's Parker said the revenue from bonding would have to be spent on projects with long shelf lives, as opposed to traditional resurfacing that wears away in a manner of years.

“My two favorite bridges [in Indianapolis] were built in 1905 and we are just now replacing them,” Parker said. “Some of the concrete streets that we’re going to repair in this program were put in in World War II and have not been touched since. Concrete and bridges clearly last.”

Purdue University economist Larry DeBoer told IBJ he would “hope the repayment period on the bond isn’t much longer than the useful life of the [projects].”

“After the bond is paid off, the revenue can then be used for maintenance and repair,” DeBoer said. “If maintenance is needed too soon then you’re doubling up on the use of the revenue.”

Johnson and DeBoer also expressed concern about relying on gas tax revenue to increase in the future, even though the tax rate will rise through 2024.

“You’d be paying back this debt from anywhere over 15 to 20 years, but you need to know the gas tax is going to cover that,” Johnson said. “The question is, how reliable are the estimates? There’s going to be a substantial amount of uncertainty. You shouldn’t borrow to the hilt of that tax.”

Qaddoura said city officials were “extremely cautious” in calculating the plan, considering possible volatility.

Electric cars are becoming more common, DeBoer pointed out. And Johnson said cars are becoming more fuel-efficient, which has already reduced that amount of gas drivers are buying.

“But if someone’s willing to buy the bond at a reasonable yield, presumably they’re confident in the revenue source,” DeBoer told IBJ.

The plan

The increased transportation funding would result in about $130 million spent on roads and bridges in 2019, about $30 million more than is slated to be spent this year. The increase in spending equals the amount of bond proceeds that will be used.

The largest amount of bond proceeds planned to be spent in a single year—$40 million—is scheduled for 2020.

Then, in 2021 and 2022, the city plans to use $25 million from bond proceeds each year.

Scott Kreider, a Republican councilor who will be co-sponsoring the bonding plan, said one exciting part of the transportation plan is that it will invest $35 million in curbs and sidewalks from 2019 to 2022 because of “the lack of connectivity we have in certain segments of our population that do a lot of walking, whether they want to do walking or they have to do walking.”

Right now, the lack of sidewalks in some areas is “not safe, comfortable or welcoming to them,” Kreider said.

“If we’re going to be a welcoming city, we need to look like it and act like it,” he said. “We’ve got to fix these things. Rather than sitting around and complaining or blaming Democrats or Republicans, we need to get serious, roll up our sleeves and try to make an impact.”

Overall, the budget, which was officially introduced at Monday night's meeting and is slated for approval in October, plans to spend $1.17 billion and take in a similar amount of revenue. An approximately $400,000 surplus is projected.

The budget also funds hiring a class of at least 120 police offers, a class of at least 80 firefighters, new analysis IT software for the police department, expanded early-voting sites for the 2019 primary and midterm elections, a $2 million scholarship fund for people pursuing high-quality degrees or certificates, four more animal care and control officers, among other items.

The city’s expected revenue includes an increase of $19 million in income tax collections and a $4 million increase in property tax collections.

“Obviously we’re incredibly encouraged by the state of the local economy and the payoffs we’re starting to see about getting individuals at a higher wage to live in Indianapolis, not just work here,” said Chief of Staff Thomas Cook.

But he also said efficiency continues to be a priority. The city has for the most part “continued to hold the line on spending,” Cook said, save for “cost-of-living adjustments” to many city departments.

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