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City of Mitchell's debt grows to $38 million

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news Mitchell, 57301
Mitchell South Dakota 120 South Lawler 57301

The city of Mitchell’s debt will be a projected $3.2 million higher this year compared to last year, but that hasn’t fazed city officials, who say the city remains in a strong financial position.

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The city’s total debt, excluding interest, is projected to be $37.62 million at the end of 2013, according to a one-page report on the city’s debt presented at the annual budget hearings in August.

“Because of the projects we have on the table and the money we’re borrowing to pay for those projects, you might assume that the city is in a financial hole,” said Mayor Ken Tracy. “But that’s not the case.”

The city’s debt includes $27.7 million in bonds and loans, including the $13.9 million in bonds the city sold in December and January to pay for the second sheet of ice at the Mitchell Activities Center, the expan- sion and renovation of the Corn Palace, the renovation of the Mitchell Public Library and the construction of a new city hall.

“We have been, I think, very fiscally responsible in how we’re planning for the future,” Tracy said.

In 2000, the city took on $8.2 million in debt to bring water to the city through a Missouri River pipeline. Voters agreed to raise the city’s debt limit for the project. The South Dakota Constitution limits the amount of debt cities can take on to 5 percent of their assessed valuation, unless local voters agree to increase the limit to 10 percent for a water or sewer project.

There will be about $4.8 million left to pay, excluding interest, on the pipeline debt by the end of 2013, along with $1.77 million left to pay on a state loan also used to fund the project.

At the end of the year, the city expects to owe $1.77 million for the Outdoor Aquatic Center at Hitchcock Park, originally a $3.65 million debt from 2004, and $1.55 million for the new water tower directly north of Interstate 90, originally a $1.66 million debt from 2009.

The debt for the Outdoor Aquatic Center is technically an annual appropriation that must be approved each year by the Mitchell City Council, said Finance Officer Marilyn Wilson, while the water tower debt is paid with revenue from the Public Works Department. In both instances, that means the debts do not count against the 5 percent debt limit, Wilson said.

“We’ve done a really good job of paying off debt in the last few years,” Wilson said. “We were in a good position to issue bonds for our community projects.”

Wilson said the city may take action soon to pay off $450,000 in debt remaining on a $1.4 million bond issued in 2003 for a remodel of the Corn Palace lobby. Other than that, the city will simply continue to make regular payments on its debt.

Wilson, who said she is comfortable with the city’s current debt level, noted the city’s debt limit constantly changes as the city makes payments.

The city’s total debt within the 5 percent debt limit at the end of 2012 was $23.65 million. That excludes the debt for the Missouri River pipeline, Outdoor Aquatic Center and water tower, all of which do not count against that limit.

Mitchell’s total debt within the 5 percent debt limit is comparable to the 5-percent-limit debt reported in other, similar sized cities in South Dakota. At the end of 2012, debt totaled $24.84 million in Brookings, $11.98 million in Huron, $26.51 million in Spearfish, $22.99 million in Vermillion, $15.85 million in Watertown and $19.14 million in Yankton.

Expert opinion

For cities and other public entities, taking on debt is a way to spread costs over generations of taxpayers, according to Bart Hildreth, editor of the Municipal Finance Journal and a professor at Georgia State University in Atlanta.

“The question for government is: What is the willingness of the citizens to fund government and to fund the infrastructure that they need?” he said.

By borrowing money, public entities can pay off debt using revenue generated during the life of whatever asset they bought, Hildreth said.

“It spreads that cost over all the users over all those years,” he said.

Hildreth, who examined Mitchell’s one-page budget report for The Daily Republic, noted that Mitchell has recently cut into its debt capacity. What impact that might have, he said, is difficult to say.

“It does restrict borrowing in the short term,” he said.

If Mitchell were hit with a catastrophe that required major infrastructure repairs, the city may be pressed to find the money.

“Just looking at the debt capacity, you might not have it,” he said.

The city’s remaining debt capacity — the amount of additional debt the city is allowed to take on based on the 5 percent debt limit — was $9.54 million at the end of 2012, but is projected to fall to $6.53 million by the end of this year.

At that level, Tracy said, the city has an adequate reserve in case of emergency or some other unexpected expense.

“We certainly hope there is no emergency that requires the city to spend $6 million,” he said.

Before the $13.9 million in bonds for the four major projects were sold in December and January, the city’s debt capacity was nearly $20 million, according to Tracy.

Exactly how much debt cities are willing to take on varies.

“It’s a community preference,” Hildreth said.

With interest rates at historically low levels recently, Hildreth said many cities across the country have been eager to borrow money to move ahead with projects.

“It’s good to borrow in low interest rate periods and then get projects in place as the community continues to grow,” he said.

TIFs

Approximately $10.2 million of the city’s projected debt can be attributed to tax increment financing districts within the city.

In a TIF district, financing is issued for infrastructure improvements to aid development. New taxes from construction in the district — or higher taxes, in some cases, because of improvements made to existing properties in the district — are then captured for an agreed upon period of time to pay off the initial financing.

TIFs are typically financed in one of two ways. Either a private developer can secure a loan from a lender and use the new and higher taxes to pay off the loan, or the city can finance the TIF on its own and use the taxes to pay off its debt.

In both cases, the TIF debt counts against the city’s 5 percent debt limit, according to Toby Morris, of Pierre and senior vice president of Dougherty & Co., an investment banking firm.

“For accounting purposes, that’s how it has to be,” he said.

Whoever secured the initial financing — either the developer or the city — is at risk if the TIF fails, Morris said.

“If they guaranteed it, then it is their responsibility,” he said.

In Mitchell, TIFs have been used to finance infrastructure improvements around new businesses and housing developments. Most recently, the Mitchell City Council approved the creation of a $200,000 TIF district to pay for a drainage project near a new Morris Equipment dealership.

Morris Inc., a Fort Pierre-based company that owns Morris Equipment, secured financing for the TIF, which means the city is technically not at risk.

Tracy said TIFs have been a useful method to encourage private development in the city.

“I think there are a lot of projects that wouldn’t have gone forward without the TIFs,” he said.

The city has 14 outstanding TIFs, according to the report on the city’s debt. With that many, the city may have limited its ability to take on additional TIFs in the near future, Tracy said.

Many cities have been proactively using TIFs in an attempt to attract private development, according to Hildreth.

“A lot of cities have been leading rather than lagging,” Hildreth said. “They find if they make the improvements in the area, it might spur private dollars and private development.”

One step at a time

As time goes on, Tracy said, the city will continue pursuing projects officials feel are worthwhile.

“I think we always need to be somewhat conservative,” he said, “but we still have a wish list.”

Even now, the city is hoping to fund improvements to the Rec Center and is looking into the construction of an indoor swimming pool, Tracy said.

This summer, Mitchell Main Street & Beyond unveiled a $5.8 million vision to transform the streetscape in the city’s historic downtown area. Even with other ongoing projects, city officials have expressed interest in the streetscape.

The plan, which encompasses 32 acres in downtown Mitchell, would add curb extensions, with trees and native landscaping, on Main Street from First Avenue to Sixth Avenue. Other proposed additions on Main Street include benches, sitting walls, bike racks, information kiosks and public art displays.

A downtown plaza, which would be located at the south end of Main Street, is also included in the plan. It could include an outdoor amphitheater and a natural playground, plus water features, public art displays and seating areas.

“We have other things that we want to take on in the years to come, but I guess we’ll take it one step at a time,” Tracy said.

LaMoine Torgerson, a retired banker and Mitchell resident, hopes the debt the city has taken on will be used wisely.

“I think for Mitchell to be progressive, it’s going to take some funds,” Torgerson said. “We’ve been stagnant for a lot of years.”

Torgerson said he is tired of seeing the city simply talk about an issue, and then study it for a long time without taking any meaningful action.

“Let’s get something done,” he said. “We need to do some things to improve and I think they’re on the right track.”

Kenneth Steichen, a retired farmer and Mitchell resident, feels the projects may be overly ambitious in a city the size of Mitchell, which has about 15,000 residents.

“I think that they’re trying to make a big city out of a small town,” he said.

Still, Steichen said he is fine with the projects as long as taxes are not increased.

“I don’t care as long as they don’t charge me,” he said. “If it’s going to cost more taxes, then no.”

Tracy said he doesn’t foresee the city taking on any additional debt in the near future.

But with four ongoing projects and potential for more in the future, managing the city’s debt will be an ongoing process.

“There will probably never be a time when there aren’t more requests for city funds than there is money available,” Tracy said.

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