How healthy is Coralville’s debt?
CORALVILLE– According to the State Treasurer of Iowa’s Outstanding Obligations report of 2012, Coralville is carrying a total of $278.9 million in debt.
It is the state’s third-highest city debt load behind Des Moines ($438 million) and Cedar Rapids ($430 million).
However, that number takes on a more troubling quality when put up against each city’s population, said Kevin O’Brien, area business owner and member of Citizens For Responsible Growth And Taxation (CFRG&T).
“Let’s put the per-capita debt in perspective,” O’Brien said. As a ratio to its population, Coralville’s per capita debt outranks all of Iowa’s largest cities, at $14, 751 per person. The next highest debt-per-capita city is Altoona, at around $7,000 per person, while the average per capita debt across the state is about $1,500.
Coralville’s per capita debt is nearly 10 times that of Des Moines, O’Brien said.
“If you were to extrapolate that out, and give Des Moines the same per capita debt ratio, it would take Des Moines’ debt to $3.8 billion. Do you think if Des Moines was $3.8 billion in debt, no one would be concerned about it?” O’Brien asked.
O’Brien and other members of CFRG&T have publically opposed Coralville’s TIF practices since the Coralville City Council approved a deal with California-based developer Oliver McMillan to financially assist the Von Maur corporation in relocating its anchor department store from the Sycamore Mall in Iowa City to the Iowa River Landing (IRL) in Coralville. Some individual members of the local business community filed legal action to challenge the structure of the deal, but the case came to a standoff when Coralville filed a counter petition claiming the plaintiffs’ lawsuit constituted interference with contract and civil conspiracy; both parties dropped litigation in February of this year.
The high-profile case brought so much attention to the ways cities use TIF for economic development that it spurred action in the Iowa legislature. In 2012, a TIF reform bill created changes to the funding mechanism, including an anti-piracy clause that would prevent cities from luring business away from neighboring areas; prior notification, consultation and public hearings with all the taxing entities impacted by a proposed TIF project; a limit on the diversion of school taxes; and a uniform, detailed reporting process on annual TIF use.
But CFRG&T members remain concerned that reforms in the law do not go far enough to protect taxpayers from poor fiscal decisions.
“Our goal was to bring attention to the fact that this is a significant amount of liability to the taxpayer,” O’Brien said. “I think the real issue is what’s really happening from a financial prospective, and we have yet to find another city in the country– and it may be out there, but we have yet to find it– that has more per-person debt than Coralville has.”
From the city’s perspective, though, the numbers are just one part of a much bigger, more complex picture about what it takes to spur economic development, encourage continued growth and provide the amenities residents want.
The IRL, for example, was a 60-acre brownfield with a hillside that harbored 72,000 gallons of diesel fuel, a coal pile and petroleum-impacted groundwater; its businesses were abandoned warehouses, adult entertainment ventures, trucking firms and recycling yards. The city of Coralville purchased the land, conducted a cleanup, installed public infrastructure and redeveloped it as a mixed-use district. The city also invested $70 million in the Marriott hotel and adjacent 6,000 sq. ft. convention center with a goal to draw future development.
Besides the hotel and conference center, the IRL now sports a University of Iowa ambulatory medical facility, a 100-room extended stay hotel, the 225,000-barrel Backpocket Brewery and several smaller commercial ventures, all of which received financial incentives in some form from the City of Coralville.
So did the publically contentious relocation of the Von Maur department store, an 80,000 sq. ft. venture that will be subsidized with TIF revenues after Coralville extended its urban renewal area from Coral Ridge Mall eastward along Interstate 80 to include the site.
Area business owner Tom Bender said it’s a move that impacts all taxpayers in Johnson County, who should all be concerned.
“The promise of TIF was to revitalize blighted areas, and the payoff to the public is supposed to be a broadened tax base,” Bender said. “What Coralville did with Coral Ridge Mall, by extending the TIF district, is deprived the taxpayers to cash in on all the money that was supposed to be available after the (mall) infrastructure was paid for. But no, they just moved it on down and kept right on going. So as taxpayers, when do we benefit?”
O’Brien said it has a ripple effect beyond individuals.
“Between $9 million and $10 million is being diverted to IRL which should have gone back in the general fund, and half of that mall is in the Clear Creek Amana (CCA) school district. So CCA is funding a project they will never benefit from, and they need to expand. As this area grows, the money they could use for expansion is being funneled to the IRL.”
To add to CFRG&T’s concerns, the city-owned Marriott Hotel is losing the city roughly $4 million each year.
“I think most people are surprised to hear that the city– the taxpayers, actually– own the Marriott, and it has lost millions of dollars,” O’Brien said. “The city acknowledges that the project itself, this $60-plus million project, has lost about $40 million in value since it was built. That’s a concern.”
Coralville City Administrator Kelly Hayworth does not dispute that the Marriott has been a money-losing prospect. But profitability was not the main motivation for building it in the first place, he said last week.
“You really have to look at what the goals of the council were at the time; it goes back to the councils of 1983 and 1985,” Hayworth said. “They identified the need for a conference center as important because the hospitality industry has been a huge part of Coralville’s economy for many years. In the ‘50s and ‘60s, the city’s motto was ‘The hub of hospitality.’ The councils of ‘83 and ’85 looked at establishing a conference center as a major way to support that piece of our economy.”
Therefore, Hayworth explained, the goal was to create a much-needed conference center and boost traffic to restaurants and other hotels in the area. Because a convention center alone would have required huge city subsidies, the Marriott was added– just 286 rooms, clearly not enough space to support such a large exhibition and meeting space, Hayworth noted– to generate at least some additional revenue, but the hotel itself was not conceived as a money-making proposition.
“So when the goal of that facility is to help other businesses in the area, there are several measures you have to look at in regards to its success, and specifically breaking even does not cover all of those,” Hayworth said.
In fact, cities own and operate many facilities that similarly do not generate enough revenues to be self-sustaining: in Coralville’s case, it also owns Brown Deer Golf Club, and it, too, loses thousands of taxpayer dollars each year.
“The golf course was a community amenity that, at that particular time, the council and parks and recreation commission thought was very good. To say it’s not an asset to the community because it doesn’t balance each year is wrong; we have lots of community amenities– the library, community center, pool– all kinds of facilities that the expectation is not that they are going to make money or break even.”
Further, Hayworth said, if the city had not accepted the operation of Brown Deer, the private property owner who gifted the golf course to the city would have sold it for other development.
“There was a major part of the community that would have been hugely impacted if the city had not taken it on,” said Hayworth.
In addition to such background details that support the city’s financial decisions, Coralville’s Director of Finance Tony Roetlin said there are also different ways to apply raw numbers to determine facts like how much money the hotel loses annually.
“The key distinction is whether we are talking about a cash basis or accrual accounting. As of this June 30, we are very close, on a cash basis, to breaking even on the hotel,” Roetlin said. “If you take FY2013 revenues minus expenditures, then pay the debt service, we are at about $75,000 that had to be subsidized. I’m not saying that’s a small number, but when you compare it to the overall project, it’s 2.5 percent of the debt service. That’s really not that big a number, and it’s definitely an improvement over several years ago.
“There a lot of different industries, including municipal finance, where the difference between cash basis and accrual accounting paint a very different picture,” Roetlin added.
As for the city’s per capita debt, Hayworth said some might be surprised to learn the city also has the highest commercial base value per capita in the state as well, tied with West Des Moines, and Coralville’s hotel/motel tax revenue intake is fifth in the state, which all translates to a picture of a strong, vibrant economy.
So while Hayworth agrees CFRG&T’s numbers about Coralville’s debt “are not wrong,” getting everybody to understand what accrual accounting is and what other factors are involved in measuring the city’s economic health is pretty difficult, he said. “You have to have a good explanation to understand fully what is being said, and that is difficult to do, whether a CPA or the city of Coralville.”
CFRG&T members have repeatedly sought those detailed explanations from city officials, chiefly in the form of financial documents, but have not been accommodated, said Coralville businessman Chuck Skogstad.
“It was disappointing in that, not only was it public that they weren’t going to have any discussion with us, but when we went as individuals to some of the city council people or administrators, the lawsuit squelched those conversations,” said Skogstad.
Even since the lawsuit was dropped on both sides, no communication between the CFRG&T members and the City of Coralville has transpired, Bender added.
“We have pursued more documents under open records requests,” he said. “We have asked for these documents, but nothing has been provided. It’s hard for them to argue why they have not released these records.”
Bender said the lack of transparency is concerning, because it mirrors the behavior of communities that have experienced serious financial hardship. “One of them is the idea that you would use a litigation against the citizens, which I learned is called a slap suit, and that’s what communities do when they have something to hide.”
O’Brien emphasized that the citizen’s group is not suggesting Coralville could go bankrupt.
“There is a statute that cities cannot file for bankruptcy, and the reason the state has that is because they don’t want to blemish their credit rating for the state. So what would happen is, the state and county would intervene. If there comes a point where the debt can’t be repaid, statewide taxpayers– which is what they are doing now, because the money is being diverted and there’s a statewide (school) backfill, so every other city and the state is essentially paying for IRL– but when the city can’t borrow any more money, state and county dollars would be pumped into this.”
But Hayworth insists the City of Coralville is able, and will continue to be able, to repay its debt in a timely manner.
“We do have a very high debt; the council has made key decisions they felt were important for community amenities, things that were important for continued growth of community; and our finances will support paying 100 percent of that debt,” Hayworth said. “There is no question in my mind that every bit of that debt, whether you agree it is high or low, it can be paid back. We have never, ever missed a debt payment.”
Roetlin said the city’s debt repayment schedule is very specific, with about half the current debt to be repaid in the next six or seven years.
“There can be misconception about municipal borrowing, and the analogy of a credit card is not applicable,” said Roetlin. “With my credit card, I could buy something and just decide when I want to pay it back. State law, federal tax code provision and, frankly, the decision making process of the municipal finance end of the capital markets preclude that kind of approach (for cities).”
When a city incurs debt, public hearings must take place, and legislative limits must be followed, he added. “Coralville’s practice has been that the borrowing document state firmly what the date of principal repayment is, what the rate of interest is. There is no flexibility. It’s not like you can leave the details of repayment to decide later. They have to be decided up front to get the debt legally issued,” Roetlin said.
Roetlin pointed to documents available on the city’s website that outline Coralville’s long-term plan to repay its debt. It’s a fairly aggressive repayment schedule, he said, and clearly shows the paydown on each category of debt.
CFRG&T members don’t buy it; the group has asked different financial experts to examine the city’s the figures, and they don’t add up, Skogstad said.
“We have CPAs that look at how this is supposed to be paid back, and we think we know from a businessman’s standpoint what this entire financial package looks like, but they are trying to mislead with embarrassingly simple charts and graphs. All it takes is for someone to dig into their audit, look at the structure of the deals we’d like to have more information on, and (it seems) that’s one of the reasons they are not obliging us. They fear there are things there that are not appropriate. There is no real plan.”
Still, Skogstad said, the citizens’ group does not intend to be confrontational.
“We are not here to prove them wrong; we are here for them to show us how they are right,” he said.
Roetlin and Hayworth both said city officials are more than willing to sit down at a table to comb through the details of Coralville’s financial picture with anyone who asks, but even that would not guarantee ultimate accord.
“We are certainly wiling to help people gain transparency,” said Roetlin. “The easiest conversation to have is a fact-based conversation, but then people with different goals and views will sometimes depart, and that’s okay; it beats apathy.”
Goals and views will vary, Roetlin added, because interests vary, but the city’s responsibility is to everyone.
“It’s important to recognize we have a lot of constituencies, and some are more vocal than others,” said Roetlin. “And while I think we are happy to talk about anything, we need to make sure we are serving all of our citizens.”
Next week: a look at the city’s practice of providing incentives to businesses.