"Lewisville is drowning in debt. Over $160 million dollars in debt (view the CAFR - City [sic] Annual Financial Report). "
In this post, we'll look at the claim that Lewisville has "Over $160 million dollars in debt". In another post, we'll examine another part of his claim.
This isn't the first time that Hill has made such claims about the city's debt, having run twice on that battle cry before. What is new is the amount that he says Lewisville is "drowning" from. In his December 2011 election, Hill said the city was over $200 million in debt - a figure that we dismissed here.
We contacted Hill to see how he derived his numbers, and he responded as follows:
"On page 74 [of the CAFR] you find $58 million with $13 million in debt services. Page 75 another $41 million. Page 77 another $32 million. And another $7 million on the same page.
Add these up with their interest payments you get $187 million. "
Here's a summary of Lewisville's debt, the way that Steve Hill sees it*:
*We adjusted the Revenue Bonds amount to list the total principal amount from CAFR of $45.8 million to be consistent with his assertion of $187 million in total debt.
Our verdict: False.Hill includes debt that should not be included, and considers future interest to be part of debt - a practice that is not typical and that overstates the amount. Even if you included all of the debt that Hill includes, the total principal is only $144.1 million.
Finding Debt The place to look, if you want to find out how much debt the city has, is the Comprehensive Annual Financial Report. It is put together once a year by City staff, and audited by an outside auditor. In Lewisville's case, this is the Certified Public Accounting firm, Grant Thornton. The report is a snapshot of the end of the Fiscal Year for which it was prepared. In this case, we use FY 2011, which ended September 30th, 2011.
Hill was correct to use the CAFR's Long Term Liabilities section as a place to start. But lumping all the numbers together ignores that the debts have different owners, different payers, and different obligations under the law.
For the property owners of Lewisville at large, we are really only obligated to one major type of debt, which is General Obligation (GO) debt, supported by taxes. This is a type of debt that is repaid only by property taxes, and it has its own property tax rate, called the Interest and Sinking Fund (I&S) rate. In Lewisville, our I&S tax rate is $0.11732 per $100 valuation per year - about $176 annually for a $150,000 home.
Here is a breakdown of our GO Debt:
The total amount owed is $58,235,000, as of 9/30/2011. If we take until 2025 to pay them off according to schedule, we will have paid $71,456,742. But it's not proper to say that you owe that much, because that is the future value. Presumably if the city received a windfall, it could pay off these bonds for around $58 million, give or take for bond premiums and discounts, depending on market conditions.
This debt is in the form of bonds, sold by the City in the financial markets. The city receives money up front, which it uses to fund major projects like streets and facilities. Much in the same way that you would borrow money to buy a house, which will last for many years, the city borrows this money at very low interest rates ranging from 0.35% - 5.25% so that it can do the capital project, and the residents who actually get to use the new streets or facility will pay on the debt for it. Unlike our Federal government, the City is prohibited by law from borrowing money for day-to-day operations, and must have a balanced budget each year.
The City borrows money for generally 16 year terms paying off the same amount each year until they are retired. After 16 years, the residents still get to enjoy the amenity or improvements they bought, since streets and facilities generally have a much longer lifespan than that. In this way, the use of credit is not only responsible, but it is more fair to the taxpayers, because they only pay for what they benefit from. If instead, the City were to save up tax dollars from today's taxpayers into a savings account for many years, then buy the improvements or amenities, then today's taxpayers might die or move away before the project was done.
The other interesting aspect of GO bonds is that they require voter approval. Generally, when citizens and the Council feel that projects need to be done, voters are given a proposition to approve bond authority for a given amount and a given purpose or purposes. Citizens are told at the time that authorizing the bonds will increase their taxes, up to a certain maximum rate that the Council agrees not to exceed. Citizens vote for or against, and if it passes, then the Council is granted the authority to sell those bonds and do the projects.
Other Types of Debt There are several other types of debt that are listed in the CAFR, but which are generally not taken in consideration when talking about the general debt level of the city, because increasing or reducing them does not affect the taxpayer.
- Water and Sewer Revenue Bonds - Component Unit Certificates of Obligation
Water and Sewer Revenue Bonds There are revenue bonds, which the City's water and sewer business issues to pay for long-term improvements, such as major water delivery infrastructure, and water treatment plants. These have a long lifespan, and are very expensive, so it makes sense to pay them out over time instead of hiking water and sewer rates in order to fund them in advance. When a city like ours is in growth mode, it's unfair to current residents to make them pay for delivering service to future ratepayers who haven't yet paid.
This type of debt is paid for by water and sewer users, and is not an obligation of the taxpayers. The more water and sewer you use, the more you pay. The rates are set accordingly so that the water and sewer utility business collects enough to pay the debt service.
Here is a summary of our outstanding Revenue Bonds:
We have $45,780,000 in remaining principal on water and sewer infrastructure.
A reason not to include water and sewer bonds when talking about the city's debt is that this type of debt is not a discretionary and political-type decision. Rather, it's a business decision much like your electric company might make when deciding how to generate or deliver electricity to you. You pay a competitive rate for the service, and leave it to the management of the company to figure out the best way to get it to you.
The Texas Bond Review Board lists Revenue Bonds like this separately from tax-supported debt.
Component Unit Debt Lewisville has two component units that owe debts: - Lewisville Parks and Library Development Corporation - Lewisville Tax Increment Reinvestment Zone #1 (TIRZ 1)
Here is a summary of our component unit debt:
The Parks and Library Development Corporation (LPLDC) was created by the voters of Lewisville in 2002, with funding by a 0.25% dedicated 4B sales tax, which is paid mostly by non-Lewisville residents who shop in our city. By law, and in accordance with the voters' wishes, this revenue can ONLY be used for parks, recreation, and library type investments. In Lewisville, we have built a new public library, aquatic facilities, and Railroad Park.
LPLDC debt should be excluded when talking about the city's debt load because whether or not you have this debt, the spending is mandated by the citizens. The voters have spoken and said that they value libraries, parks and recreation. You could not cut this spending, and use it to pave streets or hire police. The only real choice you have with LPLDC 4B funds is whether to build facilities now so that our current residents can enjoy them, or do you let the money collect and sit earning very little interest, while property values decline and residents are frustrated with a lack of amenities. The market is not going to let LPLDC sell bonds in excess of its repayment ability.
TIRZ #1, the Old Town TIRZ was set up by the City Council to encourage private investment in a blighted area. The Old Town Lewisville area still suffers, but has seen a lot of investment in recent years. The way this works is that the City sets up a district that is mostly zoned for business, and takes a snapshot of the taxable property values. The assumption is that without taking action, the values would stagnate or decline. What a TIRZ does is to dedicate all of the extra revenue from any improvement in values in the area to be spent in that area. So the extra money collected there is not from an increased rate, but from an increase in property value. Cities can borrow money to invest in the area, which causes values to increase, which then provides the money to pay back the investment. TIRZ #1 had $7.8 million in debt due to the construction of the Medical Center of Lewisville Grand Theater, which has been very successful so far.
On the other hand, because these two components (TIRZ1 and LPLDC) are supported by taxes (sales and property, respectively), the Texas Bond Review Board includes them in the same category with GO Bonds, showing Lewisville with $98.6 million in tax-supported debt.
Conclusion We rate Hill's statement false.
Hill's assertion that the City of Lewisville is over $160 million in debt is not true, even if you add up GO, Revenue, and Component debt, which would total only $144.1 million. It is not generally accepted to add in future interest payments as Hill did to reach his $187.7 million total.
Further, you need to subtract the $45.8 million in water and sewer revenue bonds, because these relate to the city's business function, and are not a tax-supported obligation. Policy-wise, the water and sewer debt are not related to anything discretionary in nature, but were necessary to provide the service that rate-payers expect. So this amount really doesn't belong in a political discussion unless you want to assert that the city's water and sewer business is poorly run. So far, that has not been the case that we've seen.
The Texas Bond Review Board lumps the remaining $98.6 million (8/31/2011) together in one amount that it uses to compare cities to one another. While we agree this is fair for comparison purposes, it fails to take into account that the component units have different funding methods and spending obligations.
So depending on how you look at it, you could say that Lewisville's debt is $58.2 million (GO only) or that it is $98.6 million (Tax-supported debt) or $144.1 million (Total debt). In any case, none of these approach $160 million, so the claim is false. We don't rate the statement as a lie, because we believe that Hill just didn't understand how to interpret the numbers in the CAFR. Since there is some subjectivity in choosing how to represent "the debt", it's defensible (though misleading) to choose the highest number that supports one's claims that we're "drowning" in debt.
But hopefully now that you have read this, you have a better understanding of what we owe, how we owe it, and how it gets paid back.
Correction: 4/16/2012 replaced the General Obligation and Revenue Bonds charts. Column labels were misleading, because they had "Maturity Fiscal Year". These amounts are totals of principal and interest due in the given year. Sometimes you try to make something clearer, but end up missing something big. Apologies for the error.
Re: Fact Check: Does Lewisville Have Over $160 Million in...
"Ooh, uh, yeah. I'm going to have to go ahead and sort of disagree with you there." - Bill Lumbergh.
It seems that Steve Hill said that the city has over $160M in debt and then when asked to itemize that, he gets to $187 counting all current principal and interest.
I agree with you that one should not count interest payments when discussing "debt" simply because the plain English meaning of "debt" is usually understood as current principal.
However, I think you're venturing a bit far afield to try to exclude debt just because it's not bond debt supported by ad valorem taxes. Water, parks, TIRZ debt obligations are all obligations of the city and if there is a funding shortfall, the city would either have to pay those debts with other revenue or risk a credit rating downgrade. And revenue sources other than property taxes are resources available to the city to enact its policies. And so debt that is paid with water revenue or sales taxes have an opportunity cost attached them that also should be considered. It's not like Steve Hill said "Lewisville property owners are saddled with $160M+ in debt." The city's tax base is more than just property taxes and its constituents are more than just property owners.
It seems to me that you're arguing to exclude some types of debt because you agree with the policy that created it. But that would seem to go toward negating the notion that the city is "drowning" in debt, not what the principal amount is. I would say that "drowning" invokes some sense of sinking or deterioration. For a municipality, that seems to conjure up an image of a city with an inability to make debt payments without significant cuts to services, sub-par maintenance levels, future tax or rate increases or a combination of these. Jefferson County, Alabama was arguably drowning in debt because it faced all of these and ultimately declared bankruptcy. It seems that you're taking exception more with this general portrayal of drowning rather than actual dollar amounts of principal outstanding.
Re: Fact Check: Does Lewisville Have Over $160 Million in...
As I noted in the article, what to include is subjective. We wouldn't have rated it false had the totals added up to $160 million or more. But in my opinion, simply adding them all up and giving that as the total is more misleading than the other options, because the debate seems to center around spending and taxation. The other totals do not react to those variables. Again though, it's subjective. The full explanation here is admittedly not what fits in a political talking point that a candidate would use, so I say it's defensible but misleading if he wants to use the grand total.
Re: Fact Check: Does Lewisville Have Over $160 Million in...
Also, I don't understand the table above for general obligation bonds. How can bonds maturing in 2012 have a principal amount of $6.3M and an interest payment of $2.3M? That implies an interest rate of 33%-ish. I think this table is showing the amount of principal that will be paid off in 2012 and the amount of interest that will be paid in 2012 both of which are the sum of all outstanding bonds regardless of the year of maturity.
Re: Fact Check: Does Lewisville Have Over $160 Million in...
I think it is the sum of all interest to be paid on GO bonds for those years, assuming we pay exactly on schedule and don't retire them earlier, or float any more bonds. I think a $10 million issue is coming though, to just about close out the last remaining authority and finish up some remaining projects.
Update: I fixed the column headers on the two tables. When I first sat down to work up the data in my spreadsheet, my intent was to list each individual bond issue, and what was owed, but then I ended up using the data in the CAFR for debt service instead, while leaving the labels as if they were individual issues. If I hadn't been cross-eyed already from looking at numbers all day, I should have noticed it. As always, I appreciate your sharp eye.
Please do not select me to be your CFO. I'd be better as America's Top Model.
Re: Fact Check: Does Lewisville Have Over $160 Million in...
This is the third and hopefully final time that this useless tea party rhetoric is thrown into a Lewisville council election. Anger over soaring debts and spending at the federal level can not be translated to anger at the Lewisville council. It is unfortunate that someone keeps giving this candidate extremely poor strategic advice.
Re: Fact Check: Does Lewisville Have Over $160 Million in...
I don't believe Mr. Hill is getting extremely poor strategic advice. He is quite capable of inventing and distorting items all on his own. On my very own doorstep he informed me the crime rate in Farmer's Branch had dropped since their anti-immigrant ordinance had been enacted. A call to the Farmer's Branch Police Department (non-emergency number) confirmed no such decrease had occurred. Secondly Mr. Hill chose to ignore the fact that the ordinance has never been put into effect. The ordinance has been declared unconstitutional at 3 federal appelate court levels. Farmer's Branch has incurred almost $5 Million dollars in legal fees so far, and some of their Council has publicly stated they want a graceful way out. Mr. Hill has a very bad case of tunnel vision, and extreme myopia to boot.
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Anonymous
Posted: 2012/4/18 17:54 Updated: 2012/4/18 18:20
Re: Fact Check: Does Lewisville Have Over $160 Million in...
You could make the case for crime rates going down in 10. But the immigration laws were passed prior to 2010.
I wonder if he mentioned the outsourcing of the library, staff layoffs and service reductions?
I still don't understand why these guys hold FB up as such a model city. They've even got a higher tax rate than Lewisville and can't keep their service levels maintained through the recession.
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Re: Fact Check: Does Lewisville Have Over $160 Million in...
