Mesa’s Debt Bomb, thanks to former Mayor Scott Smith

By Gene Dufoe

This brief study of the City of Mesa FY2014/15 Budget has been compiled by Mesa resident Gene Dufoe. Mr. Dufoe is a retired Boeing engineer/manager who possesses the following degrees: BSAE, MSAE, and an MBA with an emphasis in Finance. He is a Precinct Committeeman in LD25. Dufoe supports Danny Ray for Mayor of Mesa, Dr. Ralph Heap for the LD25 Senate seat presently held by Bob Worsley, and Diane Douglas for Arizona Superintendent of Public Instruction.

Note:  There are four utility system revenue bond authorization questions on the November 2014 ballot, one each for Water, Wastewater, Natural Gas, and Electric.  Total will be $580,000,000.  See the City Council Resolution

LOOKING AT THE CITY OF MESA BUDGET FOR THIS FISCAL YEAR 2014-2015

Normally, the City of Mesa publicizes only the millions of dollars of Total General Obligation Bonds, Total Utility Systems Revenue Bonds, Total Street and Highway User Revenue Bonds, and Total Excise Tax Obligations outstanding, not the total bonds obligation or the interest obligation.  However, both need to be exposed.  The City of Mesa Total Bonds outstanding is $1,710,800,001 for FY2013/2014 vs. $1,220,778,673 for FY2008/09.

The scheduled interest to be paid through 2037/38 is $302,539,619 for only the General Obligation Bonds issued during Scott Smith’s administration.  This is nearly three times greater than was paid on the General Obligation Bonds issued under the previous administrations.  The comparison of the Utility Revenue Bonds is even worse, $71,360,274 vs. $327,537,942, or 4.6 times greater.

During Mayor Hawker’s service from 2000 to 2008, several bond issues were refinanced from earlier administrations, and the total interest paid was only a fraction of the repaid principal.  However, the financial situation of Mayor Smith’s term of office from 2008 to his recent resignation in June, 2014, has placed the City of Mesa in worsening financial terms for the future.

Without considering the interest on the General Obligation Bonds, Utility Revenue Bonds, Street & Highway User Revenue Bonds, and Excise Tax Obligations, nearly $500,000,000 of additional bonds have been approved during Mayor Smith’s period of service.  Interest on the General Obligation and Utility Revenue Bonds will add $630,000,000 through 2037-38, totaling more than $1.1 BILLION additional debt added during Mayor Smith’s time in office.  The interest on the $114,650,000 Street and Highway User Bonds and the $216,115,000 Total Excise Tax Obligations outstanding in FY2013-14 will add to the $630,000,000 interest total; however, the exact amounts were not readily available.

In addition to those bonds outstanding (and the bonds which have been authorized, but not yet sold), the Proposed Five-Year Capital Improvement Program has $680,392,701 which needs future authorization.  These proposed bonds, needing future authorization, will likely be voted on in the next 3-4 years.  Per the FY2014/15 Final Budget Summary, the City is not obligated to a project by inclusion within the CIP.  Each project is considered individually by the City Council during the year.

The reason that the interest scheduled was so much higher during Mayor Smith’s years in office is that both the length of the bonds were extended, and the payment of principal was also substantially delayed until the last years of the bond life.  For example, under the previous mayor, $11,705,000 2005 General Obligation Bond life was 18 years and the total interest scheduled was $4,128,700 or Total Interest Paid/Principal Repaid = 36.9%.

However, under Mayor Smith, the $30,865,000 2010 General Obligation bond life was 20 years, the total interest scheduled to be paid is $26,416,950 and Total Interest Paid/Principal Repaid = 85.59%.  The reason was no principal was scheduled for the first 9 years, principal payments of $1,115,000 to $2,500,000 were scheduled for the tenth to the nineteenth years, and in the twentieth year, the principal payment of $13,225,000 was scheduled.  The Total Interest Paid/Principal Repaid = 85.6%.

However, that is NOT the worst.  The Utility Revenue Bonds which are paid by the City of Mesa residents through the Secondary Property Tax and the monthly utility bills are managed by the City of Mesa’s business portion, called Enterprise Fund.  The Enterprise Fund transferred $173,606,136 to other current obligations of the city, per the City of Mesa Summary of Estimated Revenues and Expenditures, FY2014/15.

For the $50,380,000 2010 Utility Systems Revenue Bonds, the City of Mesa has scheduled interest payments of $3,073,280 annually for 24 years with no principal payments for the first 23 years with the entire principal scheduled $50,380,000 for the 24th year.  The total interest scheduled is $73,380,000.  The ratio of Total Interest Paid/Principal repaid = 134.2%.

Slightly less bad for the taxpayers are the $36,385,000 2014 Utility Systems Revenue bonds in which the City of Mesa has scheduled estimated interest payments of $1,819,250 annually for the first 23 years with no principal payments for the first 22 years; principal payments of $20,000,000 in the 23rd year and scheduled interest payment of $829,250 and principal payment of $16,385,000 in the 24th year.  Total interest $42,620,000.  The ratio of Total Interest Paid/Principal repaid = 117.43%.

If the voters do not approve the State Imposed Expenditure Limitation Home Rule Continuation, then the City of Mesa will need to eliminate $184 million from the budget, starting with FY2015-16.  The one-time override alternative allows for exceeding the state imposed expenditure limitation for one fiscal year.  If the State Auditor General determines a city has exceeded the expenditure limitation, a portion of its share of the state income tax allocation is withheld.   The penalty is assessed as follows:

Exceeding by less than 5% – penalty will equal to amount of the excess.

Exceeding by more than 5%, but less than 10% – penalty will be three times the excess.

Exceeding by more than 10% – penalty will be five times the excess or 1/3 of the state income tax allocation, whichever is less.  If the State limitation has been exceeded by more than 10%, the expected penalty to apply to FY2014/15 would be $17.7M (based on one-third of the FY2014/15 state-shared revenue).

The FY2014/15 budget does not allow the City to address the backlog of needs considered to be lifecycle or infrastructure replacements.

The contributions to the vehicle replacement fund do not address the full annual need nor do they allow for a reserve balance to mitigate future years where needs may spike.

The aging of buildings, technology, equipment, etc., requires scheduled upgrades/replacement.

A special commission of private-sector, public-sector, and retired personnel should be formed to make recommendations to the Mayor and the City Council for actions to be taken.  It is time for the City of Mesa to cut all but the absolutely essential services and reduce the city payroll, plus have active and retired city employees pay a larger portion of their medical, dental, and vision expenses.  By contrast, most private business employees pay a high percentage of medical, dental, and vision expenses; retirees have paid for their entire medical, dental, and vision expenses for many years.  Recommendations for the Arizona State Retirement System, Public Safety Personnel Retirement System, and Elected Officials Retirement Plan should also be considered.  Privatization of some or all of the services provided by the Enterprise Fund should be part of any such study.

References

  1. City of Mesa Executive Budget Plan 2014/15 & FY2014/15 Community Report Average Homeowner’s Cost Comparison
  2. Secondary Property Tax – Resolution No. 10478
  3. FY2014/15 Legal Budget – Resolution No. 10473
  4. FY2014/15 Capital Improvement Program – Resolution No. 10472
  5. FY2014/15 Final Budget City Council Report
  6. FY2014/15 Final Budget Summary
  7. FY2014/15 Home Rule – State Imposed Expenditure Limitation – Home Rule Continuation Presentation
  8. FY2008/09 Community Report Average Homeowner’s Annual Cost Comparison
  9. FY2008/09 Tentative Five-Year Capital Improvement Program
  10. FY2008/09 Final Budget City Council Report
  11. Pledged Debt Analysis For Continuation of Impact Fees City of Mesa, Arizona, prepared by Duncan Associates, April 16, 2013
  12. Preliminary Official Statement dated May 15, 2014; $37,550,000 City of Mesa, Arizona, General Obligation Bonds Series 2014, APPENDIX B
See Also Questions from Mr. Dufoe and answers from Ryan Wimmer, Mesa’s Office of Management and Budget:

1.  General Obligation Bonds (refunding) What was the bond rating for the City of Mesa GO refunding bonds over the past six years?  When are the annual bond principal installments being redeemed and at what interest rate?

Series

2002       OS: http://emma.msrb.org/MS191242-MS166550-MD322389.pdf (see page 13 for ratings and the cover page for principal maturity and interest rates)

2004       OS: http://emma.msrb.org/MS217101-MS192409-MD373504.pdf (see page 14 for ratings and the second cover page for principal maturity and interest rates)

2006       OS: http://emma.msrb.org/MS52419-MS223977-MS616035.pdf (see page 13 for ratings and the second cover page for principal maturity and interest rates)

2012       OS: http://emma.msrb.org/EP609526-EP476667-EP877042.pdf (see page 11 for ratings and the cover page for principal maturity and interest rates)

2013       OS: http://emma.msrb.org/EA522649-EA407230-EA804180.pdf (see page 11 for ratings and the cover page for principal maturity and interest rates)

2.  The General Obligation bonds (Various Purpose) are as follows:

What was the bond rating for the City of Mesa Bonds – Various Purpose bonds when issued?  When are the bond annual bond principal installments being redeemed and at what interest rate?

2005       OS: http://emma.msrb.org/MS236093-MS211401-MD411149.pdf (see page 12 for ratings and the cover page for principal maturity and interest rates)

2006       OS: http://emma.msrb.org/MS52250-MS223608-MS615968.pdf (see page 12 for ratings and the cover page for principal maturity and interest rates)

2007       OS: http://emma.msrb.org/MS259729-MS235037-MD458462.pdf (see page 12 for ratings and the cover page for principal maturity and interest rates)

2008       OS: http://emma.msrb.org/MS270908-MS267339-MD528351.pdf (see page 11 for ratings and the cover page for principal maturity and interest rates)

2009       OS: http://emma.msrb.org/MS281039-MS280291-MD568491.pdf (see page 10 for ratings and the cover page for principal maturity and interest rates)

2010       OS: http://emma.msrb.org/EP431918-EP339205-EP735523.pdf (see page 10 for ratings and the cover page for principal maturity and interest rates)

2011       OS: http://emma.msrb.org/ER460776-ER359128-ER755820.pdf (see page 8 for ratings and the cover page for principal maturity and interest rates)

2012       OS: http://emma.msrb.org/EP644009-EP503264-EP904180.pdf (see page 10 for ratings and the cover page for principal maturity and interest rates)

2013       OS: http://emma.msrb.org/ER666235-ER517392-ER919995.pdf (see page 8 for ratings and the cover page for principal maturity and interest rates).

3.  Utility Systems Revenue Bonds (refunding) What was the bond rating for the City of Mesa Utility refunding bonds over the past six years?  When are the annual bond principal installments being redeemed and at what interest rate?

2002       OS: http://emma.msrb.org/MS188305-MS163613-MD316547.pdf (see page 13 for ratings and the cover page for principal maturity and interest rates)

2002A    OS: http://emma.msrb.org/MS197504-MS172812-MD334877.pdf (see page 14 for ratings and the cover page for principal maturity and interest rates)

2004       OS: http://emma.msrb.org/MS217102-MS192410-MD373506.pdf (see page 12 for ratings and the cover page for principal maturity and interest rates)

2006 (both issues)  OS: http://emma.msrb.org/MS52416-MS223973-MS616031.pdf (see page 12 for ratings and the cover page for principal maturity and interest rates)

OS: http://emma.msrb.org/MS254547-MS229855-MD448008.pdf (see page 13 for ratings and the second cover page for principal maturity and interest rates)

2008       OS: http://emma.msrb.org/MS270955-MS267402-MD528506.pdf (see page 11 for ratings and the cover page for principal maturity and interest rates)

2012       OS: http://emma.msrb.org/EP608885-EP476146-EP876514.pdf (see page 10 for ratings and the second cover page for principal maturity and interest rates)

2012 Taxable Refunding.  OS: http://emma.msrb.org/EP615721-EP481744-EP882241.pdf (see page 11 for ratings and the second cover page for principal maturity and interest rates).

4.  Utility Systems Revenue Bonds (Utility Improvement) What was the bond rating for the City of Mesa Utility Improvement bonds when issued?  When are the bond annual bond principal installments being redeemed and at what interest rate?

2002       OS: http://emma.msrb.org/MS188116-MS163424-MD316173.pdf (see page 12 for ratings and the cover page for principal maturity and interest rates)

2003       OS: http://emma.msrb.org/MS203914-MS179222-MD347345.pdf (see page 12 for ratings and the cover page for principal maturity and interest rates)

2004       OS: http://emma.msrb.org/MS222295-MS197603-MD383623.pdf (see page 10 for ratings and the cover page for principal maturity and interest rates)

2005       OS: http://emma.msrb.org/MS235923-MS211231-MD410807.pdf (see page 10 for ratings and the cover page for principal maturity and interest rates)

2006       OS: http://emma.msrb.org/MS52220-MS223454-MS615938.pdf (see page 11 for ratings and the cover page for principal maturity and interest rates)

2007       OS: http://emma.msrb.org/MS259549-MS234857-MD458102.pdf (see page 10 for ratings and the cover page for principal maturity and interest rates)

2008       OS: http://emma.msrb.org/MS270681-MS267070-MD527833.pdf (see page 10 for ratings and the cover page for principal maturity and interest rates)

2009       OS: http://emma.msrb.org/MS281167-MS280466-MD568877.pdf (see page 9 for ratings and the cover page for principal maturity and interest rates)

2009 WIFA Loans – WIFA loans are not rated by the rating agencies.  Redemption schedules are attached.   (See 2009 WIFA loans.)

2010       OS: http://emma.msrb.org/EP431713-EP339023-EP735345.pdf (see page 11 for ratings and the cover page for principal maturity and interest rates)

2012       OS: http://emma.msrb.org/EP643903-EP503173-EP904086.pdf (see page 10 for ratings and the second cover page for principal maturity and interest rates)

2013       OS: http://emma.msrb.org/ER666086-ER517255-ER919851.pdf (see page 10 for ratings and the cover page for principal maturity and interest rates)

2014       OS: http://emma.msrb.org/EP820778-EP635288-EP1036999.pdf (see page 10 for ratings and the cover page for principal maturity and interest rates).

5.  Street and Highway User Revenue Bonds (refunding) What was the bond rating for the City of Mesa Street and Highway User Revenue Refunding Bonds over the past six years?  When is the annual bond principal installments being redeemed and at what interest rate?

2004       OS: http://emma.msrb.org/MS217103-MS192411-MD373508.pdf (see page 14 for ratings and the cover page for principal maturity and interest rates)

2005       OS: http://emma.msrb.org/MS230312-MS205620-MD399580.pdf (see page 11 for ratings and the cover page for principal maturity and interest rates)

2012       OS: http://emma.msrb.org/EP608850-EP476109-EP876480.pdf (see page 11 for ratings and the cover page for principal maturity and interest rates)

2013       OS: http://emma.msrb.org/EP759947-EP589453-EP990970.pdf (see page 10 for ratings and the cover page for principal maturity and interest rates).

6.  Street and Highway User Revenue Bonds (Street Improvement) What was the bond rating for the City of Mesa Street Improvement bonds when issued?  When is the annual bond principal installments being redeemed and at what interest rate?

2003       OS: http://emma.msrb.org/MS203840-MS179148-MD347197.pdf (see page 13 for ratings and the cover page for principal maturity and interest rates)

2004       OS: http://emma.msrb.org/MS222376-MS197684-MD383785.pdf (see page 11 for ratings and the cover page for principal maturity and interest rates)

2005       OS: http://emma.msrb.org/MS236032-MS211340-MD411027.pdf (see page 10 for ratings and the cover page for principal maturity and interest rates)

2006       OS: http://emma.msrb.org/MS52253-MS223605-MS615966.pdf (see page 10 for ratings and the cover page for principal maturity and interest rates)

2007       OS: http://emma.msrb.org/MS259518-MS234826-MD458040.pdf (see page 11 for ratings and the cover page for principal maturity and interest rates).

7.  Excise Tax Obligations Outstanding

Were the 2010 Highway Project Advancement Notes redeemed at the July 1, 2014, optional redemption date at par? Yes.

What was the bond rating for the 2010 and 2011A City of Mesa Highway Project Advancement Notes since they were issued?

2010 – OS: http://emma.msrb.org/EP430767-EP338370-EP734691.pdf (see page 10)

2011A – OS: http://emma.msrb.org/EP571936-EP448917-EP848828.pdf (see page 14).

What was the bond rating for the Phoenix-Mesa Gateway Airport Authority obligations when they were issued?

OS: http://emma.msrb.org/ER583308-ER453122-ER855821.pdf (see page 15)

What is the rating, purpose, refunding, and interest rate paid on the Excise Tax Revenue Obligations issued in 2013?

OS: http://emma.msrb.org/EP751300-EP583298-EP984886.pdf (see page 13 for ratings, the second cover page for interest rates, and “Optional Redemption” on pages 2 and 3 for refunding provisions)

Regarding the purpose, from the cover page:

The City of Mesa, Arizona (the “City”) Excise Tax Revenue Obligations, Series 2013 (the “Obligations”) will be executed and delivered in the principal amount of $94,060,000 for the purpose of providing funds to (i) acquire and construct the Project (as defined herein) and (ii) pay costs of execution and delivery of the Obligations.

See “The Obligations” on page 2 and “The Project” on page 4.

8.  Have any of the overlapping jurisdictions informed the City of Mesa that they were in danger of not meeting their bonded debt obligations under the “Direct and Overlapping General Obligation Bonded Debt Outstanding” category? No.

9.  What is the schedule of planned sales of any authorized, but not issued, City of Mesa General Obligation bonds, Utility System Revenue bonds, Street and Highway User Revenue bonds or Excise Tax Obligations notes since 2013?

General Obligation and Utility System forecasted issuances are attached.  (SeeAuthorized Bonds – Issuance Forecast.)  There are currently no plans to issue Street and Highway User Revenue or Excise Tax bonds.

Have there been any additional refunding issues replacing series issues since 2013? No.

10.  Are there be any City of Mesa General Obligation Bonds issues, Utility System Revenue Bonds issues, Street and Highway User Revenue Bonds issues or Excise Tax Obligation notes to be submitted to the voters on the November, 2014 ballot?

There are four utility system revenue bond authorization questions on the November 2014 ballot, one each for Water, Wastewater, Natural Gas, and Electric.  See the City Council resolution at: http://mesa.legistar.com/LegislationDetail.aspx?ID=1821143&GUID=DB2A249F-5A7B-459F-A506-2A6379B8B9EC.


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