Nice to Have or Need to Have?

Susan Askew
Susan Askew

Nice to Have or Need to Have?:

Miami Beach considers priorities for general obligation bond

Miami Beach City Commissioners moved forward this week with a plan to put a General Obligation Bond offering before voters in November and began the difficult task of prioritizing what projects get included. With a $1.1 billion “wish list” and an appetite for about a $500 million spend, Commissioners held their first meeting to pare the initial list down.
 
Ricky Arriola, Chair of the Commission’s Finance Committee and a strong proponent of the GO Bond, called it “the most important topic of the year for voters and the City’s future.” He said the bond offering is “financially prudent” in the current interest rate environment. The question is not whether or not the City makes the offering but “how much we want to invest in the City,” he said. When it comes to making long-term investments, he added, “This is the appropriate way to do it … It’s a question of priorities and how much we ask the voters to support.”
 
City CFO John Woodruff said the purpose of this week’s initial GO Bond workshop was to narrow down the priorities, determining “yes” projects, “no” projects, and “maybes”.
 
“There may be a lot of maybes and that’s okay,” he told Commissioners. “That’s something over the next couple of months we can work on.”
 
“It’s been 19 years since the last GO Bond,” Woodruff continued. “That’s a long time, frankly. We probably haven’t been making as much of an investment in the community as we probably could.” He mentioned “critical needs” like a new police radio system, traffic signalization, parks and “other quality of life initiatives” along with “basic things like pavement, sidewalks, street lighting”.
 
While we are in an historically low interest rate period, he said, we are also in a rising rate environment. The difference to the City of a bond issued in the spring at say 4% and one six months to two years later at a potential 5% rate is a difference of $109 million.
 
In addition, Woodruff said, “We’re starting to see changes in credit rating methodology … we could potentially be downgraded over time if climate change affects aren’t addressed.” The City’s current credit rating is AA+. If that were to be downgraded to AA-, the City would pay additional interest of $7-8 million, he said.
 
Julie Santa Maria, a Director with RBC capital Markets and the City’s financial advisor for the past ten years, said despite an increase in short-term rates and the expectation for more rate increases this year and next, long-term rates over the past year have dropped .1 percent. Calling it “an opportune time to issue longer term debt”, she said, long-term rates have been higher 90% of the time over the past 38 years than they are today.
 
With regard to credit rating methodology she said, “Ratings agencies have increasingly focused on climate change and made it transparent that they are going to or that they are factoring in management and cities and counties response to climate change in their planning. They are making it very apparent to local governments and investors that they will take action in terms of downgrades if they don’t see governments responding in a sustainable manner to address these changes.”
 
She noted that because Miami Beach was “ahead of its time” in terms of resiliency, the City issued the first tranche of stormwater bonds in 2015 for projects to address flooding and sea level rise “and we received very strong ratings”. When the City issued the bonds for the Convention Center construction, Santa Maria said, “We received a lot of questions from institutions and the rating agencies about the City’s response to climate change.” Being able to point to the first tranche of bonds, along with the City’s implementation plans, and its commitment to issue future bonds to complete those plans, led the City to receive another favorable rating, she said. And, when the second tranche of the stormwater bonds and water and sewer bonds were issued in 2017, the City once again received strong ratings.
 
“We had lots of questions about the plan and the continuance of the plan,” she said. “It is just very much on the forefront of investors and rating analysts' and insurers' – bond insurers' – minds of how coastal communities are addressing climate change.”
 
Woodruff said the City’s general capital project funding is very limited and “GO Bonds are the only way to make major projects happen in the community.”
 
He outlined the schedule which includes a prioritization period in April and May to “separate out critical needs from ‘nice to haves’” with public engagement to begin in late April. June and July are for further Commission review and decisions with a final project list needed by the Commission’s July 25th meeting. The referendum is November 6th.
 
As Commissioners began to pare down the $1.1 billion list encompassing 114 projects, Arriola asked if there was a commitment from everyone on the dais to move forward with a bond offering. While those in attendance all indicated they were willing to support a GO Bond, it is clear there will be some back and forth on how big it will be with several seeming to land on the $500 million mark. (Commissioner Kristen Rosen Gonzalez was absent.)
 
Michael Gongora responded, “I’m not a no … I know you want to put as much into the GO bond as possible," he told Arriola. "For me, it’s more important to understand what we need now and what the timeline would be for construction and other methodologies of financing some of these projects. It’s not that I don’t think all of these projects are worthwhile. I think there’s just going to be a difference on the Commission between some of us that would rather finance it all now and some of us that would perhaps like to move at a more gradual pace to let the City absorb the cost of these projects.”
 
Commissioner Mark Samuelian noted 55% of the $1.1 billion in projects for consideration is for resiliency initiatives. “I’m not convinced we’ve done the planning necessary for these hundreds of millions of dollars” referencing the upcoming “red team” review of the City’s resiliency efforts.

“I don’t have a problem that we need to invest in resiliency,” Samuelian said. “In fact, we may need to put more money in, but I do have specific concerns about some things that are in and not in. For example, I might argue that some neighborhoods that are flooding exhorbitantly need to be accelerated and more money put there.”
 
He said with regards to his thinking on the City’s resiliency projects, “It’s more a marathon, not a sprint. So, right now, I’m not yet convinced we have the right approach here and what I strongly believe is to get comfortable – not only us, but our community – we need a more thorough planning process as it relates to stormwater management and sea level rise and that we need to make material progress on that and have a real plan before we spend hundreds of millions of dollars.”
 
Gongora added, “I think we need to move forward ... My position is that one of our more important roles as elected officials of the City is safeguarding our money.” To Arriola, he said, “Part of being progressive and brave is saying ‘We’re going to do this and we’re going to spend the money’ and that’s where you are standing out. But I want to caution you. Part of being brave is telling the people that are calling you and pushing you on every project, 'no'. We have to learn the word no. 'We can’t afford it at this point. This isn’t a project that requires getting done right now' so I would also caution you to be a little guarded with everyone pushing to spend all this money right now as well.”
 
Commissioner John Aleman said, “From a voter’s standpoint, it’s important for people to understand that the projects that we fund through this will have a beneficial impact to their property values. If the streets are cracked, the sidewalks are cracked, and we haven’t addressed flooding and there’s no water pressure in the water main and the sewer backs up, clearly the property values are going to be lower than if we spend the infrastructure money to address those things … this isn’t a fluffy 'nice to have' set of projects. We’re going after projects that really move the needle for the City for the quality of life here and for direct property values.”
 
Arriola concurred. “These are the kind of things that sound like ‘nice to haves’ but you actually have to do that in order to support property values and livability, quality of life.” One big ticket item, $84 million for above ground work including landscaping and lighting after the below ground stormwater, sewer, and water projects are completed throughout the City, “supports billions of dollars in property values,” he said.
 
By the end of the morning, Commissioners pared the initial wish list down to $695 million with more work to come. One high cost project off the table is a new $160 million public safety facility. Another, $170 million for underground infrastructure projects, was determined to best be funded through enterprise funds, which include stormwater, sewer, and water fees, and was removed from the GO Bond list.
 
Watch the workshop and specific funding discussion items here.
 

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