City faces bond debt squeeze

After postponing the issuance of general obligation bonds for two years, Evanston’s City Council Monday is scheduled to tackle two key issues.

First — how to fund the 2022 and 2023 capital improvement projects already underway.

Second — what to spend on capital projects next year to start fixing the city’s crumbling infrastructure.

Interest rates on new municipal debt are now running around 4.2%, according to the city’s CFO, Hitesh Desai.

That’s more than double the rate when the city last issued bonds, in mid-2021.

And only about half of that increase had occurred by mid-2022, so the Council’s decision not to borrow then looks in retrospect like a gamble that has not paid off.

Desai is now recommending that the city wait until March 2024 to issue bonds to cover the 2022 and 2023 projects, in hopes interest rates will have declined by then.

Since the city traditionally issues new bonds with 20-year maturities each year, one positive element for the budget is that old debts gradually are paid off.

Desai notes that the city paid off $10.69 million in bonds at the end of 2021, $11.44 million at the end of 2022, and is scheduled to pay off $11.96 million in bonds at the end of this year.

But since the city has been falling progressively further behind on facility maintenance over the years, carrying out a plan to catch up is likely impossible without either issuing substantially more bonds, selling off some city assets or paying cash for the projects — which would almost certainly mean substantially higher current taxes.

Some budget hawks on the Council have been pressing to reduce bond issuance to avoid having to make the future interest payments they require — but they have yet to propose how to square that idea with the goals of limiting any tax increases and better maintaining city facilities.

There also has been a theory that the city could use so-called “excess reserves” in the general fund to pay for the capital projects already underway.

The city ended 2022 with $57 million in the general fund.

But Desai notes that the Council used $10 million of that to balance the 2023 budget and so far this year has used $8.2 million more to fund capital improvement project cost overruns and employee wage increases in new union contracts.

“Given the wage increases that have been approved by the City Council as well as the new pension policy that will redirect $5 million previously available to the general fund,” Desai says, “staff cautions against using excess general fund reserves, as they will be needed to balance the 2024 general fund budget.”

Meanwhile, city staff have come up with a list of nearly $112 million of potential capital improvement projects for next year, including more than $32 million for which there is no funding source other than general obligation bonds.

They include needs to;

• Increase the pace of water main replacement to reduce the chance of catastrophic failures of aging lines.
• Meet state-required deadlines for replacing all the city’s lead service lines.
• Tackle major deferred maintenance issues in both neighborhood parks and ones that see community-wide usage.
• Address an estimated $145 million to $275 million in needed upgrades to or replacement of several key city facilities.

Staff is seeking to have Council set priorities for tackling specific projects.