The city of Fresno may soon have to borrow more than $20 million to bail out two local nonprofits -- at a time when the political and financial risks of taking on debt have never been more clear.
Barring a miracle, the city will be asked to make good on a $15 million construction loan that the Fresno Metropolitan Museum cannot pay. And City Hall also is on the hook for more than $5 million owed by a foundation run by the developer of the troubled Granite Park project.
Fresno already has nearly $1 billion in outstanding debt, mostly in bonds, and there's no guarantee the city can keep making annual payments without having to dip into funds now used for vital services.
In an era when mighty corporations have been laid low by debt turned suddenly oppressive by dramatic declines in revenue, some city officials worry that Fresno may be headed down the same path with its borrowing habits.
"I think we're getting so far into debt that our grandkids will have to bail us out," said Council Member Mike Dages.
The city's finance chief has the same worry.
In a January report to top city officials, interim controller Karen Bradley wrote that, given the national financial crisis, the city "will be challenged to find sufficient revenue streams to take on any additional debt backed by the General Fund."
Much of the general fund goes to pay for fire and police services.
Bradley's report raises questions about whether the city, should it go to the bond market to repay the Granite Park and Met loans, can meet the bond payments without harming services. At the same time, city officials emphasize the city's credit is strong.
They note that credit-rating agencies such as Standard & Poor's, Fitch Ratings and Moody's have deemed the city's bonds to be in the top levels of investment grade, which is the highest designation.
They note that the city is nowhere near its "bonding capacity," a debt limit described in the city charter. And they note that the city has never missed a bond payment.
Betting on growth
Yet, in the midst of a recession of a severity not seen since the Great Depression of the 1930s, Fresno is taking on increasing amounts of bond debt.
On Tuesday, the City Council authorized staff to move ahead on a $22 million bond to fund in part the construction of police substations in the central and southeast districts.
About half of the annual $1.7 million bond payment is to come from developer fees paid on the construction of homes, apartment complexes and commercial and industrial buildings.
The risk to city finances is clear: If enough houses and apartments and offices aren't built every year for decades to come, the repayment formula fails. City officials then would have to make up the difference from the general fund.
The general fund already is slated to pay the other half of the $1.7 million annual payment.
Tuesday's council action comes on top of recent approval of a $42.7 million bond for fire stations and police facilities and a bond of more than $32 million already issued for new or remodeled parks. Repayment depends in part or entirely on developer fees.
"The city is basically betting on the economy returning," said Michael Prandini, president and chief executive officer of the Building Industry Association of Fresno and Madera counties.
According to city records, Fresno's single-family housing permits fell from 2,649 in 2005 to 1,490 in 2008.
But city officials said they are not counting on an immediate return to the boom years. The repayment formula for the public-safety construction bonds makes conservative assumptions about development over the next few years, they said.
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