Thursday, October 15, 2009

Bond issues - The Woodlands needs your vote!

This is a critical time for our little Texas community. Major projects completing the final build-out of The Woodlands is being put on the line for funding in the November 3rd election. In about five years, our town should be all grown up in the residential areas and have a completed infrastructure except for government offices. Sure, the community will continue to grow after these five years, as undeveloped lots continue to be developed in various locations, especially in the Town Center and some parts of Creekside park, but after five years, our town should be primarily in maintenance mode, improving what we have, replacing what is falling apart, and in general, maintaining the usefulness and presentation of our public assets. Some parts of our community are already falling apart. These bonds address some of those issues as well.

Our current economic environment presents an opportunity for this community. Interest rates are the lowest they ever will be. They can only go up, and I believe they will, probably starting sometime in 2010. We can lock into these low rates with GO bonds. The township expects to be able to sell bonds at a rate between 4 and 5 percent. Execution of the sale can not realistically be started until about June 2010. Not all projects would be included initially. These bonds would be appropriated when the projects need to be executed. If the bond issues pass, there will be several bond sales of varying terms and interest rates. If there are better financial vehicles available at the time, then the voter-approved bond vehicle would not even be utilized. What I fear is a quick rise in interest rates. That would impact all the township bank loans having a varying interest rate. Just as we seek a fixed rate loan for a home, the township seeks the security of fixed rate bonds for financing its projects. These bonds will help mitigate the risk of rising interest rates. We as taxpayers need and want a fixed predictable low rate amortized over the life of the asset and minimized for future tax relief.   

In preparing the budget for 2010, a strategy was invoked to flatten our tax rate so that residents could keep a lid on their local tax rate, similar to the county tax strategy. To do this, our financial wizards in the association and township put their heads together and formulated a plan that would accomplish everything required over the next five years, and they planned a year-by-year budget leveled at 32.8 cents per $100 evaluation. The township has successfully developed our first budget using this strategy. Subsequent years are dependent on what happens with the bond issue on November 3rd. The plan is to levy a 32.8 cent tax rate in each year of the five year plan. The bonds will not increase our tax rate. They only provide a financial vehicle to finance the projects at an optimal cost and provide a financial path to our final governance model during this final phase of building out The Woodlands.

If the three bond issues are passed:

The plan will proceed as visioned, with a projected 32.8 cents per $100 evaluation. Therefore taxes will increase or decrease with the county assessment valuation of homes, not affected by the interest rate nor variations in the township tax rate unless the community decides to add major projects within the next five years. I don't see that happening unless we feel we must take control of the local road maintenance. These three bonds have no affect on  either the county taxes, school taxes or MUD district taxes. These bonds have everything to do with the services provided to your neighborhood but not maintenance to your streets. The bonds are interconnected to the operating budget but are related only to capital expenses, either past or future.

Funding for capital projects is normally done with bonds, because bonds are a tool to spread the payment of the assets over the life of the assets. Therefore, say for a fire station, which will be in service perhaps 30+ years, the cost of building the asset is spread out for the next 20 years. That means whoever moves into your house after you leave (unless you stay forever), will share the burden of paying for the fire station. You will pay less each year and probably collectively over the years as a result. The normal residency in The Woodlands is probably on the order of five years, so perhaps the burden of that fire station is shared between the four families living in your home over that time. For a fire truck, that would be seven years and so a shorter term bond would be used or we might pay as we go on some shorter life items or projects. 

Bottom line is that the tax rate should remain at 32.8 cents per $100 evaluation for the next five years if we vote FOR all three propositions. It is not risk free but voting FOR will go a long way to manage the tax rate risk in The Woodlands.

If the bond issues are not passed:

The township must prioritize all contracts and operational requirements and safety projects ahead of other projects. First and foremost, all obligations must be honored. Repair of existing facilities might be deferred. That means that the parks for the new village would be built, because they are a contractual obligation. The two proposed new fire stations - one in Creekside Park and the other in Indian Springs would be built for safety reasons. I would think that the Central Station which is not structurally sound might be deferred, although it might be argued that is also a safety issue.

Residents would be taxed an additional one cent per 1.1 million dollars expended for capital. There is no exact scenario of what would be built and what would not if the bonds were not passed. A contingency plan does not exist, because a complete new plan would need to be created, and it would have dependencies on the economy and interest rates.

Basically, if the township had to plan the new facilities from operational funds, that would be a direct expenditure in the years incurred. Therefore, for example, if one fire station was built in 2010 and one in 2011, taxes would have to be increased by 3.7 cents for each station in the year it is built. The alternative is to finance them at a bank, probably negotiated at a low variable rate in the near future, rising to a high rate in a few years as the rates increase because of Fed intervention. Most of us know what that means with credit cards and even homes! Over time, a variable rate has only one way to go now - up! And it can go way up! I remember not too long ago, a 14.5% fixed rate on a home.That is the reason we lock in interest rates on our homes. The same goes for our township.

Another way to look at this is for us to pay the cost of the assets as we go from our own pockets -  Proposition 1 and 2 combined adds up to 28.3 million dollars. Divide that by 1.1, equating to the number of cents required in taxes from each resident to do those projects. That equals to  24.5 cents. Spread that out over four years and it equates to about 6 cents added to your tax each of those years, if the expenses are incurred evenly. So instead of 32.8 cents, count on 38.8 cents. If we finance that amount through a bank over say 10 years, assuming we can, it would be perhaps 5 percent compounded interest. It could also be 10 percent compounded interest. Residents taxes would be impacted by the interest rate. If you can figure this all out, let me know. I am not going to try, not yet anyway. Amortization schedules and various scenarios of financing are best left to the experts.

So what am I really trying to say? 

I am FOR all three bonds. We should put this tool in the hands of the competent people we have in authority and those who work for the township in finance. Let them make the decision next year on how to finance these facilities or refinance our debt. Their tactical decisions will be based on financial analysis and strategies aligned with the economic environment and interest rates at the time. Personally, I want to keep our taxes under control and not be exposed to the risks of variable rates.  Already the financial community of the world is questioning the USA for low interest rates. They want toe USA to be financially responsible. The federal government is holding to near zero rates for the near future, but economic recovery will be measured by reasonable control of inflation through controlled borrowing. Reasonable interest rates to manage inflation is considered an appropriate tool to do this. Our current opportunity  will not last forever and in fact may change before we can even take advantage of the low rates available now.

There must be hundreds of spending scenarios. Optimizing it is the job of the township's president, financial manager and analysts. Our job is to ask questions, understand the propositions, assess our position and go vote. Please vote FOR these propositions. There is a nice brochure being distributed which presents the three propositions in an easy-to-read format. It is available at the township office1. Perhaps it will be made available at additional locations soon.

Proposition I -  $17.335mm bond authorization to finance three fire stations, related equipment and payment of Emergency Service District debt. Drawing associated annual budget funds of $4.9 mm for total of $22.335mm.1

Proposition II - $12.380 mm bond authorization to finance park and pathway contracts and renovate parks and equipment needing major maintenance. Drawing associated annual budget funds of $7.8 mm for a total of $20.189mm.1

Proposition III - $20.225mm  bond authorization to refinance existing debt, mostly under variable rate contracts . This will bring our capital debt obligations into a fixed rate bond service and take advantage of the township's legal status to have non-taxed debt.1

4.  1Printable brochure in PDF format

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