The Truth or Consequences City Commission approved another multi-million-dollar bridge loan at the March 11 meeting, which will make its third with the local Bank of the Southwest at 5 percent interest.
It’s a fairly recent requirement of the U.S. Department of Agriculture’s Rural Development grant/loan program. It used to finance the city’s loans at a 2 percent or even lower interest rate. No bridge loans were required for numerous grants/loans to upgrade the city’s wastewater treatment plant from 2014 through 2019.
Then it all changed. In 2019 the city received a $9.417 million grant/loan from USDA RD, of which 42 percent or $3.96 million was grant and 58 percent or $5.457 million was loan. The USDA has always required that the loan money be spent first before it kicks in the grant money. Its new requirement that the city seek a local bank to finance the $5.457 million loan for two or three years–until the city burned through the loan money–made the city jump through commercial-bank hoops and scrutiny. It also resulted in the city paying 5 percent interest on accruing draws over two or three years. In short, it was a much more complicated and expensive process. It also slowed the project down and added many city-staff hours and thus administrative costs. But most notably these time delays–especially during covid–as well as higher financial and administrative costs meant higher and unexpected construction costs and less money to cover those costs.
The $9.417 million 2019 downtown MSD or Main Street District water project’s construction had to be cut down three times. The parts that were left undone are being completed and added to other projects for which the city has since received grants/loans. In turn, this rejiggering required re-engineering and planning, with their attendant costs.
The way USDA RD grants/loans work now is that USDA sits back until the city burns through the bridge-loan money. When it is almost gone, the city goes back to USDA and it comes in and takes over the bridge loan, spreading the interest and principal costs over 20 to 40 years at around 2.5 percent interest.
Chris Muirhead of the Modrall Sperling Law Firm has long been the city’s financial advisor on loan and bond issuances–a role he maintains with numerous local governments throughout the state.
He spoke with the Citizen after the city commission’s approval of the $2.673-million bridge loan, which is for the Water System Project Improvements 2.
I asked him why USDA RD stopped financing the city’s loans upfront. I told him I had doggedly tracked down a USDA RD rep in 2019. She told me the policy had changed in 2015. When I asked why, she said, “We are not a bank.” I replied, “You used to be.” She wouldn’t answer other questions and merely referred me to documents too dense in legalese to pull quotes from as a substitute source.
Muirhead confirmed that the policy change didn’t happen in the State of New Mexico until 2019 and later. He agreed that USDA used to be a bank. He theorized that going to bridge loans saved USDA a huge amount of administrative costs by shoving the financial vetting and documentation and monitoring of borrowers onto local banks and cities’ staffs. He noted that the USDA only had to “swoop in at the end,” finalizing the loan in a one-time transaction instead of over the course of three years or so. “It [the policy requiring bridge loans] is much more expensive,” Muirhead concluded.
All the mumbo-jumbo past city managers Gonzales and Morris Madrid fed the public about the USDA wanting to improve local economies by forcing poor rural governments to use them for bridge loans is a smoke screen for keeping their administrative staff and costs down.
Assistant City Manager Traci Alvarez came into the conversation at the end. She’s in charge of grant and loan applications. USDA is no longer the city’s preferred water/wastewater grant/loan government funding source, she said, because Colonias Infrastructure grants/loans have more money to dole out. Colonias money comes from the federal Department of Housing and Urban Development in the form of block grants to states. In this state the New Mexico Finance Authority oversees Colonias Infrastructure grants/loans.
The city commission never discusses or thinks through various grants/loans costs and rewards. It is never informed of and nor do they question the expenses and enormous staff time that USDA grants/loans entail. They are presented with a grant application request by staff. They rubber-stamp staff’s request to apply for the grant/loan. They are next presented with the initial approval of the grant/loan by USDA and asked by staff if they want to accept the award, which the city commission again rubber stamps. Then comes the bridge loan document, which they approve without question.
Staff will spend many more hours on administering the bridge loan. Each draw, each month’s interest costs over three years will be transacted and monitored
City Manager Gary Whitehead told the Citizen the city must make sure it doesn’t draw down more than 95 percent of the loan to ensure all costs, including unexpected ones, are covered in the project. This 95 percent draw down also triggers the city’s request that USDA take over the loan, Whitehead said.
Hopefully Colonias grants/loans will not dry up. They require a 10 percent cash match and 10 percent loan, making the city’s costs about 20 percent to get 80 percent of the project funded by grant. But the city must fund the upfront costs of a preliminary engineering report or scrounge for other grant money for the PER to apply for the grant/loan in the first place. On the other hand, PERs are funded by the USDA grant/loan.
Still, at least from my observation post, the three years of draw downs and thus city oversight and administration are eliminated with Colonias grants/loans, which don’t require local bridge loans.
And USDA grants/loans offer a lower grant percentage. The last three have come with 42 percent grant (MSD project), 36 percent grant (Water System Improvement Project 1) and 73 percent grant (Water System Improvements Project 2) Colonias grants/loans average 80 percent for the grant portion.
The latest bridge loan, Water System Improvements Project 2, for $2.673 million, is a three-year term at 5 percent interest for draw downs, Muirhead told city commissioners on March 11. He clarified for the Citizen that once a draw down is made, the 5 percent interest is calculated each month thereafter until USDA takes over the loan. Therefore the interest is on the accruing draw-down amount, which makes for an expensive and hard-to-calculate accruing interest amount. The principal/interest ratio changes each month, making the money available for construction vary each month. The interest is not due until the end and is a one-time payment and the city doesn’t pay it. The USDA incorporates the bridge loan’s principal and interest rate into its long-term loan.
The city staff has only closed out the first bridge loan, which was $5.457 million for the downtown MSD project, and the city commission, under then-City Manager Angela Gonzales, wasn’t informed of the final principal/interest ratio and cost–and they never asked.
Hopefully City Manager Gary Whitehead will tell us what those costs were for Water System Improvements Projects 1 and 2 so the city commission and public can better understand the cost/rewards for a USDA loan.
Water System Improvement Project 2 will replace 14,000 linear feet of water pipe along Veater Street and Riverside Drive. For more information, please go to the city’s website at: https://www.torcnm.gov/develop/city_blueprint/wspi-2/index.php