Where has the G. O. bond money gone so far and where will it go? The answer is complicated

You remember way back in November 2022 when the people of Truth or Consequences overwhelmingly approved the issuance of $3 million in general obligation bonds? 

$2 million for water and wastewater projects and $1 million for road projects resulting from tearing up streets to get to underground pipes. 

The T or C Chamber of Commerce ran the marketing campaign, enlisted by then-City Manager Bruce Swingle. The thrust of that campaign was, “look at all the leaks. The city needs money to fix the leaks.” 

There were more detailed presentations by the city’s bond counsel, Chris Muirhead of Modrall Sperling Law Firm, and by the city’s financial advisor, Mark Valenzuela, principal of Bosque Advisors. 

Valenzuela advised the city to identify the projects the city was going to spend the $3 million on before issuing the bonds. 

Mayor Rolf Hechler specifically asked Swingle to only use the bond money to “leverage” grant and loan applications from federal and state sources. In other words, to use the bond money to satisfy the 10 percent to 60 percent cash match that is required by state and federal agencies to get the award. Those agencies want cities to demonstrate they have charged reasonable utility rates and managed that money to pay for at least part of the project. Or, that the city has managed its money well enough in general to put up a cash match. Or that the city can at least come up with enough money annually to pay off a 20-year loan at a low interest rate. 

T or C had not been doing that. Instead it had been using utility fees to pay for deficit spending in the general fund. The general fund is supposed to pay for government services that are not expected to be self-supporting, such as fire, police, street repair, financial administration and city management. Government services should be funded on taxes, not utility fees. Swingle stopped the raiding of utility funds in 2021. Water, wastewater, trash and now electric utility rates increase annually.  

But a few years of rate increases and no more raiding is not enough to make up for the cost of  dire repairs and replacement from 60 years or more of neglect. Swingle spearheaded a G.O. bond “program” that would raise property taxes, not to use as cash for emergency repairs, but  to capture grants and loans that would spread the costs of repair and replacement over  in fund debt, which would spread some of the costs over 15 to 20 years.

Valenzuela laid out a plan to raise property taxes once, the city going to the voters every four years for the approval of another $3 million G.O. bond. Unlike Albuquerque, which also has a rolling G.O. Bond program, T or C has far fewer properties and low property values. Albuquerque’s property taxes can float big G.O. bond issues that can fund whole projects. T or C’s property-tax revenue cannot. T or C’s G.O. bond money is there to leverage and capture state and federal grants. 

Leveraging requires coordinating G.O. bond issuances with state and federal grant/loan applications, which have a two-year or more timeline. The city must therefore carefully plan its capital projects more than two years in advance so that critical projects are cued up in the pipeline first, with less critical projects following. To do that, the city would need to know the location and condition of its assets, such as pipes, mains, valves, etc., etc.,The city has only recently been hiring engineers to do water, wastewater and electric asset management plans necessary to put capital projects in priority order. 

It is therefore no surprise that revenues from G.O. bonds have not been used to leverage and capture grant/loan awards from state and federal agencies—until City Manager Gary Whitehead was hired a couple of months ago. 

Whitehead agreed to an interview with the Citizen following the March 26 city commission meeting in which the $3-million general obligation bond “program” was on the agenda. 

He said $238,000 in total has been spent so far of the $1.58 million in bonds issued so far. About $40,000 went to pay for the “cost of issuance,” and about $198,000 has gone to SmithCo Construction of Caballo. 

SmithCo was hired by the city on an on-call basis to repair water and wastewater leaks and breakdowns–for emergency repairs. The city staff doesn’t have the licensing to work on water lines four feet deep, which require that coffer dams be built, for example, and it doesn’t have the big equipment that is needed in some cases. So, instead of going to leverage and capture grant and loan applications, the money has gone to emergency water and wastewater repairs. 

$161,000 went to SmithCo to put in a waterline along Tungsten Street, $7,000 to fix a problem with the effluent pond for the wastewater department and $25,000 to fix a waterline at 6th Avenue and Ash Street, Whitehead said. 

Whitehead has been studying the capital projects grant and loan awards and coordinating their match and loan requirements with G.O. bond issues. It’s complex, so here comes the explainer part of the article. 

TAX FREE, IF COMPLY WITH IRS RULES

Municipal general obligation bonds are bought by investors because they are low risk, since state laws allow cities to raise property taxes as high as they need to go to pay off the debt. In addition, investors buy them because the profit earned is tax free in most cases.  

The people are protected from being taxed to death by a cap set by the state on how much the city can borrow or the amount the city can issue in general obligation bonds. State law says the city can borrow 4 percent of its assessed property value within its city limits. T or C has $122 million in assessed property value, which is one-third of the market value. A $300,000 home would be taxed on $100,000, for example. Currently the city can borrow or issue $4.9 million in general obligation bonds–4 percent of $122 million. 

All general obligation bond issuances have to be approved by city voters, which is another check on outrageous property taxes. T or C residents approved $3 million November 2022. 

The New Mexico Finance Authority is really a sort of middleman in T or C’s G.O. bond issuances. T or C is not issuing the bond. NMFA has agreed to package and sell the bonds in its own name and under its own bond credit rating. T or C doesn’t have a bond credit rating. T or C has to pay issuance costs. NMFA is not giving T or C whatever it earns by selling the bonds on the open market. Instead, it is loaning T or C a set amount of money at a set interest rate. NMFA is issuing the $3 million in bonds in four tranches of about $750,000 each at about 2 percent interest. 

At a January 25, 2023 meeting, Valenzuela estimated the cost of issuance and interest for the $3 million loan would be $1.2 million, but his March 26 chart showed it will cost the city less than $600,000. The principal and interest of the nearly $3.56-million debt is spread over 16 years, from 2024 through 2040. 

The first tranche, which the city refers to as the 2023 G.O. Bond, was $790,000 and it was issued April 1, 2023, of which $238,000 has been spent.  

Here comes another wrinkle. The NMFA loan specifies that the city must issue $3 million in bonds within four years, although Muirhead said, at the March 26 meeting, that the four years can be extended. 

The Internal Revenue Service says that in order for investors to reap tax-free income from their bond investment, the city must spend or allocate 5 percent of the loan proceeds within six months. The city must spend or allocate 85 percent of the loan proceeds within three years. 

The city has spent or allocated enough of the first tranche to be in compliance with the 5 percent/six months IRS requirement. Whitehead is still figuring out how the 85 percent/three years IRS requirement will be met, which projects will be matched with and leveraged by the remaining first-tranche money. 

The 2024 G.O. Bond or the city’s second tranche was also $790,000 and it was issued June 1, 2024, Whitehead said. None of that money has been spent, but $142,000 has been allocated, thus meeting the 5 percent/six months IRS requirement. The two projects to be leveraged with that bond money are:

The city received a $750,000 Community Development Block Grant from the U.S. Department of Agriculture–for the second time–to purchase smart water meters for customers. The grant comes with a $75,000 cash match requirement. 

The city received a $335,000 grant from the NMFA’s Colonias Infrastructure Fund, which comes with a required 10 percent or $33,500 cash-match requirement and $33,500 loan requirement. The second tranche will pay the cash match and loan. 

Whitehead said he is still working on matching bond money to projects to meet the 85 percent/three years IRS requirement. 

By the way, there is no IRS deadline for spending 100 percent of the bond/loan proceeds. 

At the March 26 meeting, Valenzuela and Muirhead, city bond and financial counsel, proposed that the city issue the 2025 G.O. Bond or third tranche for $790,000, but Whitehead, prior to the meeting, asked them to put it off while he does more coordination and planning. It’s a three-month process, which will start in September, with issuance in December. 

The fourth and final tranche or 2026 G.O. Bond will be for $630,000. 

TAX/DEBT PAYMENT

Now we come to your part, the taxpayer. Your tax money must be coordinated with bond issuances and their corresponding debt payments. 

The people passed the $3 million G.O. bond November 2022. The property tax was 2.225 mills for nonresidential property and 1.542 mills for residential properties. 

The New Mexico Department of Finance and Administration determines what the new tax rate will be to cover G.O. bond debt. They set the new rate at 3.5 mills for 2023. 

But, according to Whitehead, the DFA didn’t inform the Sierra County Tax Assessor of the new rate, and taxes didn’t go up in 2023 and T or C didn’t get any new tax revenue. But it still had a nearly $300,000 debt payment it had to pay to NMFA. The city paid the bill from the general fund. 

To make up for the previous year, the DFA set the 2024 tax rate at 4.535 mills. That brought in nearly $556,000 in revenue, of which nearly $289,000 went to the NMFA debt payment.

The $267,000 in excess revenue from the taxes collected may be used to partially pay back the general fund. 

T or C property taxes are expected to be 3.5 mills in 2025 and 2026, generating about $430,000 in revenu

The debt payment to NMFA in 2025 is about $282,000, which will leave about $148,000 in  excess revenue. 

In 2026 the city’s debt payment will be about $492,000, with only $430,000 in tax revenue. The debt payment is higher since the city will have issued three $790,000 tranches. The $62,000 shortfall will be made up from excess 2025 tax revenue. 

Now you see how Whitehead has to coordinate humps and valleys in debt payments, as well as coordinate the timing and priority of construction projects, as well as trying to leverage bond money, while also being hit with unplanned expenses from leaks and breakdowns? 

There was no discussion of how the bond money is to be apportioned for which projects for road repairs during the March 26 meeting, and I didn’t ask Whitehead about it, because that level of detail would make everybody’s head explode, but no doubt he is coordinating and planning that aspect of the G.O. bonds too. 

April 3 at 9 a.m.,city commission chambers, will be the first budget workshop. Whitehead will have more to share then on the G.O. bond revenue and how it will be used to leverage water, wastewater and road projects.