Raleigh mulling projects due to economic free fall

| October 02, 2008

That $700 billion bailout bill in Congress probably isn't going to put any money in your pocket. But it is almost certainly going to put some in the coffers of your local government—which will help your tax rate down the line.

Raleigh City Manager Russell Allen was in New York City last week talking to rating agencies—Fitch, Moody's, Standard & Poor's—about the city's financial health and why it should continue to have top-flight, AAA-rated credit—which, he says, it almost certainly will continue to merit.

That's important because Raleigh has been planning to hit up the credit markets for $550 million to finance construction of a new police headquarters downtown and several "remote operations" service centers outside the city core. The latter are designed to deliver sanitation, roads, parks & rec and other services more cheaply to Raleigh's outskirts than is the case now; almost all of city government emanates from within a few blocks of City Hall.

But, Allen says, the city doesn't need the full $550 million right now; what it does need is a line of credit to pay for the early design work. When the real money is needed, the City Council has already authorized the issuance of city COPS (a form of bond debt known as "certificates of participation") to be repaid over two to six years.

Until Sept. 26, this line of credit approach was easy pickings for a AAA-rated municipal government like Raleigh. Money was available at low interest rates, and Raleigh had two big banks bidding for its business: Bank of America and Wachovia.

Since then, of course, Wachovia has gone away, "bought" for $2 a share by Citigroup, and the credit markets—including offers for commercial paper—have frozen. Whether the bailout bill will re-open the markets is a big question mark, Allen says, but he has his fingers crossed.

Meanwhile, he says, "we're studying our options," but currently they do not include going into the markets for money. Instead, Raleigh is drawing funds from its various capital reserve accounts, which it can do temporarily, but flush capital reserves are the reason Raleigh is rated AAA, so it doesn't want to hit them up for too long or too much.

If the markets stay frozen, then Raleigh will have to reconsider its big capital projects until they unfreeze, Allen says.

Perhaps the best indication of how the markets have changed in the past week is what has happened to Raleigh's variable-rate debt. Raleigh has been able to finance about 10 percent of its existing long-term debt on a week-to-week basis in the markets at rates of—are you ready?—1 1/2 percent to 2 percent.

Those rates have jumped to 5 percent to 7 percent, Allen says, higher than available long-term borrowing rates—which are supposed to be lower. "Right now, everything is topsy-turvy," Allen says.

When we talked, Allen was anticipating the Senate vote on the bailout bill; it passed last night by a 74-25 vote, and is expected to be taken up by the House tomorrow morning. Allen will be watching.

He remembers the late '70s, when he was managing towns in South Carolina and stagflation had pushed long-term borrowing rates above 10 percent. In the '80s, those debts were refinanced as long-term rates decreased—a reminder that what goes up eventually comes down. (Or so you hope if you're a municipal borrower.)

Allen's point is that when the short-term credit markets do revive, they probably won't be loaning money at 1 1/2 percent again soon. But if they "click up" by another point or two, such rates would still be relatively low in historical terms. But at the 7 percent mark, that's a fiscal problem and progress on projects slows.

Speaking of which, Wake County has pulled back on a $424 million bond issue it planned to sell in the now-frozen markets; it was intended to finance school and library construction work.

According to The New York Times, municipal borrowers all over the country find themselves shut out of the credit markets. They hope this bailout bill will pass—and that it will work.

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