The City's Capital Spending Bind

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Last year, the city faced an operating budget crunch that Mayor Bill Haslam solved primarily with a 35-cent (13 percent) property tax increase that raised city revenues by close to $10 million. This year, the good news is that the city's financial outlook has brightened to the point that Haslam's General Fund (operating) budget for the fiscal year ahead is expected to have about $7 million to spare for capital expenditures.

The bad news is that this $7 million represents the bulk of the money available for funding close to $25 million in worthy capital projects proposed by the city's several departments. So this year's crunch, which Haslam must resolve by the time he presents his budget on April 28, comes in terms of deciding which of some 170 projects on a master list will get funded and which will be denied—or at least deferred.

The project list covers improvements that span the gamut of city services and responsibilities: drainage, roads and sidewalks, parks and greenways, recreational facilities, police and fire fighting equipment, downtown redevelopment, etc., etc.

In years gone by, the city could cover a lot of capital outlays by issuing bonds to pay for them. But the $162 million in debt that former Mayor Victor Ashe incurred to build the city's new convention center has put a halt to any more bond financing for a while to come. According to Senior Finance Director Chris Kinney, Knoxville's $248 million in total debt exceeds the amount that bond rating agencies deem consistent with the city's AA credit rating. Only by pledging to reduce that debt—Kinney won't say by exactly how much—did he and Haslam manage to avert a lowering of the city's credit rating that would add to its borrowing cost.

The city's debt is rolling off at the rate of between $10 million and $15 million a year. And each reduction of that magnitude frees up about $1 million in revenue derived from the 81 cents in property taxes (of the $3.01 total rate) that's dedicated to debt service. "Within a two- or three-year time frame, we'll probably free up $20 million to $25 million in new debt capacity," Kinney says. So relief from the current crunch is at least within sight. In the meantime, the $1 million a year in revenues that's no longer needed to service debt can be allocated to capital projects on a pay-as-you-go basis. So can the proceeds of city property sales such as the $1.8 million derived from the sale of the Candy Factory and the Victorian Houses in the World's Fair Park for redevelopment.

Taking the sum of the two figures above and adding it to the $7 million drawn from the General Fund produces about $10 million in funding available for capital projects in the fiscal year ahead. After backing out the $3 million for street paving, which is a sacred cow, what's left just happens to equal the $7 million proposed for downtown projects at budget hearings last week by the city's Chief Operating Officer Dave Hill. Hill chaired a Downtown Advisory Committee appointed by the mayor last fall to recommend the next steps needed to further downtown's revitalization, but its exhortations don't jibe with the voices Haslam is hearing from many neighborhood groups who believe the city's priorities lie elsewhere.

"Some people would say make sure all of the $7 million goes downtown. Others would say don't spend a penny of it there," Haslam allows. "So my job is to determine the balance between meeting the legitimate everyday desires of taxpayers and those things which we can do to move the city forward."

A considerable part of the $7 million that Hill listed for downtown is already committed. To wit: $1.5 million for the local share of TDOT scheduled replacement of the Gay Street and Church Street viaducts, as well as $1 million of a $3 million total spread over two years for the downtown cinema, whose construction start is anxiously awaited. The $1.8 million proceeds from the sale of World's Fair Park assets is also dedicated to reinvestment in the park.

That leaves as the largest discretionary items $1 million each for Jackson Avenue redevelopment and for what's called a Central Business District improvement fund. Hill has said, "It will be shame on us" if the city doesn't support restoration (as loft dwellings) of the historic but dilapidated McClung warehouses that line Jackson with streetscape, sidewalk and perhaps faade improvements. A CBD fund, per the DAC's recommendations, is aimed foremostly at spurring retail revitalization on Gay Street and Market Square.

As an alternative to direct city outlays for revitalization projects, Haslam is stressing the use of tax increment financing. TIFs have been used to help developers get financing for downtown building restorations by dedicating resultant property tax increases to these projects for several years. But Haslam believes TIFs can also be employed to finance public sector improvements, including streetscapes and perhaps even a garage. Moreover, he believes downtown residential redevelopment has "gained enough momentum" that incentivization isn't needed anymore. Hence, tax increments on prospective downtown residential development could go for public sector TIFs.

The same approach applies to South Knoxville waterfront development, which is another Haslam priority that Hill is spearheading. Hill's budget request for the fiscal year ahead included $605, 000 for a "South Waterfront Action Plan" that could lead to multimillion dollar outlays in subsequent years for road work, other infrastructure, and creation of a waterfront park. Could these all be funded with TIF revenues? "Absolutely," Hill replies.

So creative financing may at least allay the bind that the city's debt ceiling is imposing on traditional means of financing capital outlays.

—Joe Sullivan

© 2005 MetroPulse. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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