My Email to City Council Regarding the Road Repair Bond

Below is the full email I sent to City Council, as a follow-up to my public comments about bonding for road repair. I have not received any replies to date. I outlined my concerns in detail and am happy to discuss further with anyone who is interested. Decisions of this magnitude require far more discussion and transparency.

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To: Mayor McConnell and all Vallejo City Councilmembers

Subject: Concerns with financing road repair through a bond measure Date: February 23, 2024

Mayor and Council,

I'm following up on the bond measure conversation from Tuesday. Having only 3 minutes for public comment makes it difficult to outline critical points, and I also know that on Tuesday you all had been meeting for 8 hours by the time this item came up (which is a serious issue in itself, given the magnitude of the project). 

I am summarizing my concerns below. It is a lot, but it's really important, and am more than happy to discuss the issue further 1:1 with anyone who would like. In fact, I hope that you will meet with me to discuss.

To be clear, the issue I am raising is not the road repair itself. It is how we pay for it. I've split it into two main concerns.

First, the nature of road repair requires us to spread the expenditure over many years, meaning we have the ability to "pay as you go" rather than take on debt to finance it.

The purpose of a loan, most broadly, is to take on a large, one-time expenditure and spread out those payments over a long term. We take out loans to buy houses, cars, or for education when we owe the whole cost upfront and can't afford it. Debt can be a very beneficial thing when used to finance major infrastructure projects or investment.

However, debt has a cost - interest. And as we know from buying homes, interest often compounds to huge amounts - for homes, it often doubles the total price paid. But it's worth it if it's the only way to fund the investment.

With road repair, we don't owe the entire cost upfront. The expenditures have to be spread over a long period, both because we can't tear up all our roads at the same time (ACM Davis explained this during the meeting) and because of the logistics of getting crews out. Road repair is also an ongoing need. Just as soon as we repair our roads, we have to get on a regular, ongoing maintenance schedule or we run into the same issues again. The costs are annual and ongoing.

This means that it is a much better fit for us to pay as you go (or "PAYGO"). This allows us to fund repairs and maintenance indefinitely, avoid taking on unnecessary debt, and save tens of millions of dollars in interest.

The presentation on Tuesday included slides on possible projected financing with a PAYGO option. It alarmed me that staff did not present these slides to you, nor did they discuss with you the costs associated with a bond measure, namely the tens of millions the city would be paying in interest - money which could otherwise be spent on other projects, including ongoing road repair. They also didn't address the implications of the measure after Year 9, when the money is exhausted and the city will be stuck making debt payments instead of having funds to continue to maintain roads.

The bond projections included in the packet by staff were extremely generous, and included interest rates lower than current federal bond rates. Realistically, I do not think the City of Vallejo will be able to get that low of an interest rate. Staff may tell you that the interest will be minimal, but it's not. Even in the most generous cases, it will be in the tens of millions of dollars. More realistically, depending on the interest rate and length of the bond term, my rough estimate is $50 to $100 million. In my view it was grossly irresponsible of staff to ask you to approve a bond application without clearly and transparently informing you of the costs associated with such a bond.

Most importantly, the bond funding option ties our hands in the future. With the current proposal, road repair spans 9 years. After that point, the city would still have 6 to 21 years left of bond repayments (depending on the length of the bond term), but no more money for road repair. It essentially mortgages our future to save a few million dollars a year now. And the big problem with that is that after year 9, our roads will begin to deteriorate again, and we will have no money to address the maintenance because we'll be making debt payments. Basically, we restart the whole cycle of deferring maintenance.

To summarize, we have two options to fund the 9 year road repair project as presented to you on Tuesday:

• Option 1: We finance the road repair with a $120 million bond measure. We pay less per year during the 9 years of road repair, but then must continue making payments for an additional 6 to 21 years after the project is complete. After year 9, we owe debt payments and have no money left for road repair. Our roads deteriorate, and by the end of the bond term, we are right back where we started. We also pay roughly $50 to $100 million in interest.

• Option 2: We pursue the "PAYGO" option. We allocate some set amount of Measure P & general funds each year -- $13.3 million if we want to stick with the same 9 year timeline as was proposed on Tuesday (but we could explore other timelines as well, which would be my recommendation) -- and put those funds towards the road repair initiative. This option requires us to spend more in the short term, but we can afford it, and it's worth it. After year 9, we have access to the Measure P funds and can continue to allocate sufficient funds to road repair each year, in order to make progress on the remainder of the estimated $300 million in deferred maintenance. We avoid future deterioration and remain solvent and flexible in dealing with our needs.
  

Second, and possibly more importantly, the decision to borrow money for road repair is going to make it extremely difficult, if not impossible, to finance a new police station.

Staff presented this item to you without a holistic picture of the city's infrastructure and capital improvement needs. The reality is that road repair is not our only major need, and we need to be selective about which projects we choose to borrow to finance.

Everything I said above about the nature of a road repair project is the opposite for a police station. Construction of a new station is going to require the city to spend a large sum (probably around $100 million) in the span of 1-2 years. The only way to pay for it will be debt. The best way to pay for it will likely be a bond measure.

Firstly, I'm not sure if it's even possible to bond for two projects of this magnitude at the same time. I've never heard of a city doing that, and I'm not sure a bond issuer would approve it. We would probably pay a premium in interest at the very least. Bonding for road repair might eliminate our most viable financing option for a police station - and block us from that type of financing for 15-30 years.

Even if we do manage to borrow for a police station in addition to the road repair bond, it would be an extremely dangerous financial decision to take on that much debt at one time. It would cripple our city's finances for the next 20-30 years.

Another worry, as I said right at the end of my public comment, is that after authorizing the $120M bond for road repair, staff will come back to you and say that we cannot afford the police station, and because of that we will need to move the police into 400 Mare Island Way, which as you all have expressed in the past, is NOT the right fit for Vallejo.

Please do not approve debt financing for road repair without insisting that staff first provide you a clear financing plan for the police station. If we want to rebuild at Amador, we need to be extremely calculated in the financial decisions we make.

Again, we have two options:

• Option 1: We bond for road repair, and somehow also manage to bond for a police station (which may not even be possible). We encumber the city with $200 million of debt over the next 20-30 years. For the first 9 years, we have a bit more flexibility in the budget as we repair the roads. We have improved roads and a new police station, but after Year 9 our city is saddled with continued debt payments which prevent us from delivering basic services. Roads deteriorate again. With so much preexisting debt, the city has no tools to address its worsening pension liability problem. The city is deeply in the red and at risk of another bankruptcy.

• Option 2: We do PAYGO for road repair and bond for a police station. Our bond for the police station is easier to secure and has a more favorable interest rate. For the first 9 years, our budget is tight - we can afford everything, but we have limited ability to fund additional priorities. After Year 9, we have improved roads and a new police station. We continue to pay the debt from funding the police station, but have access to the Measure P funds for ongoing road repair and financing of additional priorities as they come up. The city is much more financially stable and secure.
  

Every decision has tradeoffs, and ultimately this decision is yours. To me it's clear. For decades, City of Vallejo officials have taken the easy way out, ignoring our systemic issues and opting for the short-term, politically expedient options. We need to reverse that course ASAP.

Staff will not be here by the time the consequences of these decisions present themselves, which is why they are comfortable pushing the bond measure without presenting you the full context. We are the ones that will be here after year 9 when the consequences hit. It's also worth noting that none of us will be on Council - you'll all be termed out, and even if I do two terms as Mayor, I will also be done by the time any of these consequences hit. 

What I'm proposing here is doing the right thing for the medium to long term, even if it's less politically expedient in the short term. 

It's time for someone to take responsibility for the city and stop repeating the same cycle of kicking the can and letting future leaders deal with the fallout. I hope you all will start that process by making good fiscal decisions now.

Respectfully,

Andrea