City maintains good credit

City maintains good credit

As City Council begins considering the new budget for Fiscal Year 2008, one theme that sticks from the current budget is how to maintain existing facilities and build new ones in the face of rising construction costs and fluctuating revenues. At an October 2 City Council meeting, Councilor Julian Taliaferro said, “We have to find a way to put more money into facilities and buildings.”
The City’s top-notch bond rating, renewed this November, may help.

Charlottesville City Manager Gary O’Connell is partly responsible for our good credit rating—good city management is a requisite for low interest rates when the city sells municipal bonds.

When a city needs credit, it gets it by selling bonds to investors—mostly private investors who purchase the tax-exempt municipal bonds through brokers. For almost the fourth straight decade, Charlottesville has earned an AAA bond rating, the highest possible credit rating, from Standard & Poor’s and Moody’s Investors Services. Because of its good credit, when the City buys back its bonds, it does so at a low 3.95 percent interest rate. The current prime rate is 3.34 percent, by way of contrast.

The key to using bonds, says Ken Eades, finance chair at UVA’s Darden School of Business, is to use them sparingly. “A triple A rating is good news in the short run in terms of availability,” Eades says. “But if you go to the well too much, the more debt a municipality has, the lower the credit rating will be.”

In 2006-2007, the City will sell a total of $15.5 million in bonds for capital improvement projects. Councilors say borrowing the money to build projects now will actually save dollars in rising construction costs. By some estimates, local construction costs are inflating at a rate of nearly 1 percent a month, so $1 for construction today will only buy 89 cents worth of construction this time next year.
Charlottesville stays on top of its credit through relatively low debt, a strong economy and apparently wise financial planning. Though the City’s endeavors at “beau-tification” have sometimes earned it criticism for wastefulness, Charlottesville actually carries less debt than other cities. It currently owes between $50 million and $55 million.

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