When the City of Covington released the initial renderings of its new city hall in October, city officials said the city would likely take out municipal bonds to finance the project, although there was little discussion of the details.
Fast forward to July, and we now have a better idea of the city’s budget for the project: $26 million, according to city documents. The question arises: how is the city going to pay for the building, especially in the face of its struggles to bring in more revenue?
The funds for the new city hall will likely be secured through the use of general obligation bonds. These debt instruments will be secured in conjunction with an even broader restructuring of the city’s overall debt load. Neither the debt restructuring nor the bonds for the city hall have been approved by the city commission yet, but it’s worth exploring how they work in detail.
General obligation bonds are one of several common debt measures cities use to back capital projects. Newport, for instance, sought general bond funding early this year for a new parking garage. What distinguishes general obligation bonds from other debt instruments, such as industrial revenue bonds, is that they are backed by the city itself.
Here’s how they work: The city solicits investors to buy bonds, in this case $26 million worth, which will provide the city with cash to finance the building’s construction. The city is then fully on the hook to pay back the principal of that debt plus any interest. In a scenario where the project fails to generate revenue for the repayments, the city would have to make up the money some other way. In some cases, this could entail raising taxes.
The bonds for the city hall would be on a 30 year term, meaning the city would be scheduled to pay off the bonds’ principal and interest by 2054 if approved. City documents show the total payoff amount for the bonds, including interest, to be about $56.5 million.
The restructuring of the city’s remaining debt, on the other hand, is a way of controlling the amount of cash the city has to pay towards its debt every year. It’s a trade off–refinancing can increase cash flow, but it often extends the life of the debt.
“Cities restructure debt for lots of reasons,” said Janet Harrah, professor and senior director for the Center of Economic Analysis and Development at Northern Kentucky University. “It might be to get lower interest rates. It might be to improve their cash flow.”
Harrah did not comment on the city hall project itself, but she said that a debt restructure doesn’t necessarily indicate something bad has happened.
“That might not be the case at all,” Harrah said.
Covington’s Finance Director, Steve Webb, had proposed debt structuring during the city’s most recent budget talks as a way of increasing cash flow in the face of a deficit in the city’s general fund. Much of the shortfall can be traced back to the effects of tax revenue decline following the institution of work-from-home arrangements among its larger employers, namely Fidelity, which employs about 5,500 people out of its Covington office complex.
As a result of work-from-home arrangements, Fidelity began remitting payroll taxes to the jurisdiction where the employees were completing their work rather than the office’s location. This meant that if an employee worked from home outside of Covington, they were getting taxed in their home cities, even though they were officially employed out of the Covington complex.
Fidelity began calling its workers back into the office in February, but the finance department’s projections still showed that major operating expenses would likely exceed revenues by fiscal year 2026. In spite of this, Webb has expressed optimism about the city’s financial picture over the past few months, frequently saying the city’s performance exceeded expectations.
The city’s current debt load puts total debt payments at about $73 million through 2037. The proposed restructure, along with the $26 million in bonds for city hall, would add about $107 million to that payment total and extend the payments through 2056. It would also reduce the amount in yearly required payments for some of the city’s past debt.
The debt restructure is a way of dealing with the city’s shortfall in the short-term, but in the long run, Webb and the city’s elected officials have placed their hopes in the city’s economic development, especially at the former IRS site, as a means of solving the city’s financial woes.
For his own part, Webb was confident that tax revenue generated by the former IRS site would be more than enough to handle the city’s debt.
“In a matter of years, that’ll be millions and millions of dollars added to the tax base, from payroll tax, net profit tax, property tax, insurance license fees,” Webb said. “That’s why we do this. This is an investment in that.”
The design committee for the new city hall met with the project’s general contractor earlier this month to discuss refinements to the building’s design. City Manager Ken Smith updated the city commission about it at a subsequent commission meeting.
“I’m very pleased with the finished product, the final product,” Smith said. “I believe the design is actually better than it was before we went through the cost-saving options. The next steps are completing the remaining design and engineering [,which] will allow the general contractor to give us a guaranteed maximum price. And we were still hoping and expecting to break ground this fall.”
The design documents Smith referenced are not yet available for public review.