‘A Safe Situation’

City governments in Northwest Arkansas carry hundreds of millions of dollars in debt, but are well within the limit of what they can afford and will likely take on more debt in coming years, experts say.

The four largest cities in Benton and Washington counties owe $405 million in long-term bond debt, finance records show.

“The numbers sound quite large, but it’s a very safe situation,” said Dennis Hunt, senior vice president of public finance for Stephens Inc., a Little Rock-based investment company. “Nobody has an extremely large bond debt in this region.”

That $405 million figure includes only debt attached to the general operating funds for each city. More debt exists in some utility funds or other special projects. School districts, counties, rural development authorities and other government units carry their own bond debt.

Governments often issue bonds to sell to finance large projects that can’t be covered with available cash. The bonds work like a mortgage, paid off with interest over a period of years. Those who buy city bonds get to keep their interest tax-free. Each bond has a tax or other steady source of money earmarked and set aside to make monthly or yearly payments. That set-aside money is often a portion of city or county sales tax income, either from existing tax revenue or by approving an additional, dedicated tax.

Bonds include project costs, projected interest and fees, along with a built-in financial cushion to guard against declines in whatever revenue stream pays for the bond. Depending on how the bond will be paid back, voters often must approve such debt and the payment structure. The state constitution requires that voters approve any bonds backed by tax revenue.

Springdale voters approved a 1 percent sales tax increase in 2003 for $105 million in road improvements. The city sold $60 million of those bonds the next year, then another round in 2006.

“We couldn’t build $105 million in roads right away, so we sold enough to cover the first round of projects, then went back with a second round of projects several years later,” said Wyman Morgan, director of administration and financial affairs for Springdale. “We also had to go back in and redesign some things to later include the Arvest Ballpark in those plans.”

The city still owes $99.5 million on those bonds, with the final payment due in 2027.

“Without the bonds, we’d still be building roads, still be in total gridlock,” Morgan said.

Sales tax income went down as the economy tanked in 2007 and 2008. The city always had enough to meet bond payments, Morgan said. When sales tax income is better than expected, the city can make additional payments to pay the bonds off sooner, or hold the money in reserve in case revenue dips later.

“There’s a lot of cushion designed into any bond issue,” he said.

Most bond agreements include a cushion or margin of safety of about 25 percent, Hunt said.

Springdale will ask voters in August to approve another round of bonds to build an interchange at Don Tyson Parkway and Interstate 540, replace two fire stations and improve parks. Dedicating part of existing sales tax income will pay that debt, approximately $65 million.

Further north, work continues on a series of bond-financed projects in Rogers. Voters approved a $134 million package last year to build sports and aquatic parks, streets, improve Lake Atalanta and buy new police and fire vehicles.

“We’re well under way on these things,” said Mayor Greg Hines. “These are projects that will continue to benefit Rogers long after they’re paid off.”

Rogers showed $77 million in debt at the end of last year, but the $134 million replaces that number, not adds to it. Part of the 2011 package included refinancing debt originally issued in 2007, and combining new and existing debt into a single repayment.

Such refinancing is common whenever a city or other government entity takes on new debt, Hunt said. At current interest rates, many governments are refinancing debt to get lower payments, he said.

The Washington Water Authority, which operates rural water service in parts of Washington County, is seeking to refinance a $16 million bond debt from 2007. With lower interest rates, the authority could save more than $1.3 million in interest over the remaining 27-year life of the bond, or about $60,000 annually, officials said.

“Aside from refinancing, things have been very quiet over the last few years,” Hunt said. “Getting debt approved by voters, even with excellent borrowing terms, has been a lot harder than it used to be.”

School districts in particular felt that backlash in Northwest Arkansas. Fayetteville school officials looked for alternative financing after voters shot down a $105 million renovation package in 2008. Springdale voters rejected a $78 million schools package in 2010 before narrowly approving a smaller bond issue in 2011. Earlier this year, Bentonville voters soundly rejected a $95 million plan for a second high school.

Multiproject bond issues like those approved in Rogers last year and on the ballot in Springdale next month are becoming common, especially after several years of deferred projects and investments, Hunt said. He expects a flurry of bond issues over the next two or three years.

“There’s a lot of pent-up demand for improvements,” he said.

Excessive bond debt has factored into the bankruptcy filings of several governments around the country since the 2007 financial collapse. Most of those in meltdown involved general obligation bonds, where a government uses bonds to generate revenue for day-to-day operating costs. Arkansas law forbids local governments to issue those types of bonds. The federal debt is organized under general-obligation-style bonds, or Treasury Bills.

While sales tax is the most common form of dedicated repayment in Arkansas, other bonds use specialized sources. A $3-per-passenger fee for each boarding pays the $62.2 million in remaining debt from the construction of Northwest Arkansas Regional Airport. The original construction bonds issued in 1997 were refunded and refinanced in 2003 to reduce the original, higher interest rates, said Scott Van Laningham, executive director at the airport.

“The original bonds were high-risk, because we were building without any contracts signed with the airlines, without any firm assurances,” he said. “What we have now is a much better situation.”

County debt is far lower than that for cities and school districts. Benton County has no outstanding bond debt, while Washington County’s only bonds are for a $5 million renovation of the historic courthouse, completed two years ago. That bond, paid for from fines and court fees, runs through 2028 but will likely be paid off much sooner, said Roger Haney, county treasurer.

“In terms of bond issues, $5 million is very small,” Haney said. “We chose to use bonds because we had two projects, the old courthouse and the parking deck, that had to be done at the same time. We paid cash for the parking deck, but trying to pay cash for both would have put a big dent in the county’s reserves. The bond route made a lot more sense.”

Some bond-financed projects not only stretched local dollars further, but also helped bring in state, federal or private money to augment or expand projects. Fayetteville issued $47 million in bonds in 2007 for sewer improvements, street work and construction of a city trails system. Fayetteville’s trail system helped secure $36 million in federal money to create the Razorback Greenway, a larger trail system under construction now that will link all four major cities in the region.