I say let’s approve these referendums. Commentary by Jan Dillow

The bond referendum is best way to protect our island

Assuming the second amendment wording is passed by council today (July 28), there will be two referendums on the Nov. 3 ballot.

- The first gives the village the ability to issue General Obligation Bonds for up to 30 years. Proceeds from the bonds would be used exclusively for infrastructure to protect Key Biscayne from natural events such as hurricanes, sea level rise, beach erosion and drainage.

- The second referendum would allow the bonds to be exempted from the village’s current debt capacity limit.

Why do this now? What’s the rush? Why not do this next year? ​​

Because climate change presents an existential threat to the long-term future of our island. Either you believe in global warming and rising seas (which you can witness by looking at any seawall or down any storm drain), or you don’t. It would cost each property owner $1 to $2 per day to try to protect their home and family from these risks. That seems like a worthy expenditure. And, frankly, we are behind other local, state and national governments in reacting.

Locally, the City of Miami, Miami Beach and Hollywood have already received public approval for funding, and two have received money and started projects. In addition, we all know the wheels of government turn slowly. Even after the bond referendum (or authorization) is approved there’s ​a lot​ of work that needs to be done before Key Biscayne can break ground on any one of the proposed projects. If, because of COVID-19, people are hurting economically, when we are finally ready to issue a bond and start a project we can always delay. There is no expiration date on the bond authorization.

There are a lot of other reasons to go forward now: the market for municipal bonds is small and we will soon have to compete with a lot of other seaside communities for limited funding; interest rates for tax free municipals are at historic lows - close to zero - and borrowing costs are cheap, and KB needs to have “shovel ready” projects to take advantage of any potential infrastructure stimulus program. All are true.

But, fundamentally, this is about prolonging the life of the village and we should start as soon as possible.

Here are the basics about the Bond Referendums

The first question gives the village the ability to issue ​up to​ $100M in General Obligation (GO) Bonds for up to 30 years to pay for a multi-prong integrated program designed to address climate change.

There is no plan to issue a single large dollar bond​.

The strategy proposed by the village CFO Benjamin Nussbaum, is to issue smaller tranches of debt periodically over a multi-year period. These tranches will fund “shovel ready” projects that have been fully vetted and approved by a supermajority of the sitting council with the input of residents, who will be able to opine at every milestone along the way. This mimic’s the City of Miami’s Forever Bond Project in which the city asked for and received approval to issue up to $400M for climate change bonds in 2017. ​​Thirteen months later the city issued the first tranche of debt totalling $58 million (14.5% of their total authorization). A second tranche is expected later this year, three years after authorization. Despite this gradual start the city got a tremendous amount of positive press in 2017/2018 for conceptualizing and beginning to implement a comprehensive climate change strategy.

The village may or may not need to issue the total amount authorized​.

This will depend on the projects approved and the monies we could receive from grants and potential infrastructure stimulus programs. The problem is Key Biscayne can’t efficiently finance large scale projects with an unknown patchwork of funding sources. Think of the bond authorization as not only a funding vehicle but also a financial backstop to smooth out the payment of funding sources with arbitrary cash delivery dates. For example, the village could issue a 2-year general obligation note to pre-fund and accelerate the start of a project where a grant is expected to be paid 2-years hence.

Many of the projects that comprised the request have been discussed and debated at council meetings for years​, ​though that doesn’t guarantee that any will be approved in whole or in part​. Broadly, the projects are:

○ Complete Streets including street elevation, swales and infrastructure alignment components, estimated at $40 million;

○ Beach and Shoreline Protection, including offshore breakwaters, DERM mandated environmental reparations, and beach renourishment, estimated at $23 million (net of other funding offsets);

○ Utility Infrastructure Hardening estimated at $35.2 million, net of FPL contributions.

● COVID related economic concerns are real, but approval of the bond referendum doesn’t trigger any immediate financial consequences.

This is only a placeholder that says the village can issue bonds, not that they must issue bonds. Property taxes would only be affected after issuance. And, there is a built in lag time. Bonds cannot be issued until a project is fully approved and the issuer has met all the legal requirements for bond registration. It took the City of Miami over a year to fund its first project.

Property taxes will eventually go up, but the full impact will be spread over a multi-year period. ​

Current and future residents who benefit from the upgrades will bear the cost. This isn’t a one-time assessment. It's hard to pinpoint exactly how much taxes will ultimately rise; we don’t know when the bonds will be issued or for how much. But, the number I’ve seen is $650 per $1 million of assessed property value (based on a full $100 million issue at current rates). That would mean $350 for a property with a tax assessed value of $500,000. If you do the math, that is basically $1 or $2 per day to pay for critical projects that will last for decades.

The primary payback is, of course, a longer life for the Island and a better quality of life. But, there may be economic benefits as well. The ICF Business Case Stormwater Study for Miami Beach showed a 4% to 14% increase in property values for houses that benefitted from road elevation (n.b. -- Miami Beach’s property value trends have consistently outperformed those of Key Biscayne since completion of climate change initiatives.)

Key Biscayne’s National Flood Insurance Rating, the basis for flood insurance premiums, could also improve. Through mitigation projects, unincorporated Miami-Dade County has achieved a Class 5 Community rating, which guarantees a 25% discount on all flood insurance premiums in flood zones and a 10% discount on policies outside flood zones.

And, we can’t forget about avoided costs. ​The World Bank has said that the net benefit on average of investing in more resilient infrastructure results in $4 in benefit for each $1 invested.

The second referendum, if approved, would allow the bonds to be exempted from the village’s current debt cap. This debt cap limits the amount of money the village can borrow to 1% of the assessed taxable (property) value. Importantly, the referendum would ​not ​terminate the debt cap. The bonds would simply be excluded from the calculation.

All other existing and future debt would remain subject to this provision.

The amount currently available under the debt cap is approximately $65 million, but in my view the village’s ability to borrow under this restriction is significantly lower, particularly if it uses this money to fund long-term projects. Why? Because the liquidity and financial flexibility of village government must be preserved. If it isn’t, the island could face unintended and unwarranted economic strangulation. Using all or most of the debt available under the limitation would tie the hands of future councils for decades to come. Unless property values rise there could be no money for any long-term projects for up to 30 years, despite the fact that we are a relatively wealthy community with significant assets. And, it would almost assuredly result in credit rating downgrades, maybe by multiple notches.

Let’s be clear about the stakes here. If we violate this debt limitation, which is a moving target , either on purpose or accidentally, we violate our charter. If we violate our charter, we violate our debt covenants. And, if we violate our debt covenants, whatever debt is outstanding is almost certainly in technical default and could become due and payable after a short grace period.

So, specifically what is this debt cap?

Per the amended village charter, the debt cap limits borrowings to 1% of assessed taxable (property) value, which have unfortunately been declining for the past 3 years. Availability under this limitation currently stands at approximately $65 million, but it fluctuates based on debt outstanding and the annually updated July 1 Miami-Dade County publication of assessed taxable values. When property values were rising the debt cap expanded, but the converse can also be true. The village could accidentally hit this limit if we use up too much capacity and property values continue to slump.

Why should the village care about ratings?

Part of the process of issuing debt is to obtain a rating for the proposed bonds. Higher ratings generally garner more favorable terms and lower interest rates. Lower bond interest costs (or debt service) translates to smaller increases in property taxes.

Why do the agencies care about the debt cap restriction?

There are a variety of things that the agencies look at to determine ratings but a BIG one is liquidity. They are, after-all, assessing the issuers’ ability to repay debt. If Key Biscayne wants to maintain its high Aa1/AA ratings and get decent pricing on a bond issue we have to leave some ability to borrow under the debt cap. How much liquidity do we need to maintain a solid cushion? $20 million? $25 million? $30 million? I don’t really know. It will be a dance with the rating agencies to see what parameters they consider appropriate. But, my guess is that’s the range we are talking about. If it is, we are looking at possible funding flexibility for our climate initiatives of closer to $35 to $45 million . Consequently, unless we receive an overwhelming amount of grant or infrastructure spending aid, we will have to pick one project or ​dramatically​ scale back the scope and hope to accomplish a couple.

I understand that no one wants to pay more in property taxes. I don’t either.

But, in my opinion, now is not the time to dig in your heels or plant a flag. These types of large infrastructure spending programs can only be effectively done at the government level. We need these projects to insure the future viability of the village. But, we need to fund them responsibly in a way that doesn’t hinder our ability to confront future funding projects or emergencies.

I say let’s approve these referendums and change the conversation from “Should we issue bonds?” to “What is our first priority for our bond proceeds?”