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The city of Lexington is looking into financial planning for the next couple of decades in anticipation of a number of large capital projects that are coming up during that time.
On Aug. 21, Lexington City Council held a work session with representatives of Davenport & Company, a financial advisory company in Richmond.
David Rose, a senior vice-president and manager of public finance for the company, and R.T. Taylor, a vice president, worked with Lexington City Manager Jim Halasz and Finance Manager Jennifer Bell on putting together a plan based on the city’s current financial situation.
Rose said that the city was already in a good place financially, but offered some suggestions to help plan for a number of upcoming capital projects over the next five to 10 years.
The city has identified approximately $53.5 million in capital projects over the next decade, including renovations to city hall, the city schools, streets, police and fire departments.
One of the suggestions made was for a change to the city’s policy regarding its unassigned fund balance. Currently, the city’s policy is that at least 20 percent of its general fund revenue would be left unassigned, meaning it is not earmarked for any particular project, but can be used to help fund projects as needed.
Due to interest earned on the account, it has grown well beyond that 20 percent minimum and at the end of the 2022 fiscal year, the city’s general fund balance was $16.3 million, of which $12.7 million, or just over 62 percent, was unassigned.
Rose and Taylor suggested revising the policy to set the unassigned fund balance at 40 percent of the general fund balance and leave that amount as unassigned funds ($8.1 million based on the numbers at the end of FY 2022) and moving the remaining $4.6 million into a capital reserve fund, setting it aside specifically for capital projects.
“We’re thinking about the long haul and how to take care of that $53 million-plus that you’ve identified for next 10 years,” Rose said. “If we can create this capital reserve fund, we can help ‘seed’ some of the dollars toward that with a combination of that, borrowing and pay-go that you’ve been doing.”
The city currently has a capital projects fund which had $4.8 million at the end of FY 2022. That money has been earmarked for specific projects.
Even with setting aside funds for capital projects, the city will likely have to borrow money to help cover the costs of some of the projects.
In anticipation of the city taking on new debt, Davenport recommended that the city be proactive and consider setting aside a percentage of some existing revenue source and adding it to the Capital Reserve Fund to aid in debt relief for the city. A strategic use of that dedicated percentage, along with $3.6 million of the money in the reserve fund, could provide for the issuance of as much as $30 million in total debt over the next 10 to 15 years without detrimentally impacting the city’s ability to pay it back.
“I feel like we’re really looking at the ability to do that kind of level of debt,” Rose said. “We’re not pushing for it, but we’re thinking if we can get a couple of pennies – maybe it’ll take another penny or two five or seven years from now depending on what exactly happens – but for the moment, we really feel like you could put yourself in a very sustainable mode by thinking about a couple of equivalent pennies in the next budget or a subsequent budget. You don’t need it right now … It’s really putting us on the right trajectory for the future.”
Council member David Sigler floated the idea of that dedicated percentage coming from the revenues of the city’s lodging tax, which Rose said other cities had done for this sort of planning.
Rose and Taylor also recommended that the city obtain at least two formal credit ratings from the National Bond Rating Agencies. The city previously had a credit rating, but it lapsed. Getting a credit rating would allow for a wider pool of potential lenders to the city, which would serve to help keep interest rates low.
“As you move to larger borrowings, you’re looking at different investors in the world out there,” Rose said. “If we can walk in with a double-A credit rating with any of our projects, we’re really talking about opening the world of potential investors that are very different …We see you as really putting yourself in a position to not only save a lot of money, but to make yourself a lot more attractive [to potential lenders].”
Rose encouraged City Council to review the proposal and offer any suggestions or feedback they had on it. He plans to present an updated proposal based on the feedback at a future City Council meeting.
