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Local debt likely unaffected by national changes

Photo by Carly Farrell

Photo by Carly Farrell

ALBANY, Ga. -- While much of the nation continues to sift through the wreckage of the nation's first-ever downgrading of the federal government's credit rating, local governments' ability to borrow money likely won't be affected.

Local government debt and federal government debt are hardly the same things.

The federal government's debt problem stems from chronic borrowing inflamed by the fact that it spends more than it takes in.

At the local level, governments are barred from spending more than they receive in tax revenues from year to year.

If the city of Albany's upcoming budget was $105 million, for example, it would have to use a mixture of property taxes, sales taxes, fees, surcharges and grants to come up to that amount. If it couldn't, the city couldn't "borrow" the difference. It would simply have to raise taxes or cut its budget.

But when local governments do borrow money, it's often for long-term, high-dollar projects like sewer extensions or large road projects.

In the most basic sense, government debt operates just like a personal loan or mortgage. The city or county borrows the amount of money that would complete a project and agrees to pay it back over a set period of time with a certain interest rate.

The only difference is that instead of using a traditional bank, local governments float their debt through the purchase and sale of bonds.

Typically there are two kinds of bonds: Revenue bonds and general obligation bonds.

Revenue bonds are essentially loans that are tied into some kind of revenue-generating facet of government, such as the sewer system.

According to its 2010 Comprehensive Annual Financial Report, the city of Albany has several revenue bonds. The principles on those tally up to $33.7 million. Payments made on the bonds will come from accounts that generate fees, not the city's general fund.

General obligation debt is backed by the full faith and credit of the government agency, meaning that if there is a default on the bond, taxes are to be raised to pay off the debt.

The city of Albany, for example, has $6.4 million listed as general obligation debt for bonds issued over the years to the Albany Dougherty Inner City Authority for purchase of land, building and other capital expenses.

In total, the city of Albany has roughly $57 million in outstanding debt with almost 60 percent tied to revenue bonds. More than $12 million is scheduled to be paid on that amount over the next year.

The Albany Water, Gas & Light Commission, which is not considered part of the city of Albany for purposes of the financial report but is listed as a "component unit," has $20.8 million in long-term debt, with $9.5 million due to be paid off over the next fiscal year.

In terms of ratings, the city is rated predominantly by Moody's with a A-3 rating, with the exception of its sewer bonds which were given a AAA rating -- Moody's highest. A-3, according to Moody's website is "considered upper-medium grade and is subject to low-credit risk," with the "3" referencing a ranking in the lower end of that generic rating category.

The Dougherty County government has a smaller debt load. The total government long-term debt of the county is roughly $22.2 million.

In addition to the traditional bonds named above, the county has additional liabilities tied to the growth of the landfill. According to the county's financial records, $4.1 million is an estimated liability the county is facing for closure and post-closure costs of the Dougherty County Landfill.

The county is rated by a different agency, Standard & Poors, at AA-, which, according to the agency's website means "very strong capacity to meet financial commitments" with minimal risk.

Where the downgrade is having the most impact on local government is in each agency's pension or employee retirement program.

The city of Albany's $100 million pension program is scattered throughout a 60/40 percentage split between equities and fixed income investments, respectively, Pension Board Chairman Phil Roberson said.

"We have a host of money managers who trade and who make investment decisions based on the board's policies and procedures," Roberson said.

With such a volatile market, Roberson said it's hard to tell what the impact on the pension fund will be but that the program is geared toward long-term investments so short-term whipsaws like those seen this week likely won't leave a tangible mark on the fund.

Roberson said, however, that volatility could hurt the program's growth goals. Currently, the city strives to make an 8 percent growth on the account each year.

Last year, the fund grew by 11 percent.

Currently, the city contributes $5.5 million annually to its pension fund, with the payout currently at $9.5 million. The difference is funded by proceeds from investments.