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Alder Scott J. Resnick

Alder Scott J. Resnick

Home Address:
661 Mendota Ct # 1404
Madison , WI 53703

Phone: 608-807-7962
district8@cityofmadison.com
Common Council Office:
210 Martin Luther King, Jr. Blvd
Room 417
Madison, WI 53703
Phone: (608) 266-4071
Fax: (608) 267-8669
WI Relay Service

Premiums and operating expenditures

October 19, 2012 4:05 PM

(I apologize in advanced for the wonkie nature of this article. If you want to learn more about premiums, keep on reading. If not, enjoy your weekend!)

Over the next few weeks the Mayor's Office, City Council, and community will be discussing responsible budget practices as it relates to the use of a one-time premium to fund operating expenses. Mayor Soglin's executive budget calls for 1.1 million dollars of our existing 5.4 million dollar premium payment to fund operating expenses. The Council is proposing to allocate more of the premium to the operating budget to fund additional expenditures like Overture. 

While this is not a long term solution, this practice has been used in both previous Soglin and Cieslewicz's budgets and it is not as controversial as the some would like to make it out to be.

Since 2006, debtors (banks) have offered the City of Madison a premium payment along with competitive interest rates for acquiring our debt loans. This practice is a relatively recent phenomenon which reflects current market conditions of low interest rates and the availability of AAA bonds. These premium payments have been as low as $293 thousand in 2007 and as high as $10 million in 2012. The premium payment is placed in our general debt reserves account, and is used to cover capital expenditures (multi-year purchases) and operating expenditures (annual purchases).

In last year's 2012 budget, $11.2 million of general debt reserves was applied to reduce general fund debt service.  Of this ammount, $6.952 million was spent on capital expenditures and $4.248 million was used for operating expenses. 

We currently have $5,454,800 in our general debt reserves, including premiums of $5.2 million from our general debt and central library that the city received this year. In Mayor Soglin's executive budget, $4.3 million of reserves are used to cover capital budget items such as paying for Olbrich Garden's roof, and $1.16 million is applied to the general fund for operating expenses. In terms of percentages, 20% of Soglin's current executive budget applies general debt reserves to operating.

Using the premium to cover operating expenses is not a new concept. In the past, Mayor Dave Cieslewicz applied even more of our premium to operating expenses: 76%, 100%, and 86% of the premium went to operating during his last three budgets. Last year, Mayor Soglin and the Common Council approved 38% ($4.248 million) of the general debt reserves to be spent on operating expenses.

One controversial point of the Overture funding is that the Council has proposed to amend the Mayor's executive budget to shift an additional $500,000 of premium to fund operating expenses. The Mayor and several alders have argued this is creating structural deficits and poor budgeting practices. However, even with the amendment, only 31% ($1.66 million) of our premium would be going towards operating expenditures. Historically, this is still much less than any previous year, including last year under the same Mayor.

I am glad that we are using a higher percentage of premium funds to cover capital expenses. Premiums will not exist forever and they are an excellent method to lower our debt ratio. Eventually interest rates will climb, but at that time, our property values should inversely improve providing the city with a better fiscal position in the future. So while the controversy of what to items to fund still exists, the use of premium for operating expenditures is not a foreign concept to Madison and has been used in the past.

(If some of this is confusing or you'd like more information, feel free to contact me at district8@cityofmadison.com. These conversations are deep, and I am willing to walk anyone through the intricate details.)




Tags: Budget

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