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November 04, 2018

Comments

hollyroller@gmail.com

Dear Joe/Russ,
How are "Vulgar/Irrelevant Comments" determined?
I love this site and it provides lots of fun, as well as important information.
How is the Editing done?
That's all.

Editor

It's done very well, thank you.

hollyroller@gmail.com

Touché'

Lorne

Just an update: The City Council has been trying to “value engineer” the overall project cost to a max of $50 million. However, during the most recent council discussion on July 1, an additional $2 million of staff-recommended add-ons were approved, bringing the new total estimate to $52 million. Coincidentally, it was announced at the council meeting that a capital campaign committee has been formed to raise $2-$2.5 million in private donations.

Importantly, the above $52 million estimate does not include the interest cost of an eventual $30 million bond issue to partially pay for this project (this is the max capacity the city has to debt finance using $ from the Measure I sales tax and additional contributions from the general fund).

Assuming an average 20 year bond issue (consistent with a previous assumption by the city’s financial advisory firm, PFM) and a 2% interest rate (in-line with current investment grade municipal bond rates), the interest cost could be about $7 million, bringing the total project cost closer to $60 million. Of course, we won’t know what the interest cost will be until bonds are actually issued, as it will depend on the interest rate environment at the time.

Finally, all of the above relates only to the upfront capital cost. I don’t believe I have ever seen estimates of what the ongoing operating costs of the new center will be.

Here’s the most recent project budget that was presented at the July meeting:

https://burlingameca.legistar.com/View.ashx?M=F&ID=7339610&GUID=C47F015E-A733-44D3-A8D3-9538C69AABD0

Lorne

Actually, the assumed interest cost would be closer to $6 million in my example above. My apologies.

Just Visiting

With interest rates still at historical lows, isn't now the time to borrow for capital improvements? Isn't that the financially sound approach? Capital improvements ARE expensive, that's why entities borrow and governments bond for them. There's nothing unique about that. Shouldn't our government use this opportunity to undertake those capital projects?

Or, alternatively, should the City simply abandon capital projects, and allow the rec center, City Hall, etc. to continue their deterioration?

Bruce Dickinson

Ok, time for a Bruce Dickinson teaching moment! Far more than the interest cost of capital improvements, the City should be a lot smarter with respect to three things:

1. Not overpay for "trophy" buildings that are setting records in terms of the dollar per square foot constructed. Something more modest may be in order for something such as a rec center that is more in line with what is there now (it can look nice but doesn't have to be the next Trump Tower).

2. The City should engage in aggressive capital improvement programs during a recession or downturn. When you do it a peak of an economic cycle you will overpay for materials, labor, architect fees, etc. We're building this Rec center at the peak pricing of all these things. And guess what? Interest rates tend to be even lower during a recession!

3. While bonds are being raised for this and other projects, the debt service comes from the City. Guess what the City also has to service? The underfunded pension and healthcare liabilities of current and retired city workers. This is also real debt, and when you have too much debt and you can't service it, then guess what happens? you go bankrupt! So there is a real limit to how much Burlingame can effectively borrow, especially considering the gross receipts of sales taxes, occupancy taxes, and property taxes are highly levered to the tech/bubble economy. Look how much revenues went down in 2000-2001 and 2008-2009. There was a lot of nail-biting at City Hall at that time!

Folks, it doesn't take a Captain of Industry, like yours truly, to come up with this stuff. Even Captain Obvious should be able to get it, but I fear that some of our city leadership may not have full the grasp and experience of smart decision making and figuring out the right timing to make those decisions!

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