Add City Hall to the growing list of entities affected by the financial crisis gripping Wall Street.
With several capital projects in need of funding and a general fund lacking in sufficient cash to foot the bill, the city of Del Mar is closely examining its borrowing options in a financial world rife with credit questions.
The specter of crumbling financial institutions and the fear of lending is making it more difficult for state and local governments to borrow money for capital improvement projects. And that is precisely what Del Mar has been planning to do for three projects, the 17th Street Safety Center, the Shores Property purchase deal and a replacement of the 21st Street sewer lift station.
One of those projects is in immediate need of cash.
It was revealed last week by Friends of Del Mar Parks President Joe Sullivan, that fundraising for the Del Mar Shores purchase would most likely fall short of a required $623,958 promissory note payment due Nov. 15. Six similar payments are due monthly to the property's seller, the Del Mar Union School District. The information that no money is available from city coffers, has prompted a special Oct. 13 City Council meeting where it is expected council members will seek an immediate interest-only loan through a bank line of credit.
That option, recommended by the city's financial advisor Richard Morales at a workshop last week, was not the city's first choice for financing.
In March, the council authorized City Manager Karen Brust to pursue a commercial paper program and, in June, they chose a bond counsel. But then the U.S. financial meltdown hit, severely impacting credit markets and sending shockwaves through the municipal bond market and fear into investors. Bond issuers were downgraded and billions of dollars of auction rate securities were restructured, while short-term variable interest rates soared.
"Back in March it (commercial paper) made a lot of sense," said Brust, a former finance director for the County Water Authority. "But Wall Street has eroded so greatly, it no longer makes any sense.
"It's very frightening," Brust added, "I haven't experienced anything like this in my 20 years in finance."
Lending to consumers and businesses has slowed to a crawl amid the credit crisis. Borrowing by state and local governments with good credit is usually easy, thanks to rules that make lenders' profits tax-exempt. But sobering news was received last week when Gov. Arnold Schwarzenegger requested an emergency $7 billion loan from the federal government after credit talks between the state and potential creditors Goldman Sachs and Bank of America were suddenly broken off.
But according to Morales, Del Mar, unlike the state of California, should be an attractive credit risk for prospective bank lenders. Morales points to a low debt load and a very high credit rating achieved through years of prudent financing.
"Del Mar is a strong city," he said.
Morales said he has already started initial talks with some banks.
"The city is already in the queue," he said.
Council has choices
The city will have a decision though on the priority placement for its other capital projects. On Monday, the council is expected to decide exactly how large a credit line it will immediately seek.
Sullivan says he remains confident his group's campaign will be successful in securing sufficient funds for the city.
"We've gone from guardedly optimistic to guarded," he said. "But interim financing will give us time."
Sullivan said his group should have at least enough funds available to cover the city's loan fees, estimated by Morales to be about $100,000.
As for the other capital projects, the city has already applied for state funding to replace the 35-year-old sewer station. The project is estimated to cost $5 million.
In 2005, a shutdown switch failed at the station, which threatened to send massive amounts of raw sewage into local waterways.
The 17th Street lifeguard station, slated to become a new city safety center, might be the odd project out according to Brust. Despite fundraising and grant funding, the project still needs about $2.35 million.
"Is now the right time to get funding?" said Brust of the lifeguard station. "Probably not. But there will be other opportunities going forward.
We have to move slowly and carefully with all of this," she said. It's very important to protect the city at all costs."