Whatever concerns the Port of Galveston has about the city of Galveston’s effort to create its first debt management policy should be acknowledged, then quickly overcome.
It’s good and right officials want to adopt formal guidelines for issuing and managing bonds and other forms of debt the city commonly takes on to finance large projects.
It’s inevitable that most government entities consider issuing debt. But issuing debt obligates a government and taxpayers to debt service for sometimes 30 years or more. And that can have a great effect on a city’s financial condition and limit money for needed services, according to the Municipal Research and Services Center, a nonprofit organization that provides legal and policy guidance to local governments.
“The amount of debt your jurisdiction issues is an important factor in measuring financial well-being, and proper use and management of debt can yield significant fiscal advantages,” according to the center.
While it might seem obvious to most people, a debt management policy should consider when it’s appropriate to use debt and for what purpose.
“Of equal importance is to clarify those circumstances in which your jurisdiction will not use debt,” according to the center. For example, all cities and governments should have an ironclad policy not to use debt to sustain current operations, which would be bad fiscal policy under any circumstances.
Although paying for a project with existing revenue is ideal — using debt increases the total cost of the project through interest payments — that’s sometimes unrealistic for large capital improvement and infrastructure projects.
The Port of Galveston, long strapped for cash, has financed construction of cruise ship terminals by taking on debt. It’s not a stretch to say the port wouldn’t have the cruise business it has today without incurring debt.
Director Rodger Rees is worried the city’s new policy might not align with the regulations mandated to the port by state entities, he said.
“This policy does have a lot of far-reaching implications for the port,” Rees said. “We have certain bond covenants that relate to revenues.”
Technically, the port can’t issue bonds and goes through the city to do so. The city has under its current leadership attempted to create policies that put the city, the port and Park Board of Trustees, which oversees tourism, under the same umbrella. The efforts have sometimes chafed the leaders of those entities, which act largely independently of the city council.
Rees’ concerns are reasonable, particularly the worry that city policy changes might affect existing bond covenants. When an issuer violates a bond covenant, it’s considered to be in technical default.
Violating a covenant means that the lender can legally “call” the debt, or demand repayment in full, which would be fiscally disastrous for the port and the city.
The city and port should work to resolve this without causing financial harm to the port, while not losing sight of the objective — to create a sound debt management policy.
The Municipal Research and Services Center asserts that by creating such a policy, the city is exhibiting fiscal prudence and would be enhancing its ability to make decisions on issuing or entering debt obligations, not to mention demonstrating to rating agencies and lenders that it’s well-managed and more likely to meet its debt obligations.
Whatever issues the port might have shouldn’t be insurmountable. Ultimately everyone will benefit from the policy.
• Laura Elder