Changes could minimize mill impact

Published 8:51 am Friday, February 12, 2010

FRANKLIN—The good news is that the city of Franklin is currently in a positive position to pay down its debt.

The bad news is that the city stands to lose about $1.3 million in revenue annually after International Paper Co. closes its Franklin mill.

Isle of Wight County is expecting the full hit from lost revenue in the 2012 fiscal year. Under a revenue-sharing agreement with Isle of Wight, Franklin receives a percentage of the tax revenue collected in a 6.37-square-mile area of the county, including IP. Payments from the county to the city are made the year after taxes are actually paid, so the city won’t see the drop-off until at least fiscal 2013.

Amber Stansbury, Franklin’s interim finance director, said that she is hearing information from Isle of Wight that suggests the full hit for Franklin might not occur until fiscal 2014.

Whether the revenue disappears in 2013 or 2014, it will have a major impact on the city’s budget. Representatives from Davenport & Co. LLC, a company that provides financial advisory services to the city, told the City Council during a work session Monday night that the $1.3 million hit is equivalent to approximately 33 full-time city employees or an increase of approximately 22 cents on the real estate tax rate.

To offset the need for devastating workforce cuts or increased tax rates, Davenport & Co. is recommending that the city restructure its debt to build up a cash reserve that can be used to cover the revenue lost when the mill closes.

“In the debt that we’ve done over the years, we’ve actually done a good job of setting it up so we don’t have too long a debt … we’ve paid it off quickly, and this is going to be one of those times that we’re benefiting from having it paid off quickly,” said David Rose of Davenport & Co.

As of June 30, 2009, the city had a total outstanding debt of $17.5 million; $13.2 million was classified as tax-supported debt, and $4.3 million was classified as self-supporting.

Under the existing debt service, the city would pay off nearly 68 percent of its tax-supported debt in 10 years, well above the rate of 50 percent that rating agencies look for, according to Davenport & Co.

Ten-year pay off ratios for the water and sewer and electric funds are also above average at nearly 93 percent and nearly 71 percent, respectively, well above the 40-percent range that rating agencies generally look for.

Davenport & Co.’s proposed restructuring strategy involves creating cash flow savings over the next few years, which will be placed into a capital reserve fund; using the capital reserve fund to cushion the city against projected revenue losses after the mill closes; and investing the capital reserve fund monies to maximize the effectiveness of the restructuring.

Rose said the restructuring would “do no harm to the overall financial health” of the city. He also said refinancing is a good idea at the moment because of low interest rates.

“This is one of the things that makes it favorable,” he said. “There are more chances rates are going to go up than they’re going to go down … so we’re thinking there’s no time like the present.”

“If we do a restructuring, what we effectively can do here is get us to essentially 2015 before we have to have money coming out-of-pocket from the city,” he said. “So, we’re buying ourselves two additional years.”

By 2015, the city will be in a better position to absorb the lost revenue from IP because its debt will be lower and it will have time to explore economic development initiatives, according to Davenport & Co. If the city doesn’t lose the revenue until 2014, the situation could be even better.

“We could be in a mode that we could avoid ever having to raise any pennies (on the real estate tax rate) tied to the $1.3 million that’s being lost, because our debt naturally drops down and we’re buying ourselves some time to put some money into a capital account and we’re going to take that money and we’re going to use that money as we start to lose the money in 2013 (or 2014),” he said.

Rose said restructuring would not affect the final maturity of the city’s existing debt.

“If you don’t do this, the consequences, as we see it, are greater,” he said. “You can only keep cutting your budget so much before you do harm.”

The City Council will take action on the proposal at a later meeting.