John Heffernan went to the pages of the Daily Pilot with a critical assessment of City Manager Dave Kiff's thoughtful Newsletter discussion of the Civic Center project ("Sounding Off: Letter left questions unanswered," Aug. 7). In his opinion piece, Mr. Heffernan offered, "I could well be wrong." Indeed he is.
Let's begin with his curious opposition to the use of Build America Bonds, also known as "BABs." Heffernan suggested that these bonds will make the federal deficit larger, and therefore the city should pay higher borrowing costs to help the Feds out.
Heffernan is apparently unaware that BABs were invented by the U.S. Treasury specifically to reduce the impact of municipal borrowing on the treasury. He has it exactly backward.
Consider this example: Typically, local governments borrow in the tax-exempt markets. A package of $100,000 in bonds, at 4.50%, would generate $4,500 in annual interest that would be tax free to the bondholder. If that person is in the 35% tax bracket, the "loss" to the federal treasury (from Treasury's perspective), is $1,575 in avoided taxes.
BABs are taxable bonds so the interest rate is higher. The same bond as above would be sold at 6.00% interest and the bondholder would receive $6,000. However, he would pay $2,100 to the federal government in taxes. To offset the higher interest costs, the federal government has agreed to subsidize the borrowing rate of local issuers by 35% to entice them to sell BABs. Taxing the interest offsets the subsidy and thus the impact to the federal deficit is substantially less than with traditional tax exempt bonds, exactly the opposite of the point made by Heffernan.
More important, however, is that the cost to the city to sell the bonds is reduced from 4.50% to a net 3.90%, lowering our debt service costs by approximately 13.5%. This is why, despite Heffernan's opposition, we will sell BABs if market conditions warrant.
Next, Heffernan muses about how the project estimated at $50 million four and a half years ago, before he quit the city council, is now higher. In fact, the cost to construct the city hall itself is remarkably close at an estimated $55 million to $60 million. Despite knowing better, Heffernan, like some other self-styled "pundits," offers the false and misleading comparison of one project, the city hall, vs. five — the city hall, park, parking structure, library expansion and disaster preparedness center.
Some of the elements of the project are related to the specific conditions of this site, significant excavation and structured parking for example. Some, such as reconfiguring the entrance of the library so the 600,000 annual library users can use the new parking structure, just make sense.
We would welcome Heffernan's suggestions as to what elements of the Civic Center he would cut, but I don't think the community will stand to see "City Hall in the Park" turned into "City Hall in the Big Dirt Field."
Heffernan raises questions about the expedited schedule, but delay until the economy improves, construction costs recover their 30% decline and interest rates rise will only make the project more expensive, not less.
Some things have changed since Heffernan quit the City Council. This council, our citizens committee and our city staff have spent two years in countless open public meetings with hundreds of residents, listening about what they want for this site. We have brought together both the supporters and opponents of Measure B.
We convened a citizens committee to review financing and affordability and they developed strict guidelines that the current project falls well within. The seven members of the City Council are as concerned about the cost of the project as any seven people in town. Costs have already been reduced by $20 million from the high estimate and are going lower. The parking structure bids have just come back and they are $2 million below estimates for example. This project will not involve any increase in taxes and will not exceed the policy of 5% of the general fund budget as recommended by the citizens' Facilities Financing Committee.
We structured an innovative construction management package with private contractors that shifts the risk of cost overruns to the private sector. We are moving rapidly to take advantage of the best construction market in a generation and interest rates near all time lows. I would hope that John Heffernan would want to join us to bring our community together and move forward.
KEITH D. CURRY is the mayor of Newport Beach.