Should Sherman issue debt while the market is low?
Sherman city leaders are weighing the cost and benefit of issuing debt now for projects in the future. City Manager Robby Hefton is proposing that the city issue debt for projects, like the new police department headquarters, while the market is at near historic low borrowing rates.
Rates are significantly lower than the last time the city issued debt. However, city leaders worry that these rates may not stay this low much longer.
"I believe we have the opportunity now to take advantage of historically low borrowing rates," Hefton said Tuesday before the city council. "We have some projects, like the police department headquarters, that we know are right here at our doorstep in terms of being ready for construction."
The city has several project coming up that could be financed now while rates are low. The new Sherman Police Department Headquarters is expected to cost between $13 million and $15 million, while the city is also considering several road improvements and potential parks projects in the near future.
"With the police station, we do not have $13 million to $15 million sitting around; We would have to issue debt," Hefton said.
The question on if the city should issue bonds now comes down to several factors, Hefton said, ranging from the current market and the city's ability to pay for this debt. Hefton said he expects that the city's ability to hold debt will increase over the next several years due to incoming and expected future growth in the city.
Based on upcoming growth, Hefton said the city's capacity to hold debt could increase by about $70 million to $80 million based on current tax rates and its debt ratio. If the city were to leverage its full tax rate, this could increase to $250 million in coming years.
While the market is currently at favorable rates, Hefton said there are some who expect this to change with the change in national leadership. Hefton said there is an expectation of increased national spending which could translate into higher inflation and a shift in borrowing rates.
"We believe that the current rate is about 2 percent," he said, noting fluctuations as low as 1.8 percent. "So what are the rates going to to do moving forward. No one knows fully, but there are indications in the market that rates are going to increase. Nobody knows when; nobody knows how much."
The current rate is significantly lower than it was two years ago when the city last issued major debt for projects. In 2019, the city issued about $19.1 million in bonds at a rate of about 3.07 percent.
As an example of the savings the city could see, Hefton compared what it would cost to finance the construction of the new Sherman Police Department Headquarters today compared to 2019's rates. Based on these rates, Hefton said the city could afford $2.5 million of other projects today compared to two years ago.
Council member Sandra Melton cautioned that the city should not rush into something and asked that the council be presented a list of proposed projects.
Meanwhile, council member Josh Stevenson acknowledged Melton's concerns, but said time was of the essence to take advantage of the rates.
"If we do not borrow when it is cheap to borrow, then I think we would be doing the citizens a disservice by waiting for rates to rise money we can use for a police department and other projects," he said.
Hefton said he plans to present a list of projects and more information at an upcoming meeting.