Norfolk has $1.1 billion in debt, likely delaying major projects
NORFOLK, Va. — City officials have big hopes for the coming decade, including building new defenses against Norfolk's ever-worsening flooding and redeveloping a 200-acre swath east of downtown that contains aging public housing communities.
But mounting debt that will eat up larger chunks of municipal budgets for the next several years could delay those and other high-profile projects. That's likely to have the city tightening its belt until it can pay down some of the bills it's racked up over the past 10 years.
Norfolk essentially paid its way through the recession on its credit card, city officials say, and continued taking on debt to construct major projects while it delayed paying off what it owed.
Now, the city's total unpaid debt has topped $1.1 billion, with another $300 million authorized but still to be issued.
"We took on a lot of debt over the last 10 years, and the bill is coming due," Mayor Kenny Alexander said at a recent City Council meeting.
Norfolk's annual debt payments will grow by more than 30% in the next couple of years — necessitating budget cuts, revenue growth or both — and the city won't have much leeway to issue any more debt for major projects, likely to pushing the timeline for projects like a new Maury High School or major flood-mitigation at The Hague out to 2023 or beyond.
On Tuesday, Norfolk passed its 2019 spending plan, which includes increases in taxes and fees. And as debt continues to grow, officials said, that might not be the last tax hike.
After the recession hit in 2008, declining property values combined with reduced tax rates to decimate the city's revenues. Instead of only using debt to fund major construction projects, as is typical, Norfolk started borrowing money to buy equipment — and even to pay employees.
"We started putting it on our credit card," said Catheryn Whitesell, the deputy city manager who oversees finances, who joined the city from Virginia Beach in 2017.
Stagnant economic growth in Norfolk, and the whole Hampton Roads region, led to a prolonged period of weak tax revenues after the lowest point of the recession. Real estate assessments, and revenues from taxes, have been on the uptick since 2014, but at a much slower pace than anyone expected.
In the meantime, the city was putting off much-needed maintenance.
Norfolk held off on upgrading computers and software, stopped resurfacing roads and skimped on replacing water pipes. Those expenses have made their way back into this year's spending plan, crowding out other projects.
Some of the city's prior spending decisions shed light on how Norfolk ended up in this budget predicament.
From 2007 to 2018, Norfolk issued $257 million more in debt than it paid off.
While relying on debt to get through the recession and still fund major projects, city staff made the decision to backload some of the city's debt, making small payments to start with the promise of larger ones down the road.
The city also reduced annual debt payments by simply not issuing all of the debt for some projects when they were being built.
The first half of Norfolk's $123 million courthouse complex opened in 2015, and the second wing was finished this year. But even though construction crews moved on months ago, the city still hasn't issued all of the debt to fund the project.
Next fiscal year, the city will issue the final $40 million in courthouse debt, plus $27 million to pay for five new schools — four of which are already open.
The courthouse, the schools and the light-rail line are some of the projects eating up the city's capacity to take on debt. Norfolk has issued roughly $170 million for those projects -- about 15% of its $1.1 billion in outstanding debt.
And the city is slated to take on another $263 million in debt over the next four years for already-approved projects and ongoing maintenance, according to figures presented to the council.
Besides putting off debt, the city also put off paying down what it owed. Some years, it made what amounted to interest-only payments: taking on more debt without paying off any of the principal.
In 2010, for instance, the city issued $157 million in new debt while paying just $44 million toward existing debts.
"We artificially lowered debt service so we could free up capacity for pay raises, services and new program initiatives" during that time, Whitesell said during a recent council meeting.
Whitesell said the city was "very aggressive" using those strategies and it worked in the short term, but now it's catching up Norfolk and will continue to be an issue for years to come.
Alexander, who was elected mayor in 2016, said one could question the timing of some of the projects over the last decade, but the results have been positive.
"But for those investments, we would not have attracted ADP and we would not have seen a resurgence in Waterside and we would not have seen the development and the synergy we have downtown," Alexander said.
City Manager Doug Smith, Whitesell and other city staff likewise said the debt decisions made sense at the time and have paid dividends. But they say it's time for a change.
"A good strategy going forward, and we're going to have to manage our expectations to get there, is to only sell roughly what we pay off in any one year," Whitesell told the council. -
All of this adds up to one thing: no new projects.
Under current projections, the city won't have the room to take on substantial debt again until 2023.
At least, not unless the City Council authorizes staff to either blow past a self-imposed debt limit or issue more back-loaded debt for future administrations to deal with — a move Whitesell advises against.
"That's not what we're trying to do — we're trying a 'live-within-our-means' strategy," she said in an interview.
That means major projects, from major resiliency efforts like flood gates at the Hague to physical investments in the St. Paul's area, will all be on hold.
The city is responsible for school debt as well, so a new or renovated Maury High School or the much-talked-about Career and Technical Education facility also appear to be on ice, for the time being.
The city's Capital Improvement Plans, or CIPs, bear this out. Next year's includes $109 million in upgrades and maintenance, but no substantial construction. The five-year version, which looks out to 2023, calls for spending half a billion dollars on fixes including replacing decrepit wastewater pipes, upgrading water-treatment plants and renovating Chrysler Hall. But again, no new construction.
One glimmer of hope: $30 million from the sale of the Lambert's Point Golf Course to the Hampton Roads Sanitation District. That money — $15 million this year and another $15 million in 2023 — is in a set-aside fund for school construction. Smith told the council recently that money plus an expected $20 million in private contributions could fund part of a career and technology school project.
Meanwhile, the amount Norfolk must pay toward debt keeps growing every year.
This upcoming year, that bill will be $65 million, or about 8.1% of the city's annual budget.
As more debt is issued and more notes come due in the next few years, that yearly expense will spike — up $15 million by 2020 and another $5 million the following year to a peak of $85 million.
That accounts for 9.6 percent of the city's annual budget, brushing up against a self-imposed limit of 10% set by the council in 2013.
That will make debt service the third largest expense in the budget, after schools and police.
And the debt isn't the only thing impacting the budget. As the so-called "generational projects" built over the past decade have opened, they require more spending to run. The Slover Library and other new projects opened since 2014 have meant 60 extra full-time staffers and $6.8 million in new operating costs every year.
To cover the growing annual payments, the city will either need to cut back on other spending — which would impact services — or increase revenues, potentially with further tax or fee increases if real estate property values continue to grow tepidly.
Officials said it's likely to require a combination of both.
But with the 2019 budget already passed, that will be a question for another year.