BRADENTON, Fla. — Birmingham, Ala., plans to use recovery zone economic development bonds in a “creative” way, according to city officials.

Officials say they will use RZEDBs to help eliminate part of a projected $77 million budget deficit by funding qualified capital projects with the debt instead of cash. The approach is one way issuers can use debt financing, instead of pay-as-you-go funding, in lean years.

The proceeds of recovery zone bonds can only be used in designated areas and offer the issuer a 45% federal subsidy for interest costs on qualifying projects.

The City Council Tuesday agreed to issue $39.1 million of debt for capital projects. Most if not all of the debt will be recovery zone bonds. The council also approved possibly issuing tax-exempt bonds and taxable Build America Bonds, which receive a 35% subsidy depending on which projects qualify for the various debt-financing programs.

“We are at a critical point in the city financially, but I want to say I believe this is a good plan,” council member Johnathan Austin said at Tuesday’s meeting. “This is very important to moving the city forward.”

Calling the use of RZEDBs a “creative approach” to dealing with budget problems, council member James Roberson stressed that the city is financially sound. Bonding also eliminated the need for a bank loan, which was under consideration and might have had a negative effect on the city’s rating, he added.

“What we’re doing now is taking the right approach to using funds to help fund capital projects [and] at the same time halting spending in other areas,” Roberson said.

The bonding is part of a downsizing strategy that enabled the council to remove $42.26 million in funding for various capital projects from the current budget, which was projected to have a $77 million deficit at the June 30 end of the fiscal year.

The large deficit was mainly due to some operational expenses that were not funded when the budget was first approved, inclusion of too many capital projects, and revenue collections that have declined faster than anticipated with the recession.

In response, the council and Mayor William Bell have worked for several months drafting a plan to deal with the expected deficit, including cutting expenses.

On Tuesday, the council’s vote to use debt instead of pay-as-you-go financing enabled it to remove $42.26 million in various capital projects from the budget. It was the last step toward eliminating the deficit.

However, Bell said even though the city is using recovery zone bonds, some capital projects still must be put on hold until revenues recovery sufficiently.

Bell also said he has enlisted the business school at the University of Alabama to assist with revenue projections to prepare the fiscal 2011 budget.

City officials also said they would evaluate in the next fiscal year offering an early retirement buyout plan to certain employees.

Birmingham’s general obligation rating is AA from Fitch Ratings, Aa3 from Moody’s Investors Service, and AA from Standard & Poor’s. Birmingham is the seat of Jefferson County.

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