Potential funding strategies

Funding, and choosing the appropriate financing mechanism, should be a major consideration when planning for any project. When the potential project is a municipal facility, it’s especially crucial to explore funding scenarios and do as much detailed legwork as possible in the early planning stages, as we’ve done throughout the Merriam Parks & Recreation Facilities Master Plan process.

Upon completion of the Facilities Master Plan, city council will have information related to three options:

  1. “Band-Aid” the current facility;
  2. Demolish a part of it and rebuild; or
  3. Build a new facility.

Public preferences
Question 14 of the statistically-valid survey asked: “It is likely Municipal Bonds would be required to finance development of a new or renovated community recreation center. Please indicate which option you would most likely support the city taking.” In response, six percent said they would support a property tax increase; 25 percent supported a local sales tax increase; 24 percent supported a combination of an increase in local property and sales tax; 21 percent did not support a tax increase; and 24 percent said they didn’t know.

As the master planning process comes to a close, we’re especially focused on understanding the potential funding strategies before us. While not experts in this area, our job as city staff is to clearly explain the funding strategies available for two of the three options (partial demolition with rebuild, or building new).

Potential funding strategies
Based on staff’s experience with these types of projects, issuing municipal bonds is the favorable option. There are two types of bonds – revenue bonds and general obligation bonds. Revenue bonds use the revenue and interest generated from a facility to repay the debt. This is not a preferred option as it carries a higher interest rate and could negatively impact the city’s bond rating (currently Aa2).

The preferred and more acceptable bonding option is the general obligation bond, which uses the full faith and credit of the city’s taxing power and requires a vote of the public. There are two taxes that can fund a general obligation bond – property and sales tax. Based on survey findings, 24 percent indicated a combination of increases, so staff sought a better understanding of the city’s capacity for raising property tax. Currently, Merriam residents pay 14 cents of every dollar of revenue generated in personal property tax. This is the lowest tax rate when compared to nearby cities Roeland Park (25 cents), Mission (27 cents), Prairie Village (34 cents), and Shawnee (36 cents). Although this comparison shows capacity to raise personal property tax, it is not the recommendation of Merriam staff.

Sales tax considerations
Instead, staff determined that a sales tax increase would be the best option. The unique quality of sales tax is that anyone spending money in Merriam contributes to this revenue source. Therefore, the city would greatly benefit from its strong “pull factor” —  a term that refers to the number non-residents a community “pulls” in for shopping purposes. This value is one way to assess the relative strength of a local retail economy.

A community’s pull factor also determines how well it holds onto existing business and attracts new business, as opposed to losing businesses to other places. A pull factor above 1.00 indicates that a community attracts more business than it loses. Currently, Merriam’s pull factor is 4.67, the highest in the state of Kansas. How this relates to Merriam residents is that for every $1 of sales tax generated, a Merriam resident has contributed approximately 18 cents.

Potential impact on residents
A partial demolition or building a new community center is going to be expensive. While an estimated cost is unknown, preliminary numbers indicate the “build new” option to be approximately $25 million.  How would this amount impact Merriam residents? First, staff estimates the bond payment on $25 million to equal a debt service payment of $2 million annually for 20 years. Currently, a ¼ cent sales tax would generate $2 million, of which staff estimates (after calculating the pull factor) only $360,000 would be paid by Merriam residents. Since Merriam’s population is approximately 11,300 residents, this option is estimated to cost residents $32 per year — or one McDonald’s Happy Meal per month.

One option to explore for sales tax would be to renew the ¼-cent sales tax when it’s scheduled to expire. The renewed tax could include recreation improvements. According to state statute, staff believes that two votes would be required if the “build new” option is pursued. There would need to be a vote regarding financing through sales tax, as well as a vote to support building new recreational facilities.

Next steps
As decisions are made about which option is most suitable, bond council will help clearly define the process and ballot language, as well as more accurately provide financing details.

More detailed costs and information about the third option (to build new), will be presented at a public meeting on December 13, at 7 p.m. at the Irene B. French Community Center. The final Facility Master Plan will be presented to city Council on January 9, 2017 at 7 pm. Council’s acknowledgement of the completed plan will lead to a discussion regarding which of the three options the city should pursue.

On the sales tax I would take out the word Merriam and just say one option to explore is… Then the transition to voting on the new building seems odd.  Maybe something like.. According to state statute staff believes two votes are going to be required if the build new option is pursued.  There would need to be a vote regarding financing through sales tax as well as a vote to support building new recreational facilities.

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