Councilman challenges Spokane’s borrowing from investment fund

Quick growth in Spokane’s collection of investments, and a predilection by city leaders to dip into the investment pool to fund one-time projects, has led at least one Spokane City Council member to suggest that practice runs afoul of the city charter.

For the 20th time, the city of Spokane is planning to borrow money from itself, as the council considers on Monday whether to support the city administration’s plan to borrow $5 million from the Spokane Investment Pool. The latest loan would help pay for the recently completed, $17 million Central Service Center in east Spokane.

Councilman Mike Allen said he’ll vote against the plan.

“It’s starting to look like the go-to fund,” Allen said. “It is being very close to being councilmanic debt, which is a violation of the city charter.”

Councilmanic debt is borrowing approved by the council without a new tax. Critics say it could endanger city services as existing tax revenue is siphoned to pay debt.

Allen said he wants more restrictions on how investment pool funds can be used and a public vote on the use of such funds. He cited the city charter, which states “a vote of the people shall be required for capital expenditures.”

“The actions we’re taking today are going to have direct ramifications on what services the general fund can provide” in the future, he said. “If you’re going to take on obligations to the general fund, you take it to the voters and ask for it.”

No other council member has lined up behind Allen.

Investment pool created in 2007

The investment pool is the city’s collection of investments totaling almost $558 million, thanks in large part to the recent issuance of $200 million in green bonds aimed at improving water quality in the Spokane River by upgrading the sewer system, and the $64 million Riverfront Park bond approved by voters last fall. When the city borrows against the investment pool, the pool acts as a bank issuing and managing the debt. In effect, the city borrows money from itself, and pays itself back with interest.

The Spokane Investment Pool was created in 2007 to centralize the city’s funds and investing capital, with the goal of more active management of the city’s investing ability.

Under city policy, 15 percent of the investment pool can be loaned to the city, and for a maximum term of five years. With that rubric, the city can loan itself up to $75 million and not violate its own policy. Though the city has borrowed more than $58 million from the pool, it currently owes about $40 million to itself.

Allen said he supports some uses of the pool, such as funding critical public safety needs. But it was the recent request by Councilman Jon Snyder for $1 million from the investment pool to help fund a Centennial Trail bridge over Mission Avenue that made him question the pool’s use.

But other city officials, the chief financial officer among them, say such borrowing is not only safe but smarter than going to banks to fund projects such as neighborhood-approved local improvement districts. Gavin Cooley, the city’s chief financial officer, noted that such use of city funds is not extraordinary and said the county and school district use similar investments.

“If anybody suggests that we should just be sitting on it and not doing anything else with it, that would be to the detriment of the taxpayers,” Cooley said.

Cooley said borrowing from the pool didn’t incur debt to taxpayers, but rather is an “interfund” debt. In other words, the city is moving money from one fund to another, and then moving it back with interest. He added that not doing anything with the money was tantamount to “putting the money in a tin can and burying it in the backyard.”

Cooley noted the interest rates on such internal loans are low, averaging about 2.3 percent, which adds to their appeal. The interest earned by the investment pool, albeit from another department, is another incentive to continue with the borrowing program.

“From an investment standpoint, on an annual basis, that’s worth $15,000 that I normally would not have got,” Cooley said, referring to the service center loan. “We gain $150,000 in investment earnings, and we also gain efficiencies that we normally wouldn’t have.”

Service center will generate savings to pay back loan

Ken Gimpel, the city’s assistant utilities division director who led the service center construction project, said the money saved by consolidating the fleet would be more than enough to pay back the loan.

“The savings are real,” he said. “They’re there.”

Among the savings are the elimination of costs at the city’s Normandy Street fleet operation to maintain pumps and tanks; consolidation of the city’s parts inventory from three sites to one; elimination of two temporary worker positions and other positions through attrition; elimination of the repairs and maintenance needed on the three old facilities that are being consolidated at the service center; and a 25 percent decrease in utility bills.

At a recent Finance Committee meeting, Cooley said the consolidation of the city’s fleet at the service center will create $433,000 in savings every year, money used to pay back the loan.

At the meeting, Snyder, who came up with the idea to use pool money to pay for the Mission bridge, suggested he was in favor of the loan to the service center. He described the investment pool as a source of loans “that is the most flexible and that we have the most control over.”

Council President Ben Stuckart agreed, adding that the city had an outside attorney examine the pool’s use at Allen’s urging. Both Foster Pepper PLLC and K&L Gates examined the pool’s use.

“They clearly said it’s within the purview of the City Council to do this,” he said. “There’s no question that we can do it legally.”

Stuckart argued further that the charter is not being violated because the city’s taxpayers are not incurring debt.

“It’s not indebtedness. We’re loaning ourselves money,” he said. “It’s just a smarter way to use that money.”

Stuckart commended Cooley for his savvy investment of the city’s funds, noting that in 2014 Cooley earned $1.3 million in “investment income” that went straight into the city reserves. About 90 percent of the investment pool is invested in federal agencies such as Fannie Mae and Freddie Mac.

Councilman Mike Fagan hasn’t supported every loan from the pool, notably Snyder’s plan to fund the Mission bridge and the $500,000 earmarked for the Division Street Gateway project, which was aimed at beautifying areas adjacent to the Interstate 90 exit at Division. But he said using the pool to fund projects that create “payback” or outstanding equipment needs had his vote. He applauded last year’s decision to match a 1 percent property tax increase with pool funds to generate $26 million for eight fire engines, two ladder trucks and two pumper ladder trucks, and police cars, among other things.

“Sometimes you gotta end up biting the bullet,” Fagan said. “I have no problem being in office and taking the hits for it. We’re looking at decades of neglect. Decades of refusal by previous administrations and councils to address these problems.”

Voters’ intent violated, former councilman says

Former City Councilman Steve Eugster, who took part in helping to create the section of the city charter requiring a vote when public debt is incurred, acknowledged that using the investment pool as a source of money did not violate the charter because it does not create “indebtedness of the taxpayers.”

However, he said, using the money violated the intent of voters.

“I don’t think that the city can go out, pass a bond issue, collect money on the bond, put it in the investment pool and allow other parts of the government to borrow from it. That money has a specific purpose, and it’s not for borrowing,” he said. “That money’s not there to be lent.”