Arbor Update

Ann Arbor Area Community News

Costing Out the Courts/Police Facility

23. March 2008

Version 3.0

Costing Out The Courts/Police Facility

by The Working Group

March 8, 2008

The proposed new courts/police facility will probably come in at between $45 million and $47 million. For the purpose of this paper, we assume a cost of $46 million. This is the cost of the total project, and we assume that it includes the same costs as the phase one estimate of $57 million for last fall’s version. All of the figures in this paper are approximate.

This money must be paid to the contractors during construction. The money can either be paid from what the City has already (cash, or sale of assets), by cost savings due to the project, or by borrowing. The City may intend to sell some of its land, but nothing has been decided, so we will not include sale of land in this paper.

Cash On Hand

The DDA is projected to contribute $5 million. The City has roughly $8 million in its municipal center fund (fund 8) and $1 million in its court facility fund (fund 23). Adding up this cash on hand gives us $5 million + $8 million + 1 million = $14 million.

The general fund is likely to be in deficit for the near future, considering the flattening or even possible decline in tax revenue, payouts of accrued leave/comp time when employees depart, and millions due in payments for retiree health care. Therefore, the general fund cannot provide any money to pay the contractors.

The project cost is $46 million. Subtracting the $14 million the City (and DDA) have on hand, the City must still come up with $46 million – $14 million = $32 million.

Cost Savings

Tom Crawford’s original idea was that the City could borrow the needed funds by purchasing bonds. The City would make the bond payments from the lease payments that would no longer be made because the courts and other offices would be moved into the new facility. In other words, what was saved on the leases would pay off the bonds.

We estimate that the City would save $737,000 per year on lease payments. In addition, the City would no longer be diverting $212,000 per year in traffic ticket revenue into the court facilities fund; it could be used to pay for other District Court expenses. These annual cost savings total to $737,000 + $212,000 = $949,000 per year.

Unfortunately for Crawford’s idea that the bonds could be paid for by cost savings, we also need to consider the added costs of operating the new building, and the added cost of providing staff for the City to run its own security operation for this building.

According to the Quinn Evans report dated September 11, 2006, the additional operating costs for a new energy-efficient building amount to $3.72 per square foot per year. For a 90,000 square foot building, they would be $3.72 × 90,000 = $335,000 per year. These costs will be smaller if the building is smaller than 90,000 square feet, but we do not know what the new design will look like yet.

The cost of paying three new temporary security people, according to the County, is $190,000 per year.

Therefore, the net cost savings would be reduced to $949,000 – $335,000 – 190,000 = $424,000 per year.

Borrowing

Contractors must be paid during construction. The annual lease savings will not be available until the project is completed. Therefore, the City must borrow the $32 million needed to complete the project by selling bonds, and repay the bondholders with annual payments that include principal and interest.

Tom Crawford used a 5.25% interest rate in February 2007 projections. However, interest rates have been falling and 4.35% has been used in more recent projections. Just as with a home mortgage, the longer the term of the bond, the lower the annual payment, but the higher the total amount paid in principal and interest. We have chosen 30 years as the longer of two terms used by Tom Crawford in his recent estimates. Doing this reduces the annual payment on the bonds.

At the assumed interest rate of 4.35%, in order to buy $32 million in bonds, the City will have to make annual payments, for 30 years, of $1,930,002. The total amount of these payments is $1,930,002 × 30 = $57,900,060.

Since there will be cost savings of $424,000 per year, the net additional annual cost to the City will be $1,930,002 – $424,000 = $1,506,002. This additional cost must be paid by the City every year for 30 years. The total additional cost of these annual payments is 30 x $1,506,002 = $45,180,060.

The Bottom Line

The total cost of the project to the taxpayers is $14 million (from cash on hand) + $45,180,060 (sum of the additional annual payments) = $59,180,060.

The net additional annual cost to the city of $1,506,002 must be paid from some source. One possibility is service cuts. Another possibility is a tax increase.