FEMA Denial Poses Huge Financial Problem for Capitola

The is extremely serious. The total cost to Capitola for flood-related damage is $1,469,356 per the proposed 2011-12 budget.

In addition, the Council has voted to close the Pacific Cove Mobile Home Park, the location of the ruptured pipe which caused the flood. The estimate to relocate the tenants of the park is $1.2 to $1.5 million. There are grants available, but the conditions that go along with the grants may be too onerous for the City Council to bear.

Typically, the General Fund requires borrowing from the Contingency Reserve to manage the cash flow. The worst case of negative cash flow was in November 2010, when the General Fund balance was -$255,900 after using all of the Contingency Reserve of over $1 million. Due to the unforeseen expenses of the flood close to $3 million, the city will probably have to borrow funds during this fiscal year.

If we borrow there are two approaches. First would be Certificates of Participation, which do not require a vote of the people. I am against this approach as I believe the citizens should vote on any proposed debt issue. And the term of the loan should be short, no more than 10 years. The other approach is a bond issue, which requires a vote of the people and should carry a lower interest rate than Certificates of Participation.

What are the yearly payments on the bond? At present, the interest rate on municipal bonds is about 5 percent. The unforeseen expenses are $3 million. Assuming we obtain about $1 million in grants, Capitola may need a $2 million bond issue. At 5 percent interest, the payment each year on the bond issue is $2 million x 5 percent, or $100,000 per year.

Where do we find the money to make the payments on the bond? We need to increase the Transient Occupancy Tax (TOT). The 2011-12 budget estimates TOT revenue at $875,000. If we increased the TOT from 10 percent to 12 percent it would generate $175,000 additional revenue.

Any Questions? Thoughts? Comments?