FINANCIAL REVIEW OF THE CITY OF KERRVILLE

Prepared December 2017

By John Harrison, Danny Almond, and Ed Livermore

EDITOR’S NOTE: This document is the first of a series of white papers that present factual and relevant
information about the issues facing the City of Kerrville. Kerrville United’s primary goal is to educate the
voters of Kerrville so that they can make smart decisions at the ballot box.

This white paper deals with the city’s finances, budget, and specifically its debt. So of course, this is not
an exhaustive review of every aspect of the city’s finances. For a closer examination, take a look at the
city’s annual budget books, or the 2016 Comprehensive Annual Financial Report. All of the statements
and figures relied upon for this document are cited within.

Thank you for taking an interest in your local government!

NOTES
As stated in the 2016 Fiscal Year (FY) Budget book: “The accounting and financial reporting policies of
the City conform to Generally Accepted Accounting Principles (GAAP) and the accounting principles
prescribed by the Governmental Accounting Standards Board (GASB). The City uses “fund accounting” to
ensure and demonstrate compliance with finance related legal requirements.” (Pg. 42, 2016 FY KVL
Budget Book)

The City is audited annually to ensure compliance with these principles. Fund accounting as stated
above supports a detailed review of the City’s finances. But at the same time “fund accounting” makes it
difficult to summarize from a high level. Therefore, for the purposes of this summary, we will
consolidate some of the funds to support understanding.
THE CITY’S BUDGET
When we look at our personal financial situation, we usually look at our Income, Expenses and Debt.
This review will take a similar approach with the City Finances to make it easier to understand.

Income
The City budgeted to receive $41.9 Million in income (or revenue) in fiscal year 2017 (Oct 1, 2016 – Sept.
31, 2017). The sources of that revenue were:

Source Revenue (in millions) Percentage of Total

Property Tax $10.5 25%
Sales Tax $6.4 15%
Fines and Forfeitures $0.6 1%
Other Taxes $3.1 7%
Interest and Misc $2.9 7%
Kerr Co. & Others $2.5 6%
Permits and Fees $0.5 1%
Service Revenue $15.4 37%

REVENUE SOURCES (INCOME)

Other

Interest

Service Revenue
Other Tax

Sales Tax

Property Tax

(Pg. 25, 2017 FY KVL Budget Book).

There are many sub categories of each group. These revenue streams are forecasted forward by City
Staff and approved by City Council each year. The forecasts are based on history as well as projections
made by outside sources. For more detail on the history of each revenue stream and how future
forecasts are developed, take a look at the budget books.
Kerrville City Government puts together a “sustainable” budget each fiscal year, meaning it does not use
one-time revenues to meet expenditures nor does it use those one-time funds for future planning.

Assets/Cash
Before we review where this money is spent, let’s review the “Bank Account Balance” for the City. The
City has an internal requirement to maintain 15% to 25% of expenditures in reserve for both the
General Fund and the Water and Sewer Fund (Pg. 306, 2017 FY KVL Budget Book). Some have described
this self-imposed requirement as a “rainy day fund.”

At the end of the 2016 fiscal year the City had $15.2 M in reserve. (From 2016 CAFR, pages 22 and 27).
This is over 30% of total annual expenditures well above the City’s self-imposed requirement. And
impressively, this is up from just 5% in 2010. Good work by the City leaders at managing city finances
and keeping a healthy reserve in the bank!

So we have $15.2M in the bank and are expecting to receive $41.9 M in revenue in fiscal year 2017.

Where does all this money get spent?

Expenses
Here is one way to look at the 2017 Budgeted Planned ($41.2M) spending: (Pg. 28, 2017 FY KVL Budget
Book).

There are actually two ways that the city presents its expenses. One way is to examine the costs by type.
For instance, personnel, maintenance, supplies, etc. Another way is to examine it by department, such
as Police, Parks, Streets, Administration, etc. Either way you look at it, the city budgeted $41.2 million in
spending for fiscal year 2017 (Pg. 28, 2017 FY KVL Budget Book).

Here is a breakdown of expenses classified by type:

Type Cost (in millions) Percentage of Total

Personnel $20.2 49%
Services $7.5 18%
Debt Service $6.6 16%
Maintenance $3.0 7%
Supplies $2.1 5%
Capital $1.1 3%
Other $0.7 2%

EXPENSES
Capital Other
Supplies
Maintenance

Debt Service Personnel

Services

Another way to look at the spending is by department. This is when “fund accounting” complicates the
issue since there is always some cross-charging between funds. The above look is total cash and does
not take into account the cross charging.

The cross charging is necessary so that we can see and understand the cost of each group as if it were a
standalone department (i.e. had their own Human Resources, Information Technology, Administration,
and other employees as part of their department). Doing the accounting in this manner allows us to
compare (benchmark) our departmental costs against other cities. At the end of this paper is some
benchmark data that compares our Water and Sewer rates to similar size cities in Texas.
Here is a breakdown of expenses by department:

Department Budget (in millions)

Water and Sewer $12.1
Fire/EMS $7.3
Police $5.6
Streets $2.8
Parks $2.3
Admin and Other $11.1*

NOTE: Except for Admin and Other, all figures are found in Pg. 101, 2017 FY KVL Budget Book). Admin
and other is computed by taking the difference between the $41.2 million in cash budget and all other
departments on the list.

We projected to receive $41.9 M in income and spend $41.2 M. Bottom line is that the City is able to
balance the budget for 2017 fiscal year without using any of the reserve. Well done.

Debt
From the above first look at spending you will see $6.6 M budgeted for Debt Service in 2017. So how
much Debt does the City have? Again, there is a lot of detail in the budget books. But, here is a high level
look.

Currently the City has a AA rating from Standards & Poor’s (a credit rating agency) for the General
Obligation debt. This is similar to an individual’s credit rating. AA means we are considered to have very
good credit, a stable outlook, and can borrow money as needed at a low rate relative to the market. In
fact, our financial consultant contacted Standard & Poor’s and they affirmed our good rating, and they
also offered this feedback about the criteria they used to determine our standing:

• Very strong management, with strong financial policies and practices under our Financial
Management Assessment methodology
• Strong budgetary performance, with operating surpluses in the general fund and at the total
governmental fund level in fiscal 2016
• Very strong budgetary flexibility, with an available fund balance in fiscal 2016 of 35% of
operating expenditures
• Very strong liquidity, with total government available cash at 47.5% of total governmental fund
expenditures and 5.5x governmental debt service, and access to external liquidity we consider
strong
• Strong debt and contingent liability position
• Strong institutional framework score

So, if our financial situation is so strong, why borrow money? A City borrows money for investment in
facilities that will be utilized for years into the future, just like many of us borrow money to buy a car or
house. The question we ask ourselves when buying a car or house is, can we make the payments? And,
will the asset we are buying be paid off before the asset has to be replaced? The City has established
some guidelines to ensure that the payments can be made on the debt.
Debt Guidelines:

1. In 2010 the City decided that no General Obligation (GO Debt) debt would be added that
required an increase in ad valorem (property) taxes.
2. Debt in the Water and Sewer fund cannot exceed 35% of the fund’s annual revenue.

There are two accounts that hold the City debt. The first account is debt the City takes on for
investments in assets other than Water and Sewer. For purposes of this review we will refer to this debt
as General Obligation (GO) Debt. The second account is Water and Sewer Debt. We will start the review
with the GO Debt.

General Obligation Debt (GO Debt)

Ad Valorem taxes (property taxes) are the collateral for all GO Debt. However, this does not mean that
GO Debt must all be paid for with ad valorem taxes.

Here is the projected payment schedule (principal and interest) for all of the City’s GO Debt: (Pg. 205,
2017 FY KVL Budget Book).

Year Payment (in millions)

2017 $2.5
2018 $2.6
2019 $2.5
2020 $2.2
2021 $2.2
2022 $2.2
2023 $1.6
2024 $1.6
2025 $1.6
2026 $1.6

G.O. DEBT SERVICE PAYMENTS (IN MILLIONS)

Payment

$3.0

$2.6
$2.5 $2.5

$2.2 $2.2 $2.2

$2.0

$1.6 $1.6 $1.6 $1.6

$1.0
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
4B Sales Tax Supported Debt
The City has an Economic Development process that receives what is referred to as 4B sales tax. This is a
½ cent sales tax in Kerrville that is designated (by state law) for use in economic development,
infrastructure, and quality of life projects.

A separate volunteer group, the Economic Improvement Corporation (EIC), assists the City Council in
evaluating projects for spending these funds. The EIC has approved using 4B sales tax money to fund
debt service for debt associated with two quality of life projects (River Trail and Sports Complex). Debt
service for these projects averages $1.1 M per year through 2031 then decreases to $0.6M per year
through 2035.

4B CONTRIBUTION TO GO DEBT
Payment

$2.0

$1.1 $1.1 $1.1 $1.1 $1.1 $1.1 $1.1 $1.1 $1.1 $1.1 $1.1 $1.1 $1.1 $1.1 $1.1

$1.0

$0.6 $0.6 $0.6 $0.6

$0.0

We will review the 4B revenue and the overall EIC process in a future paper. Bottom line for now, the
debt associated with the River Trail and the Sports Complex is being paid for with 4B sales tax monies.

If you subtract $1.1M from the payment schedule seen above, then you have the amount of GO Debt
that is paid from ad valorem taxes (Pg. 203-205, 2017 FY KVL Budget Book). When you compare Kerrville
against similar sized cities in Texas that have a AA S+P rating, we have extremely low GO Debt. (Pg. 201,
2017 FY KVL Budget Book)
Water and Sewer Fund Debt
So, of our $6.6 million in debt service we pay in 2017, $1.1 million comes from 4B sales tax, $1.4 million
comes from ad valorem taxes, and the rest ($4.1 million) comes from Water and Sewer Debt. The
payment schedule for Water and Sewer Fund Debt is as follows:

Year Payment (in millions)

2017 $4.1
2018 $4.0
2019 $4.0
2020 $5.0
2021 $4.7
2022 $4.7
2023 $4.0
2024 $3.7
2025 $3.7
2026 $3.7

W&S DEBT SERVICE PAYMENTS (IN MILLIONS)

Payment

$5.0
$5.0
$4.7 $4.7

$4.1
$4.0 $4.0 $4.0
$4.0
$3.7 $3.7 $3.7

$3.0
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

This debt is paid with monies from our Water and Sewer fund. The projects paid with this debt are all
associated with providing “us” water and wastewater cleanup. We should understand that “us” is more
than just the ad valorem taxpayers in Kerrville. The non-profits in Kerrville and nearby Kerr County
residents, neither of which pay ad valorem taxes, each are required to pay for water and wastewater
services they receive.
Remember that the City Council has an internal requirement to not allow W+S debt service to exceed
35%. In 2017 we are at 33%, so close to the maximum and if you will look at the years 2020 thru 2022
we might even exceed this target.

We understand that the City Staff, under the guidance of the City Council, are undertaking two actions
to deal with the debt:

1. Working with Kerrville Public Utility Board (KPUB) to re-structure an existing $7.5M loan that
KPUB had made to the city. This will help level out the debt service during the years 2020-2022.
2. Some of our current debt is callable and/or advanced refundable, meaning we can pay it off
early. In fact, we can now borrow money cheaper than the interest rate of the original debt.
Therefore, the City Council recently gave City Staff approval to take on new debt to pay off some
of the older higher cost debt – essentially refinancing some of the debt. The total savings from
this activity, in today’s dollars, is projected to be $1.17 million (net present value savings as
presented in the City Council Meeting on December 12, 2017).

The City Staff and council continuously update the City’s projected capital project plan associated with
Water and Sewer as well as the financing plan. They are currently looking at projects to deal with the
TTHM issue in our drinking water as well as the Legion lift station.

With the actions taken above in managing our debt, it is our understanding that the City will easily
stay below the 35% target, even after taking on these two new projects.

So, based on these three sources (ad valorem taxes, 4B sales tax monies, and water & sewer fund), the
total debt service that the city pays is sourced as follows:

DEBT SERVICE CONTRIBUTIONS (IN MILLIONS)

Ad Valorem Tax
$1.4

4B Sales Tax
Utilities $1.1
$4.1
Conclusions
It is our conclusion that the City is in very good financial shape. However, we do have some concerns.

The City has been able to maintain the ad valorem tax rate at 0.5625 since 2010, so as property values
rise and new buildings are built, the total ad valorem tax revenue has slowly increased. For reasons that
are difficult to understand, the City Council recently made the decision to reduce the tax rate so that
2018 revenue would be the same as 2017. This gives the average homeowner roughly $20 in annual
savings. But as with all averages, the majority of those savings will go to the home and building owners
that are valued the highest – that is, the savings will go mostly to the wealthy.

Therefore, this is a tax break that mainly benefits the wealthier citizens while potentially putting our city
in a difficult financial and tax situation in future years. We conclude that this action was not in the best
interest, long-term, of our city.

Comparing Kerrville to Other Cities

One useful method of comparing our financial health with other cities is to examine the water and
sewer rates that customers pay for those services. As you can see from the chat below, Kerrville’s utility
rates are lower or near other cities that are approximately our size.
Final Thoughts

Although many politicians and other self-described financial experts might say that Kerrville has too
much debt, or is in dire financial straits, the analysis you see here will help you come to your own
conclusions. In fact, Kerrville is in a very sustainable financial position with a healthy amount of debt
that easily falls within our self-imposed standards.