Crestwood officials are considering paying off $1.57 million in remaining debt and building cash reserves using funds from a 2006 voter-approved tax-rate increase designed to retire that debt.

Faced in April 2006 with $2 million in debt and a $1.5 million line of credit, Crestwood voters approved Proposition S, a tax-rate increase of 20 cents per $100 on real and personal property. In October 2006, the Board of Aldermen approved an annual-appropriation note with Royal Banks of Missouri to receive a loan to help pay off that debt through Prop S funds.

However, city officials learned in 2008 that the tax-exempt status of that note hampered the ability to build cash reserves.

“I think Proposition S was passed in order to remove the city’s line of credit and allow us to have sufficient cash reserves,” City Administrator Jim Eckrich told the Ways and Means Committee last week. “While it’s been very successful of eliminating the line of credit, because of the way it’s set up it’s done a very poor job of allowing us to maintain cash reserves because cash reserves are restricted by the nontaxable status of the Prop S loan.”

In March, aldermen approved prepaying $525,000 in excess of a federal 5-percent balance limit tacked onto the city’s refinanced debt.

The city’s original $2.87 million annual-appropriation note contains an Internal Revenue Service provision that limits the city’s general-fund balance to no more than 5 percent of the highest expenditure month during the previous calendar year.

With that 5-percent limit still in place on the tax-exempt note, Eckrich estimates the city will have to pay $1.1 million in excess cash next year on top of the scheduled 2009 payment of $478,000.

Between those payments, the city would pay off the rest of the $1.57 million owed on the note.

If aldermen choose to pay off that remaining debt and end that obligation, Eckrich said the question then becomes how to use the roughly $550,000 in property taxes collected each year until 2013 from Prop S. The real and personal property rate for Prop S is 16.9 cents per $100 of assessed value while the commercial rate is 20 cents.

While officials in early 2006 sold Prop S as a way to pay off the city’s debt and eliminate its line of credit, its ballot language also states that the funds can be used to provide city services.

In full, the ballot language for Prop S states: “Shall the city of Crestwood, St. Louis County, Mo., impose a general property tax in the amount of $.20 additional on each $100 of assessed valuation of all taxable residential, commercial and personal property for the purposes of paying off any loans or indebtedness, eliminating any encumbrances on city-owned property, providing sufficient funds for cash flow to remove the need for a line of credit, and thereafter, providing city services to the residents of Crestwood, said tax to be imposed for a period of seven years commencing in the year of passage?”

With this ballot language in mind, Eckrich said he favors levying the Prop S tax until 2013 so that taxes that had been collected to pay down debt now can be used to build cash reserves and provide city services.

“There is no reason to give up that money,” Eckrich said. “Part of the reason we got the money was to give ourselves cash that we can in the future operate on without having a line of credit. To retire the note and then a year from now get us right back in the position where we need a line of credit seems silly to me. But that’s ultimately a decision the board would make.”

Eckrich also pointed out to the Ways and Means Committee that even with paying off the debt in 2009, the city’s cash position in the general fund would improve from a Jan. 1, 2009, estimated reserve of $620,263 to a Jan. 1, 2010, estimated reserve of $1.16 million, which city officials would not have to forfeit through the 5-percent limit on the tax-exempt note.

“Can we afford to get rid of $1.5 million?” Eckrich asked. “What’s that going to do to our cash flow? We looked at this. If we’re paying this $1.57 million — and these numbers are calculated on a $1.5 million basis, so you’d have to revise them by $70,000 — but assuming a $1.5 million payoff, the general-fund cash would have been reduced to an estimated cash balance of $620,263 on Jan. 1. We performed a monthly cash-flow analysis. And what it showed is that our cash position … would never be worse than that $620,000. And then, by Jan. 1, 2010, we show a cash reserve of $1,160,852. So essentially, what we’re able to do by paying this off is eliminate the Prop S payment, eliminate any restrictions on our cash reserves and by the end of Jan. 1, 2010, we’d have a cash-balance position of $1.16 million, which I think we’re comfortable with.”

“… This would benefit the city in a number of ways including one, we no longer are restricted to a cash reserve of 5 percent of operating expenses and two, we would operate with general-fund reserves over expenses in not only 2009, but projected in 2010 and 2011 as well,” he continued. “… The general fund is improved dramatically over what’s shown in the budget. The reason is we are removing that Prop S payment from these future years. So instead of 2010 showing a deficit or revenues under expenditures by $186,000, we’re showing revenues over expenditures by $290,000.”

“And then in 2011, we still show revenues barely over expenditures. So, doing what we’re proposing gets us through 2011 and into 2012. We still have a problem in that our revenues are declining and our expenditures are going up. But because we’ve reduced our expenditures, we’re improving our position in the near future.”

Eckrich also noted that the 2009 budget draft he presented last week includes only the $478,000 prepayment. Should aldermen decide in 2009 to pay off the full $1.57 million, Eckrich said the budget could then be modified.

Mayor Roy Robinson said he supports Eckrich’s recommendation to pay off the debt early, but also wants to present two options to aldermen. One option would pay off the debt while the other option would convert the note from tax-exempt to taxable, which would eliminate the 5-percent IRS limit and allow the city to build cash reserves.

As for the prospect of using Prop S tax funds after the debt is retired to build cash reserves and provide city services until 2013, the mayor also is in favor.

“We’re not going against our word,” he said. “There are some of us who said we’ll pay off this Prop S and when it’s paid off, we’ll close out the (Prop S tax). But I think if we can show we’re saving money … I just believe that it’s important that whatever we do, we do it in the best interest of our community and we’re not doing it for personal reasons.”