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How do you pay for a $2.2 billion project?

FARGO -- Consultants for the Fargo-Moorhead Diversion Authority recently gave Cass County and Fargo officials a glimpse of the next seven decades. In two charts, they depicted roughly how much taxpayers may actually spend on the $2.2 billion floo...

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FARGO - Consultants for the Fargo-Moorhead Diversion Authority recently gave Cass County and Fargo officials a glimpse of the next seven decades.

In two charts, they depicted roughly how much taxpayers may actually spend on the $2.2 billion flood-control project and when the spending would happen, starting with the construction expected later this year and ending in 2084 when the last bonds are paid off.

One chart shows spending spiking in the early 2020s as the construction phase reaches its peak. Ernst & Young, the consulting firm that produced this financial plan, said $1.1 billion of that spending will be borrowed. The next chart shows how taxpayers and their descendants are expected to pay back the borrowed money as the construction phase gives way to the repayment phase in 2025. With interest, the total amount repaid would be in the neighborhood of $3 billion.

The chart also shows sales tax revenue outpacing debt payments, allowing the county and city, both members of the authority, to repay the debt three decades early and thereby avoiding much of the interest. To make this possible, voters would have to agree in November to extend a county half-cent sales tax and two city half-cent sales taxes beyond their sunset dates in about 15 years.

"It's a huge project so, trying to finance it, we looked at every modality that we could do," said Fargo Mayor Tim Mahoney, a member of the Diversion Authority's finance committee. "We were trying to find the least painful way to a normal person," he said, referring to the sales taxes.

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"The way we talk about it being flexible and resilient is that we can afford it," said County Auditor Mike Montplaisir, also a member of the finance committee. "Our sales tax is pretty strong."

Construction costs

Ernst & Young revealed that $2.5 billion would be spent in the 8.25-year construction phase, which is higher than the $2.2 billion official cost estimate because of inflation.

Analysis of the construction-phase chart shows the Diversion Authority spending some $400 million in cash, which is all the sales tax collected in those 8.25 years. The consultants said this pay-as-you-go approach reduces the need for loans.

The rest of the chart shows some $1.6 billion in state grants and borrowed money, including the contractor's own financing.

Left out of the chart is $500 million in federal funds to be spent by the U.S. Army Corps of Engineers.

Where the money will go exactly is shown in a breakout of the $2.2 billion cost estimate the Diversion Authority provided to would-be contractors in June.

About $1 billion would go to land purchases, bridges over the diversion channel and dikes through Fargo, all of which would be directly overseen by the authority and the city. About $433 million would go to a corps-built dam to reduce the flow into the diversion channel. The remaining $763 million would go to the channel itself and some related structures, which will be overseen by a single large contractor as part of P3 financing.

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Short for public-private partnership, P3 is a key component of the financial plan.

While most of the other project components are divvied out to many contractors, the diversion channel will be built by one contractor, likely a consortium of construction firms and banks. This contractor would agree to build the channel for a fixed cost plus profit paid over many decades. Diversion Authority officials say the contractor would assume the risk of cost overruns instead of the authority. The dragged-out repayment is seen as a warranty because the contractor doesn't get paid if the channel isn't available for use.

Only a part of the contractor's payout happens during the construction phase, structured as a series of "milestone payments." The remainder comes in a series of "availability payments" in the next phase.

Debt payments

When construction ends, the financial plan calls for the Diversion Authority to refinance the $1.1 billion debt to stretch out payments over many decades, ensuring that annual payments never exceed annual sales tax collections.

The model assumes a conservative revenue growth of 3 percent a year, though currently the average is 4 percent, said Tom Rousakis, an executive at Ernst & Young. He said the growth line is not a smooth curve because an existing sales tax with a quarter-cent dedicated to flood control will expire in 2028, causing revenue to dip.

Mahoney said that even at 2 percent a year, there would be enough to repay debt.

Of the debt, $200 million will be repaid over 30 years with interest in a series of bonds secured by special assessments, according to Rousakis. Diversion Authority officials have promised they would pay off the bonds with sales taxes rather than special assessments, which property owners dislike. But, by securing the bonds with specials, creditors will know they can require specials be levied if revenue fell short. Their confidence translates into lower interest rates.

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The $400 million in availability payments will also be repaid over 30 years and be secured by special assessments. During this period, the contractor must maintain the channel to ensure it's available during flooding, which means the Diversion Authority doesn't have to pay for maintenance. The authority has estimated maintenance of the entire project, including the dam, would average about $5 million a year.

Because special assessment districts expire after 30 years, that places a limit on the repayment period for those kinds of bonds.

There's no such limit on sales tax revenue. The remaining $500 million in debts will be repaid over 60 years in a series of bonds secured by sales taxes. Here, interest will be higher because creditors would be out of luck if revenue fell short.

Ernst & Young didn't provide an estimates of the interest rate or the total interest payment. But based on The Forum's analysis of the chart, the total amount paid over 60 years is roughly $3 billion. That's a huge amount of interest paid on principal of $1.1 billion, but the repayment period is very long. The average interest rate over that period works out to about 1.7 percent.

For comparison, the city of Fargo expects to get 2.5 to 3 percent for a 25-year special-assessment bond and 3 to 3.5 percent for a 25-year sales-tax bond, according to Finance Director Kent Costin.

Montplaisir said the county wouldn't issue 60-year bonds, but rather a series of 20- to 30-year bonds with balloon payments at the end, and then issue new bonds to pay the balloon payments.

But given how quickly sales tax revenue outpaces the annual payments, it's likely the Diversion Authority will be able to retire all debts long before 2084.

Rousakis said this timeframe is only necessary because credit-rating agencies use existing revenue, not projected revenue, and the city and county need those ratings to get low interest rates. As a result, the bond repayment is scheduled as if revenue will never grow. The model, though, shows that by 2084, projected revenue would be nine times as large as the payment.

Martin Nicholson, project director with CH2M Hill, the engineering firm overseeing the project for the Diversion Authority, and Rousakis said it might be possible to retire all of the debt and rescind the sales taxes in 2054, though they think it would be more prudent to wait a few years in case something goes wrong.

Idealized picture

While the charts provide a glimpse of what's ahead, the consultants caution that they should be seen as one out of many scenarios possible with the financial plan.

"This is the base plan not having a crystal ball," Rousakis said.

Reality could be messier, Montplaisir said. An aggressive P3 contractor could wrap up construction earlier than planned. A wet year could delay construction. Sales tax revenue could go down some years and up in others.

The county auditor said the financial plan is flexible enough to change with conditions. If construction wraps up early or interest rates threaten to go up, the city and county could issue bonds earlier, he said. If sales tax revenue is lower than expected, bonds could be issued with longer repayment p eriods to give revenue time to recover, he said.

"We have to put together a plan when we're going to issue bonds," he said, "but in reality we're going to be constantly changing and updating that plan as we go along."

How we made this chart

The two charts that the Diversion Authority presented to city and county officials are pretty much all the information that's public right now about the financial plan.

The Forum requested the numbers behind those charts for analysis and to combine them into one chart for a better sense of scale, but the authority's consultants denied the request.

They said the financial modeling is proprietary and has not even been given out to authority officials. More importantly, they said, making the numbers public would undermine the competitiveness of the bidding process among contractors.

"We're a little sensitive about advancing numbers while that process is going, because they're going to get excited about how much we've assumed in the plan for different packages," said Martin Nicholson, an engineering consultant for the Diversion Authority.

The charts themselves, however, permitted rough estimates.

Using graphic-design software, The Forum measured the heights of the bars and lines in the charts to 1/10,000 of an inch. This level of precision was undermined somewhat by occasional artifacts, such as the height of the grid lines varying by several thousandths of an inch. Such inaccuracies aren't significant for individual years but can add up over 60, which is why The Forum's analysis, specifically noted in the story, should be seen as ballpark figures.

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