In a mayoral campaign just now heating up, the most direct criticism of Mayor Tom Henry surrounds how much the city owes its lenders. In an apparent attempt to capitalize on national concern over the federal deficit, Republican mayoral candidate Paula Hughes has been hammering away at the city’s debt.

Absent any significant scandal or malfeasance in the Henry administration, Hughes – by far the most active of the three major GOP candidates thus far – has targeted city finances. The strategy makes sense – fiscal conservatism is generally something all Republicans, both moderates and the far right/tea party wing, can agree upon. Henry does have vulnerability over some specific spending decisions, most regarding consultants. And Hughes’ success as a County Council member in bringing structure to the county budget gives her credibility on financial issues.

But the city’s overall financial picture is sound, particularly compared with a number of cash-strapped Hoosier cities making painful budget cuts.

More important, unlike the federal government – which can simply print and borrow money whenever it wants – the city’s debt is tied up in bond issues, each of which is subject to strict scrutiny and has a revenue stream dedicated to repaying it.

The debt sounds big – “a staggering $405 million,” a recent Hughes news release read.

Actually, city government’s debt is only about half that amount. The other half is in City Utilities, the separate city-owned business that operates the city water and sewer systems.

“In fact, that number increased by $78.4 million in 2009 alone,” the Hughes news release said.

More than half of that 2009 increase went to two big projects – Parkview Field (about $26 million) and purchase and renovation of the government building now known as Citizens Square (about $16 million). At a public hearing in 2007, Hughes testified in favor of building Harrison Square – with the ballpark as its major feature – and as a County Council member, voted in favor of sharing space with the city in Citizens Square.

Hughes recently pointed out that county government paid off a bond financing its portion of the parking garage behind the City-County Building early, while the city has not. The city borrowed $1.7 million in a 20-year bond for its share, “the equivalent of a family making $40,000 a week taking out a 20-year loan for a $540 television,” her news release said.

That comparison has some problems.

A television will last a few years, and it would be foolish to borrow for it over a 20-year term. The parking garage, on the other hand, will still be standing past 2021.

“You’re not allowed to bond longer than the life of what you’re bonding,” City Controller Pat Roller said.

Indeed, while the Parkview Field bond matures in 2034, bonds for vehicles and equipment are more typically issued for a period of about five to seven years.

Still, Hughes said the city will pay $1 million in interest on the parking garage bond, money that could be better used for other needs.

Hughes promised that if she is elected mayor, she will reduce the city’s debt by at least 24 percent at the end of her first term. In fact, if no new debt is issued, the current debt load will fall by about one-third by the end of 2016 no matter who is elected.

Debt’s cost, benefits

Money that goes to pay interest rates on bond issues cannot be used for other projects or returned to taxpayers in the form of lower debt.

But that does not mean the money is wasted. Indeed, as Republican candidates repeatedly argue that government should be run more like a business, it’s important to remember that nearly all corporations have debt.

“Debt plays a major part in the corporate setting,” said Stanley Davis, chairman of the Accounting Department at the IPFW Doermer School of Business.

One businessman who agreed with Davis is Eric Doden – one of Hughes’ challengers in the May primary.

“No organization that maximizes its asset base is going to have no debt,” said Doden, the director of investments at a consulting and private equity firm. “What’s important is to have well-managed debt.”

Roller notes that nearly all of the city’s debt is paid not with property taxes but with local income taxes, particularly the County Economic Development Income Tax.

“This is what CEDIT dollars were meant to do, to invest in the community,” she said.

In theory, lower debt could mean a slightly lower local income tax – though without bond issues, it would be even more important for the city to save revenue.

But as a practical matter, the local income tax has remained at 1 percent since 1998 and will probably not be reduced for the foreseeable future.

With the cost of borrowing so low – two of the big 2009 bonds were at 3.5 percent – the city has an even better chance of leveraging the proceeds of bond issues to bring in more investment to the city.

For example, the city had a $14 million bond issue for redevelopment of the Southtown Mall site. Menard’s, Wal-Mart and other businesses there invested $25 million more, bringing in more property tax and income tax revenues to the city.

Political tactics

Hughes said she does not have a specific figure in mind for how much debt the city should have, but “we are nowhere near what’s appropriate right now.” She called for using a portion of the proceeds from the lease and sale of City Light to pay off some debt.

And she does believe some debt is unavoidable, citing City Utilities’ borrowing to pay for a massively expensive, federally mandated project to reduce sewer pollution going into the rivers.

Still, “There are communities that have been successful without any debt,” Hughes argues.

If so, they probably aren’t in Indiana.

“It’s very common for cities and towns to have debt,” said Matt Greller, executive director of the Indiana Association of Cities and Towns.

Hughes frequently cites the economic principles of talk radio show host Dave Ramsey, and her news release said she would implement “Ramsey’s debt snowball approach to paying down city debt.”

Under that method, lowest debt balances are paid first, then those payments go to bigger debt.

Such an approach may work with personal finances. But with a $180 million city budget?

It likely isn’t coincidental that Ramsey uses faith and biblical references in his approach to personal finances and is popular among a wing of the GOP that may well be more attracted to Republican candidate Liz Brown.

For her part, Brown notes one potential problem with trying to pay off bond issues early is that “they all have early-payment premiums. … Initially, if you do pay down this debt, what is the cost of doing it?”

While Hughes’ criticism is doubtlessly influenced by politics, it’s important to note that she played a lead role over the past eight years as a County Council member in putting Allen County government’s financial house in order. Until she led a reform-minded council following her election in 2002, county officials long cried poverty and were dealing with financial “crises” practically annually.

Hughes played no small role in changing that approach, paying down the county’s own debt and building cash reserves while bringing structure and priority-setting to the county budget process.

Over the next five weeks, expect Hughes – and perhaps the other Republican candidates as well – to take issue with some of the specific spending of the Henry administration, particularly on consultants. They may find fodder for criticism there.

But the city’s debt – unlike the federal deficit – really isn’t a problem.