Omaha City Council's approval of $440 million in bonds puts streetcar on track to construction

Omaha’s planned streetcar on Tuesday overcame its last major hurdle on the road to construction.

Omaha City Council members approved the issuance of $440 million in bonds to fund construction of the project and to purchase necessary equipment, including streetcar vehicles.

The 6-1 vote marks the closest Omaha has come to breaking ground on a streetcar system that has been contemplated for decades.

Councilwoman Juanita Johnson voted against the bond ordinances while calling for better transit options in North and South Omaha.

The vote came after considerable discussion last week over the risk of issuing lease purchasing bonds and continued debate over the financial role the Metropolitan Utilities District has been asked to take on by the city.

Jennifer Taylor with the city’s law department and Mark Mendenhall with MUD confirmed to City Council members that negotiations on costs were ongoing.

“I’ve had very positive meetings with MUD staff, with (city) staff and greatly appreciate the cooperation both parties have shown,” Taylor said. “I’m very confident after our meeting that both will continue to work together in good faith.”

Mendenhall affirmed that both parties were working hard to find a solution that wouldn’t result in a rate increase for customers, but he stated the avoidance of a rate hike related to the streetcar project could not be guaranteed.

“I cannot sit here and express that we are confident this will result in no pay raise,” Mendenhall said. “What I am able to say is that we are here and expect to continue to work with the city to further minimize costs of the project.”

Mendenhall, who serves as senior vice president and general counsel with the MUD Board of Directors, raised concerns last week of significant rate hikes should the utilities district be on the hook for the estimated $20.5 million cost of reinforcing and moving water and gas mains along the streetcar route.

MUD is willing to contribute about $4.2 million to the $20.5 million price tag through an accelerated replacement of certain utility lines close to the streetcar. Without an agreement to fund the remaining $16.3 million by the city, MUD predicts a water rate increase to customers of up to 19% and a gas rate increase of up to 6%.

City administrators contend that MUD would have to replace the line eventually, and suggest that MUD spend $4.9 million held in the utilities district’s reserve and that the city would cover $5 million of the cost of the newer lines along the route.

The city also would issue bonds for the remaining project costs that would be repaid by MUD over an agreed-upon period of time, which would not start sooner than 2025.

Multiple council members said they felt good about moving forward with approval of the bonds after assurances that the Mayor’s Office and MUD would continue discussions on a payment plan that avoids rate hikes related to the streetcar.

They also had assurances from a third-party analysis that the streetcar’s financial plan wouldn’t leave taxpayers on the hook for millions of dollars in lease purchase bonds.

One of the approved bond ordinances allows for the issuance of up to $360 million in redevelopment bonds. The buyers of these bonds assume any risks with their investment, leaving little or no risk for taxpayers.

The other ordinance allows for the issuance of up to $80 million in lease purchasing bonds — a type of bond backed by the city’s general fund.

Lease purchase bonds were considered in part because they’re likely to come at a much more attractive interest rate, said Steve Curtiss, city finance director. They also can be sold in smaller pieces, meaning the city could maximize their efficiency.

The City Council in March agreed to pay Maryland-based public finance consulting firm MuniCap Inc. up to $100,000 for an analysis of the streetcar financial plan.

MuniCap’s months-long analysis, obtained by The World-Herald, confirms what city administrators have predicted from the beginning: If all goes as planned, development spurred by the streetcar should more than cover the cost of paying off the $306 million project.

MuniCap’s analysis leans heavily on assumptions, including estimates of future property values, the rate of tax credits, the strength of Omaha’s economy and little change in zoning laws.

If those assumptions hold, the firm conservatively predicts that a special district along the streetcar route will see more than $600 million in tax-increment financing revenues through 2057.

Tax-increment financing, or TIF, is essential to the financial plan, which calls for the issuance of $80 million in lease purchasing bonds and $360 million in redevelopment bonds to pay the initial costs of building the streetcar system — including the purchase of vehicles, construction of the tracks and price of a vehicle maintenance building.

TIF revenues would be used to pay off those bonds.

TIF is a development tool long used by the city, but never used on a project of this scale.

Under TIF, the developer of a city-approved project takes out a loan to help cover eligible redevelopment expenses. The loan is paid back, generally over a 15-year period, by using the increased property taxes that are generated on the new development.

During the TIF period, the property owner continues to pay a portion of property taxes to local governments based on the valuation that existed before the improvements. After the TIF loan is repaid, property taxes collected on the higher-value, improved property then start flowing to local governments.

If the TIF district works as intended, the streetcar would more than pay for itself through the development it encourages along its route.

Jay Noddle, a local developer and president of the Omaha Streetcar Authority, said the development brought by Mutual of Omaha is just one example of upcoming projects along the streetcar route.

“There are many more development projects already considered and approved that don’t get talked about,” Noddle said. “I think we’ll see a lot of cranes in 2023.”