Prior to the 2008 real estate bust, many Americans had purchased homes that they could not afford comfortably, at least if judged by traditional lending practices that had been in place for decades. By 2007, lending standards had been relaxed, adjustable loans with low initial rates had been pushed, and the accepted assumption was that home values would continue to increase. Good people who wanted the American Dream for their families and who had every good intention of paying back their mortgage faithfully, ended up not being able to do so, eventually losing their homes and savings. The laws of economics don’t care much about good intentions.
In these years leading up to 2018 in Falls Church, we have worked our way into a position where we are being asked to spend $120,000,000 on a new high school. We are asked to overlook long-established City borrowing policies because the new high school is something we really need for our families. We have a complex plan to pay the bond back which includes cashing in City assets to keep the payments lower in the first years of bond repayment period. We assume that we can depend on future commercial development after that asset money runs out. But what might happen if the laws of economics start to disrupt our carefully crafted plans and good intentions?
What are our Risks with the $120 MM Bond deal?
On September 10th, the City Manager told a group of us at GMHS that these are the risks:
* market timing risk
* credit downgrade
* project cost control risk
* operating cost risk
Afterward, it occurred to me that he did not tell us what would be the possible impact if one of more of these risky situations actually developed so I sent him this letter on September 15th. To date, the City Manager has written me back twice saying he will answer my letter soon. If he does, we will post it.
What we should Know before we Vote
- What is the impact of each of the risks materializing at varying degrees at an inopportune time? What is the plan to handle each risk as it develops?
- Has the City done any modeling for the risks they have identified? If yes, please make it public. If no, why not?
- A specific problem has already been identified by the Superintendent and the City Manager. They told us that school needs would likely increase 4 % per year into the future while City revenues would likely only increase 2.5%. What is the impact of this difference in 2, 5, and 10 years? How will we handle it?
- History presents us with another specific problem that we have to believe is somewhat likely to occur. How will we handle a 20 % cost overrun with the construction of the high school?