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?
I have reservations about this referendum. It seems like a lot of money for a city our size. It also concerns me that this is just for George Mason and I wonder if we will be able to borrow more funds when we need them for the other schools.
I think this whole referendum and analysis is a bit hurried and haphazard for the amount involved.
When I see the chart of how much debt we will be carrying compared to other jurisdictions, it is a little unsettling.
Not sure where anyone else stands because no one seems to want to talk about it. If it’s for the schools, we have been trained to say yes otherwise people think we don’t care about schools. I care deeply about the schools but I think this is just a little to much for our little city.
Don’t forget the Mount Daniel fiasco. Keep in mind the mis-management and cost overrun that occurred. To date, I don’t believe any city official has publicly apologized to taxpayers about the delays and the large amount of wasted taxpayer money. It is simply brushed aside. And now many of these same folks want your complete trust in managing a project that is at least 10 to 15 times as big. If Count on a high school project that when is all said and done will no doubt cost a lot more than $120 million despite referendum language…..not to mention increasing operational costs which no one seems to want to talk about right now, but which you will definitely hear about when the next budget season rolls around when the schools ignore budget guidance and the city manager and city council will not have the strength to say no….operational increases that will be on top of the large debt service and exceed revenue projections.
I have a question, and perhaps some more savvy municipal finance types have an answer. The projected “net tax yield” on the new development on the 8 – 10 acres of high school land is $3.1m per year starting in 2033 (which means the net present value of that $3.1 million is a lot less). My question, however, is that the current cost of a student in our school system is $18,418 (2016 data), and there is a projected 150 new students (city projections, probably a low number) in the new residential development. That amounts to a $2.762 million cost in current dollars, much higher in 15 years. So how can the tax revenue increase of $3.1 million possibly offset the cost of the new students? I do not think that the cost is reflected in the tax yield projections but I could be wrong. On the surface, this looks like we would be investing in negative cash flow.
The Mt. Daniel situation is what concerns me most – very poor planning with this led to significant cost overruns – and the project is barely off the ground. It really actually never should’ve been started!
Apart from this, I agree with Brian H – it’s acceptable to support our schools and not support this bond.
Also, $120M – this is a ton of money! I’m aware of other HS’s around the Country being built right now for half as much or less. Even $60M would be a huge amount of debt but I’m certain the high school could be built for this – the interim superintendent had this thought as well.
Joe, You raise good questions and understand the issue. The net tax yield is based upon a city model that the city uses to determine how much we will yield after expenses. It’s a model with deficiencies and it has been wrong in the past. The big component that the city used when they used the model and provided the net tax yield was they expect 1000 new apartments to generate only 150 kids. I would submit that a large apartment complex so close to MEH and GMHS would be a major draw to families with children – they never have to take the bus, they never have to be picked up, they can come and go from home without supervision. We have asked the city to run those models with more children and you can see that the net revenue is quickly net neutral or net negative. This is what happen at Pearson Square which the city will just call an anomaly instead of planning for another a similar outcome.
I think the city is being misleading by not running the models with different risk levels. It is a disservice to the citizens.
The cost per student is confusing because it is subsidized by the Federal and State Government. The current cost to educate each child is $18,418 of which 82.5% is paid by local RE taxes. The city and schools DO NOT include debt when they show the ratio of how much of our local funds go to the schools unlike other jurisdictions. If you just add the current debt associated with schools, the school takes 51.1% of the annual budget. You can compare apples-apples if you look at the data provided by WABE instead of the FCCPS site as it includes all expenses that are related to the schools. FCCPS never includes debt when they show their expenses, they just look at select data so it is not a true financial picture of school expenses.