There is an intricate 30-year City plan to procure a $ 120MM new high school. It is risky because there are so many steps in the plan and each step has risk. The risks have been identified and there are mitigation plans to help keep each risk from occurring, but there is little or no contingency planning for the situations if the risks were to come true. Some call this stress testing, sensitivity testing or modeling.
For example, the City says the worse consequence of many of the risks would be that taxpayers would have to pay the $ 7.4 MM bond payment every year with permanent higher real estate taxes of 15.5 to 18.5 cents. But, how would that tax increase impact our home values? What other impacts would the large tax increase cause? Why haven’t we asked one of our highly paid consultants to investigate the possible consequences to home values if taxes were to increase 15.5-18.5 cents, which would make Falls Church City will be 40-50% higher than neighboring jurisdictions?
I asked the City Manager, Wyatt Shields, about risk impacts and, later, asked that the City send me everything they had on risk assessments and risk modeling for the $ 120MM new high school plan.
This is Mr. Shields response to my email asking about certain risk impacts.
This is the City’s response to my request for all the risk assessment and risk modeling plans.
- Risk: Non-Adoption of the Modified CIP.
Last summer, with information available from their financial consultant, Davenport and Company, City Staff and the Planning Commission recommended that City Council adopt a Modified CIP that would delay some capital projects in order to help limit the risk of the $ 120MM new high school plan. The City Council voted for the Full CIP, however, so this risk mitigation opportunity is no longer available. This is important because we have a project that is riskier because City Council did not heed the advise of City Staff.
- Risk: City cannot net approximately $40 MM from the land deal.
The City will not issue bonds unless they sell or lease the land for “enough” money. Getting enough money depends on many sub-risks and circumstances (site survey, infrastructure, raw land value, market timing, zoning, WMATA/VDOT issues etc.) which are discussed in detail in the second link above. If the City cannot make a good enough deal, the City will not issue the bonds, and the $ 120MM new high school program will not go forward. This sensible plan would be better if the City would identify now, the “enough” value.
- Risk: Interest rates rise above 4%
The City plans to issue bonds in three rounds and assumes the interest rates on the bonds will average 4%. What if interest rates increase significantly? The basic impact would be an increase in the yearly bond payments but how high can our payment go without a negative impact on school and city services. And, how might this effect the developer of the commercial site?
This is how Alvarez and Marshall (A&M), consultants to the City, addressed the interest rate risk in their September 2017 report (see link 2):
“Interest Rate Risk Interest rates have remained at historic lows, facilitating access to cheap capital for development across the region. Should interest rates rise following developer selection, but prior to transaction closing, value may be negatively impacted.
Mitigation Technique: Limit project delays to execute prior to increases in benchmark rates and define a rate threshold within which the developer must continue to deliver promised value.”
Alvarez & Marshall, also added this on page 11:
Recommendation 2: Conduct a risk assessment and work to mitigate risks to the City and Project.
Consultant Davenport & Company addressed the interest rate risk in a Memo dated November 2016 talked about interest rate risk at length (see link 2), and said this:
“Moreover, since the cost of capital (interest rate) on future borrowings is not locked in until the bonds are issued, the City faces exposure to fluctuations in future interest rates. This creates risk to the City’s CIP Funding Plan because future borrowing rates might well exceed the estimates contained in the funding model, thereby increasing future debt service costs. Generally speaking, the longer the period of time of exposure and the more the borrowing is weighted toward the back end of such period, the greater the theoretical risk to the City. Davenport would be happy to run interest rate sensitivity cases, if asked, that would highlight the effects of higher rates.”
Why did the City ignore the recommendations from their consultants?
- Risk: Major Repairs needed at GMHS before new high school is ready
This is not a risk I’ve seen identified by the City, but under the $120 MM high school procurement plan, students will stay in the existing GMHS facility for about the next four years. We’ve heard from the Superintendent that repairs and replacement of roof, elevator and HVAC systems at GMHS could run up into the tens of millions of dollars. Do we have a financial contingency plan if we are forced by circumstances to make one of these very expensive repairs before the new high school is complete? Has there been an engineering study to determine the likelihood that these three expensive systems can be patched-up for 4 years?
- Risk: Increased Operating Costs
The Superintendent says to expect costs at the school to increase 4% and the City Manager says to expect City revenue growth at 2.5% (recently, he said, FY2019 will be a better 3%). In a mathematical sense, this situation would lead to funding gaps of $ 5 MM per year or more within 5 years. In a practical sense, City leaders tell us since we cannot print money, we will just have deal with our situation every year as part of the budget process. We can’t spend more than our revenues. Or, can we by borrowing or other schemes that would kick the can down the financial road? It would be risky to not face these tough budget choices head-on each year…. just like it was risky to approve the Full CIP.
City Council doesn’t have a choice when it comes to paying back our bond debt. Davenport & Company tells us what would happen in their risk discussion of November 2016 in a Memo to the City Manager:
“ A related risk in this area is Virginia’s constitutional post-default intercept of state aid to pay debt service. In the example cited above, a future council could make revenue choices that would lead to a shortfall and a possible default on the City’s general obligation bonds. In that instance, the commonwealth would immediately withho1d state funds, including disbursements for education, and divert those funds to pay City debt service. Thus there is a risk that future councils, which have the ultimate taxing power, could put the City in a situation where not only the general government is in financial trouble, but that such problems cou1d affect the School Board’s operations.”
- Risk: Construction Cost Escalation
This is any easy risk to anticipate as it’s been part of our recent history. The City did not send me any results of modeling for cost overruns.
The City should have a contingency plan and model to understand and then deal with a construction cost overruns of, say, 10%, 20 %, or 40 %. How would we get the extra money, and how would it impact other aspects of City operations and CIP plans?
I asked the City Manager specifically this question about cost overruns and impacts and this is the one question he did not answer (see first link).
7. Risk: Insufficient Net Revenue from 10 Acres
We expect $ 3.2 M in commercial net revenue by the year 2031 from the 10 acres of land we sell/lease for development at the GMHS site. Obviously, there are a number of factors that could cause the revenue figure to be higher or lower. Is there any contingency planning or modeling for drastically reduced net revenue projections? Is it just to raise taxes as necessary? How is the gap between the bond payment of $ 7.4 MM and the $ 3.2 MM in available revenue going to be closed?
8. Risk: Quality of Life Issues
There are plans is to bring in 1700 new apartments along Broad Street during the next 10 years or so. How many new residents will that bring? How many more cars? How will so such an increase in population in such a short period effect our City? At the very least, has there been a traffic study?
Conclusion
Risks have been identified by the City. There is a mitigation plan associated with each risk; that is, a plan to make the risk less likely to surface. It doesn’t appear to me there has been enough contingency planning for situations where the mitigation plan has failed and the risk materializes and is upon us. Multiple contingency plans for different circumstances would add up to a model of a general stress test or general risk assessment. I don’t see where the City has done this.
I agree with Mark. For a project this size, you would think that there would be detailed analysis and stress testing to be sure we have all contingencies covered.
Why hasn’t the city done this type of analysis?
So the city has not done the necessary investigation? Surprise, surprise. After the Mt. Daniel fiasco, I would expect the City Council and School Board would be extremely careful with identifying and mitigating risk.
From what I have seen here and on the “official” links from the school and city, I am very worried that they haven’t done their homework.
Voters, I would urge you to read what the city has done and what they haven’t done and be wise to the fact that your risks are not covered. This usually equates to higher taxes.
“Thus there is a risk that future councils, which have the ultimate taxing power, could put the City in a situation where not only the general government is in financial trouble, but that such problems cou1d affect the School Board’s operations.”
Basically, the annual contributions from the state to offset school expenditures would go towards paying the bond – teachers. Teachers are more important then buildings.
Originally, I was for the referendum. I know we need some updates to the current GMHS and I saw that the repairs would be expensive. However, the more I read about the risks, the less comfortable I felt about all that money being borrowed. I wish the City would have given us cheaper options to consider. Something that is more affordable for the amount of people that live in this small area.
Couldn’t the city have crafted the referendum in a fashion where voters could have voted for a choice amongst a range of amounts? Or wad there a statutory impediment? It got set up as $120 million or nothing.
Dale, some city council members will say that the referendum just authorizes them to spend up to $120 million and they don’t have to spend all of it. I think this statement is misleading because if the bond is approved (and I hope Falls Church City reads all the risks and consequences and votes NO) the plan is to move forward with a $120 Million school plan.
Absolutely, BB. If this referendum passes in my opinion there is no chance that less than $120 million will be spent. This group has been determined to sell to the public that need for a $120 million from the get go, when Dr. Jones first advocated it, rather than look more at what is affordable with less risk. Unfortunately, many casual observers will believe what this group of officials say.
I agree with you, Dale. Because they chose just one number for the referendum in stead of more options, I see such ugly and divisive conversations if you are against the referendum. People like myself are using initials instead of our real names because our fellow citizens will ridicule us or think we are anti school. I have kids in the system and would be able to take advantage of a new high school but it simply is too much and I don’t think we can afford it.
That’s too bad. You can care about schools and also care about what is affordable, and not be labeled anti-school. I am no newcomer to all of this. I have lived in the city for 50 years or so, attended and graduated from the city school system, as did my children. I value the schools but I also care strongly about affordability and risk especially for those who are on fixed or slowly rising incomes.
I forgot that a majority of the City Council ignored the City Manager’s and Planning Commission’s recommendation for a smaller referendum. Hold them firmly accountable going forward should the referendum pass and their are issues. Question them every step of the way. Ms Connelly who is up for reelection this year was a yes vote from the get go and probably would favor more than $120 million. Mr. Snyder who is also up for reelection also voted yes and seemed to throw up his hands and say let the voters decide. Mr. Duncan seems to have been a definite yes given his relentless defense of the full referendum. Me. Hardi voted for the smaller referendum and wrote on her blog her major concerns with the full referendum only to flip and vote for it.
Mark: Thank you so much for all of this work! Wow! I hope everyone appreciates this heavy lift here. So I am still working through this information but I have a question to anyone who can answer it.
So I went to the link that was titled City’s response to my request for all the risk assessment and risk modeling plans. On that list I chose the July 10th Council meeting. So here is my question: Why are the proffers on this 10 acres site as low as $3 million ($300 K per acre.) That seems low to me. Can anyone explain? I would want more is what I am thinking.
This was the amounts from Tinner Hill:
$1,577,310 schools;
14 ADUs;
$1.2 million utility undergrounding;
Tinner Hill is developed on 2.19 acres
You raise a good point, however, the impact of 1000 new apartments to our school system means capital costs for all schools – expanding TJ, figuring out what to do when Mt D. is filled, GMHS and MEH.
I would suggest that they build condos and or office space – both provide higher returns on taxes and are less likely to introduce many new kids into the system.
So thank you Lyn so it seems to me that the proffers seem very low. Am I missing something? I would certainly push for more. $3 million on 8-10 acres seems low.
No you are not missing anything. It is low if you look at it on a per acre basis.
I would prefer nothing on that land – keep our green space, keep the ability to expand our recreation areas, add more fields for kids soccer and parks, and at the same time reduce congestion, automobile traffic, noise, light and air pollution, etc. However, if there is a decision to build, do not provide a special exemption on any of our commercial land for apartments.
Acknowledging that this is anecdotal, I am currently trying to sell my house in FCC, and our realtor has told us that two separate interested buyers have opted to purchase homes in Arlington instead of FCC because the property tax rate is significantly higher here.
Hi Melissa, It is stressful selling a house and I have no doubt that taxes play a large role in the decision factor: what people can afford and if the premium is worth the extra expense. Most people will find comparable homes in neighboring jurisdictions and the schools are just as good or even better.
Falls Church City taxes are 30% higher and could go up much more now that City Council approved a Full CIP. The only way the market mitigates the higher taxes is usually by decreasing home prices so a new buyer’s Payment, Interest and Taxes is comparable to similar houses across the city line. This is unfortunate for you and all future home sellers and I would beg City Council and the School Board to cut expenses now to preserve our home values.
Has anyone seen any substantiation to the option chart that lists the costs for those options other than a single number for the cost of each option. It is my understanding that all the other choices were rejected after careful consideration which for me would mean more detail than one simple number. Folks are asking me about these options and about the detail that was considered. I asked for this information in my public comment to the school board on September 12th. If anyone has that data I would appreciate it.
You should be able to write to the School Board and ask for the data from Perkins Eastman. I noticed that they didn’t give a lot of detail on the options and/or the “winner” of the designs. It is a pretty brochure but not much detail.
Obviously the tax rate will increase whether there is no risk or not to this $120M bond. We probably can accept the reality over the next 5 or 10 years of some increase in taxation just because that’s life. But, it appears to me the ADDED risk of up to 18 cents for just bond debt service can have very bad consequences for our future. No one has even discussed the general economy over this period….if federal government contracts, for example, local commercial revenues will go down and so will our local tax revenues.
I sat with my financial advisor recently about all this stuff. The bank’s modeling expert joined in the meeting and showed me 3 likely outcomes on tax rate if FCC goes forward with this bond. The tax rates were based on year 2022…about 5 years out. Lowest tax rate was $1.61; most likely tax rate $1.79: highest was $2.07. The modeling expert is one of the best and well respected on Wall Street.
These numbers could take my taxes from a current cost of about $13,500 to as high as about $22,000. He reminded me that his modeling assumed no significant negative impact to the region’s local economy. He would not predict what tax rate increases would do to home values but he did say that at the very least it would take much longer to sell a home in FCC even in a decent market. The competition with nearby jurisdictions would weigh heavily. He also added that school systems in FFX County and Arlington would probably offer higher compensation to newer teachers then FCC…and probably better increases to existing teachers. I think this means our school system will not be able to maintain its current reputation as #1.
I am near 60. In 2022 I will be 65 and nearing retirement. This tax increase at age 65 could cost me an additional $100,000 in tax burden between age 65 and age 75…10 years. To generate that extra $100k either I squirrel away at least $10k to my savings each year for at least 5 years and hope for good returns OR change the risk profile on my investment strategy.
I am one of the lucky ones and in all models and profiles, I can afford to stay here and remain comfortable. My illustration is not about me per se…it is more about the dramatic CHANGE a $120M bond can have on any citizen residing here in FCC.
But, the question for ME comes down to this…
Why should I absorb this cost when jurisdictions around me offer excellent schools too? When a community overwhelmingly ignores risk especially to those who are less fortunate then you, it is the epitome of selfishness in my opinion. Too many risks. Too many unintended consequences. Too much burden on citizens who already struggle… And, too less diversity in community population as minorities will NEVER be able to afford residence in FCC.
That is not a community. That is a select few living in a gated compound.
If the bond is approved, we will sell and leave.
Your above analysis is excellent – – one of the best I have read. I urge you to seek publication in other outlets to get expanded coverage.
I am much in the same situation and I know many others are too, and can relate to and agree with your points.
Well done.
Thanks Dale. I heard that about 1 out of 4 households in the City ha e school children. I never was able to get an accurate count. Any idea?
The school board chairman or school superintendent I would think could confirm that. Folks in this forum, such as Alison Kutchma, who have done a lot of digging into data, might know.
I heard one candidate say that the city should consider establishing special tax districts within the city. In other words, if you have children in the system, your taxes would be more as a user….given the increasing taxes largely to support the school system. If you have children who have graduated from the system or if you don’t have children or have never had children in the system then you would pay less in tax. Any thoughts?
Always remember the Vice Mayor’s (who works for the school superintendent) own words…..”it is leap of faith.”
Taxation is complicated. I do not think it would pass the courts to be honest.
Understood.
Would you, as a voter, have liked to see more than one option to vote for on November 7th rather than an up or down – all or nothing – $120 million?
Yes! I wish they would have given us multiple thresholds.
Was there a legal impediment of some sort which prevented different thresholds being presented to voters? After all and correct me if I am wrong, but both the city manager and a majority of the planning commission were in favor of a lesser amount. Given that and if there was not a legal impediment, why not put more dollar threshold options in front of voters?
Dale, perhaps they need to be very concise with the language? I went to a few City Council meetings where they discussed each and every word in the referendum and maybe they thought too many choices would not be clear to the citizens, but I just don’t know. That would be a good question for the City Attorney: 703.248.5010 or
city-attorney@fallschurchva.gov
Would you mind calling and getting an answer then sharing?
For what’s worth…too late now so a moot point….legal reports there was no legal impediment to offering voters with threshold options to consider and vote on.
Thank you for getting the information. It may be a moot point but perhaps we can learn from this and offer threshold options for any future projects. I really appreciate this.