In November, we will probably be asked to approve a referendum for a $120 M (Million) bond issuance to finance construction of a new high school. The debt service will be approximately $7.08 M every year for 30 yearsi. Some people have warned that paying for increasing School system operating costs will be more challenging than the bond debt payment. The counter thinking is that new development and a modest real estate tax increase will pay for the need of our Schools.
During the past few weeks, the City has held some meetings and issued some reports that provide enough data to allow anyone to make their own back-of-the-envelope analysis. Here goes…
- The new Superintendent, Dr. Peter Noonan, wrote that he expects the operating costs of the school to increase by 4% per year until 2030.ii The data is based on the last 10 years of historical data.
- City Manager, Wyatt Shields, advised City Council on June 19th that he believes that the City will see average revenue growth of 2.5% per year. He said he based that on the past 10 years of data. This level of growth is assumed in the 2018 Ordinance to Amend the CIP.iii
- In June, the City released a report on the economic impact of the last eight MUDS. Currently, they provide $ 3.8 M of net revenue to the City annually (which is $ 475,000 per MUD, or another way of looking at it, $ 207,000 per developed acre). iv
How would we be doing in 2028 – ten years into the bond issuance?
Dr. Noonan says our Schools will need $74.9 M in 2028 (Year 10).v We would also need to pay the annual bond debt of $7.08, so our total school need would be $81.98 M. According to Mr. Wyatt’s projections, the City will collect $ 113.3 M in revenue in 2018.vi We’d expect about 51.5% of City revenue, or $ 58.3 M, to go to the Schools.vii
In Year 10, then, we face a school funding deficit of $23.7 M ($74.9M less $58.3M) for this one year. The $23.7M is not a cumulative debt, but rather the funding deficit for just this year, 2028.
How could we pay for it?
1. In theory, I suppose, we could have brought on another eight MUDs during the ten years to produce $3.8 M in additional revenue (we have to assume Mr. Shields didn’t take any of these 8 new MUDs into account when projecting 2.5% growth). This seems really optimistic, eight more MUDs, but the point is that it wouldn’t help that much anyway – only $3.8 M added and we need $23.7 M.
2. Adding a penny to the real estate taxes produces about $ 400,000 in revenue to the City.viii To make up the entire $23.7 M shortfall, you would need to raise taxes 59 cents over current levels.
3. We could sell 10 acres of school land to developers for $40 Mix. That would pay all the deficit for Year 10 and most of the deficit for Year 11 and then it would be depleted. The point is, it does not go very far when you need so much money each year to balance the budget.
4. What about income from the development of the 10 acres we sold? From the City’s reportx, we would expect 10 acres to produce about $2.07 M ($ 207,000 per acre) in annual net revenue. Again, that is helpful, but it doesn’t take us very far down the path to resolve the $23.7 M shortfall.
5. We could also take some portion of City funds ($54.9 M) to pay for the School debt and operating costs. To pay all the $23.7 M in School shortfall would be a large portion, though – 43%. This leaves little money for the City-side of expenses.
In reality some combination of the above would probably be the answer, but it would be painful and it would only be worse the next year and every year thereafter as long as the operating costs of the School system outpace the revenue growth of the City.
We need to get a handle on paying for the operating costs of the Schools. At the June 19th City Council meeting, Mr. Shields said that the 2.5% forecast growth of City revenue would cover increases in School operating costs over the life of the bondxi. In fairness to Mr. Shields, he said that about a week before Mr. Noonan came out with his 4% projection. At any rate, we now have identified a big problem and it needs to be addressed. It may not sound like much of a difference, 2.5% versus 4 %, but with compounding interest over longish periods with big base numbers, it has huge, negative consequences.
I don’t think aggressive development can solve our funding needs, just help some. In my example, if you bring on 8 more MUDs, plus develop the 10 school acres, you would only be netting $ 5.87 M extra per year in City revenue. We need $23.7 M per year by Year 10.
I don’t think selling 10 acres of school land for $40 M will solve the problem, it can help some of course. In the June 19th City Council meeting there was discussion of how $40 M would be used if collected in about year 3, I think it was. The recommendation from the finance consultants was to hold the funds in liquid accounts and then use the funds to make payments on the bond, not to buy down the bond. They didn’t go into specifics, but you can imagine a plan where $ 4 M per year is used to supplement the budget for 10 years or something to this effect. The point is, selling the land doesn’t solve our funding problems, though, it helps some over a stretch of years.
I don’t think raising the real estate taxes will solve the problem by itself either. By Year 10, we’d be taxed at $1.90 and the rate would need to climb each year thereafter. In reality, at some point, raising tax rates becomes counterproductive as smart consumers tend to move to good, nearby alternatives which would, over time, decrease our home values and shrink the tax base.
All these revenue raising measures help, but even in the aggregate, taken in some reasonable and palatable proportion from the different sources, they would not be enough to solve the $23.7 M deficit. To solve the funding problem, some pretty unreasonable and unpalatable steps would be needed. And, my Year 10 assumptions are optimistic. What if the land is not sold, or there are construction cost overruns with the high school, or there is a general recession and growth is stagnant and development declines markedly?
I know I am leaving out some things – like the use of “voluntary” developer payments toward the Schools which might amount to $10 M or so, and $10 M in water sale money that could be used in early years of the bond debt – but, these one-time, shots-in-the-arm will have been exhausted by year 10. They don’t do anything to help the $23.7 M shortfall problem in 2028, because they were used-up helping deficit problems in years before then. In fact, you would needed about $20 M to have solved the deficit in Year 9 alone.
I think we should solve the operating cost issue before considering going $120 M in debt.
i $ 120 million at 30 years at 4.25%. These numbers can all be checked in endnote iii document.
ii Peter Noonan memo to Wyatt Shields, Re: GMHS & MEHS School Campus Project, undated. Released to public on or about 6/26/2017
iii Ordinance to Amend CIP Budget… presented to City Council on 6/26/2017. Line 115
iv Mixed Use Development Fiscal Impact Report, City of Falls Church, June 2017. Page 1
v See endnote ii
vi City of Falls Church, FY 2018 Proposed Budget, pages 1-5. There is $ 88.5M in City revenue in FY 2018. Solve $ 88.5 M for 10 years at 2.5% = $ 113.3 M.
vii See endnote vi
viii I asked and received this information from Ira Kaylin in late June.
ix See endnote iii, lines 45-51 for $ 40 M justification.
x See endnote iv
xi You can also see this in the Ordinance to Amend CIP (endnote iii), lines 111-113