By Karen Oliver
The classic Aesop’s Fable of the grasshopper and the ant is the tale of preparation. A grasshopper spent the summer singing while the ant worked hard to store up food for winter. The grasshopper didn’t understand why the ant was working so hard until winter came, when he discovered that the ant had wisely saved a stockpile of food for the long winter and he had not.
As I write this on the winter solstice, Falls Church City faces a fiscal winter. We have enormous capital investment needs in the next ten years, and current capital reserves are less than the investments we have identified. The needs for school facilities, as well investments in library, city hall and our transportation network are huge. And it may not make sense to count on economic development, future harvests if you will, to get us through the next few crucial years.
At its December 12 meeting the city council discussed several changes to our financial policies that could support stronger long-range planning and also add flexibility to the once-in-a-generation financing challenge presented by the proposed George Mason High School Campus Project. The financial policies themselves do not determine the outcome of the campus planning process, instead, they provide flexibility in making decisions about that project by identifying different financing strategies we could adopt and the potential costs of those strategies. Like the ant, this is a way to prepare so that we can survive the winter.
In preparation for the extraordinary capital projects, Council set aside some proceeds of the 2014 water sale and the small surplus from last year’s budget in capital reserves. A first proposed revision to the fiscal policies clarifies that our capital reserves may be used for annual debt service. This is akin to using savings to pay a portion of the mortgage. If we use this mechanism to fund the capital projects we would still pay more taxes but we could reduce the immediate increase.
Even with these measures, the current borrowing capacity of the city is far less than the estimated cost of a new high school, library and City Hall. With the help of financial advisors, we’ve further tweaked our policies to allow us to borrow sufficient funds for these extraordinary needs, with a plan to mitigate the risk.
Municipal debt management policies are designed to reassure lenders that city bonds are a safe investment so that we can borrow at the lowest possible cost. To show lenders we can manage our debt load, our policy holds the annual debt service load to 12 percent of the total operating budget. We also demonstrate that the city considers borrowing capacity for future projects. The current policy parameters require that the city use 20-year level principal debt so that at least 25 percent of our debt is paid off within five years and 50 percent is paid off within 10 years.
The second key proposed policy revision allows the city to issue 30-year level-payment debt if a plan exists to rebuild debt capacity within five years. A third proposal allows the city to exceed the 12 percent debt service limit if additional resilience is created by increasing the unassigned fund balance. By making these policy changes before we embark on the project we reassure our lenders we are understand and are committed to managing our risks if we choose these options.
Note: If we believe the best option for the high school project raises debt service above 12 percent, council could choose to fund the unassigned fund balance over three years rather than one. This decision is separate from a vote on the policy itself, and would be made during this year’s budget process. Like the ant, we could choose to stock part of our cupboard before winter comes.
Finally, the proposed revisions to the capital reinvestment policy call for new annual cash funding of at least $1 million per year for smaller capital projects. Current policy is silent on this issue and recent budgets have underfunded rehabilitation and replacement of existing building and heavy equipment, or have used debt for these needs. It is important that we commit to this regular investment in infrastructure and keep our debt capacity for key projects for the city. Are you prepared to be an ant so that we can meet these needs?
The current policy and proposed revisions are available online at www.fallschurchva.gov and I encourage you to take a few minutes to review them. I have highlighted the key changes but we welcome your comments and questions on any of the proposed policy before we vote later this year. And we hope you will join us in methodical, ant-like preparation for the city’s looming capital needs.
Karen Oliver is a member of the Falls Church City Council and chair of the Council’s Budget & Finance Committee.
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