If Falls Church jumped off a cliff, would Vienna jump off a cliff too? Minor update 9/25/2018

Posted on September 23, 2018

I have been thinking about doing a survey of Falls Church residents, to see how they like their big new mixed-use developments.  In the course of that, my wife brought up the issue of schools, and the fact that Falls Church runs its own schools.  And that question of schools led me to a better understanding of how the incentives for development differ between Falls Church and Vienna.

We are obviously copying Falls Church, in trying to attract large mixed-use buildings to our main street.   We’re at the point where the same assisted living company that built in Falls Church is now checking out locations in Vienna.

But does it make sense for Vienna to do what Falls Church has done?  Is what was (arguably) rational for Falls Church necessarily rational for Vienna?

Independent City status and school costs.  Falls Church is one of the independent cities of Virginia.  As such, it stands as an equal to Fairfax County.  It replaces Fairfax County as the collector of most taxes (i.e., almost all property tax that would otherwise go to Fairfax County instead goes to the Falls Church City).  And, likewise, it has to provide all the services that Fairfax would otherwise provide, including police, courts, and most importantly, schools.

And so, (almost) all the tax collected on Falls Church City properties accrues to Falls Church.  Whatever tax revenue benefits arise from their new mixed-use developments, roughly 100% of that accrues to Falls Church City.

And Falls Church City has to pay for its own schools, which is a huge expense.  Falls Church was, as I now understand it, kind of worried about paying for that, a few years back (during the aftermath of 2008 near-crash of the financial system).

And so, they invited in a bunch of mixed-use development.  And they have kept careful track of the net results, particularly including additional revenues versus additional costs of schooling.  You can download a two-page summary  from their economic development website (pdf).

The main point is that, while Falls Church has borne 100% of the costs associated with this new mixed-use development — traffic for example, but also more school kids to be educated — they also collect 100% of the tax benefits.

The situation for the Town of Vienna is materially different.  We collect only a fraction of the property tax revenues that these buildings will generate.

Let me start by comparing Vienna and Falls Church, in the little table below.

Falls Church is smaller than Vienna in terms of both land area and population, and much more densely populated.  Median household income is a bit lower in Falls Church.  On net, residents of Falls Church pay slightly lower real estate tax rate than we do.   And for the time being, they pay slightly more in meals tax.  But that will change around 2021, as Vienna plans to raise the meals tax to pay for the $16M  build-out of the police station and maybe $6M for a parking garage at Patrick HenryEdit: Those plans changed in the most recent Vienna capital plan , and the meals tax is now slated to remain 3%.

My main point is that of our $1.4085 per $100 property tax rate, roughly 15% goes to the Town of Vienna.  The remainder goes to Fairfax County, with some small flow back to Vienna for maintenance and improvement of storm water management projects.

Unlike Falls Church, Vienna bears some of the additional costs (e.g., traffic) but not others (schools).  And Vienna only collects a fraction of the resulting property tax revenue.  What may have been a reasonably rational cost/benefit tradeoff for Falls Church might or might not be such a benefit for the Town of Vienna.

If you gave Town of Vienna residents the choice of burying their downtown in more traffic, or degrading their schools — well, at that point, then you’d have a debate worth having.  That now appears to me to be something like what Falls Church faced during the aftermath of the last recession.

But we don’t actually face such a trade-off.   School costs are Fairfax County’s problem, not ours. And we only get 15 cents on the dollar of real estate taxes.  We will bear 100% of the burden of the additional congestion and cut-through traffic  … for what, exactly?

Well, Vienna does face stagnant tax revenue growth.  (What follows is my calculations from Vienna budget documents posted on the Town of Vienna website.) Between the 2009-10 budget and the current budget, Vienna’s operating budget (excluding use of reserves, the last two lines on the operating budget summary table) grew at an annual rate of just over 2.3%.  (Including use of reserves, it grew by 3% per year).  Over the same time period, the US Consumer Price Index rose at an annual rate of 1.7%.  Cumulatively, adjusting for inflation, the Town of Vienna operating income is about 5% higher than it was 9 years ago.

Or, per year, roughly one-half-percent per year growth in real (inflation adjusted) operating revenues.  Without knowing more, it would seem kind of tough to pay for raises and health care premium growth out of that revenue stream.  That also seems a bit surprising, given the tear-down boom that has gone on in Vienna.

The situation looks somewhat better — but not hugely so — if you just focus on the most recent budgets.  Between the 2016-2017 budget and the one adopted for 2018-2019, real (inflation-adjusted) operating revenues (excluding use of reserves) rose just under 2%, or real operating revenue growth of just about 1% per year.

Hmm.  Maybe this really is all about the taxes.  I have to say, if faced with this, and looking a few miles away at the success that Falls Church is having (.pdf reference above), that might look like a pretty good plan.

On the other hand, the operating budget is only part of the picture.  It’s tough to feel sorry for the Town government given the capital budget (e.g., the large cost overrun on rebuilding the rec center), and the recent rise in water and sewer rates.  But the operating budget in isolation suggests the Town has had little leeway on the revenue side of the budget over the past decade.

As an aside, I have wondered for years why Vienna went from a perfectly reasonable late fee policy (they charged you market interest rates on the money, more or less, if you were late) to the current punitive late fees (fees so high that if your credit card company charged them, it would be illegal.)   I wonder now if the Town was so hurting for cash, they didn’t care about the ill-will that generated with residents.

Let me sum it up this way:  If Falls Church jumped off a cliff, should Vienna jump off a cliff too?

For Falls Church, very close to 100% of the additional real estate tax revenues went to Falls Church City.   For them, they could have judged that the ill-will the development might generate with current residents would be offset by (e.g.) being able to pay for the schools.

But Vienna faces a very different revenue situation.  Like Falls Church, we will bear 100% of the congestion costs from new development on Maple.  But unlike Falls Church, we’ll only get about 15% of the resulting greatly increased property taxes.

Perhaps in this light, the widespread resistance to the 444 Maple West proposal in the form of over 1000 petition signers  may be entirely rational.  Current residents will bear 100% of the dis-amenity of these large buildings, while the Town gets about 15% of the property tax financial benefit.

I’m clearly going to have to work this out in more detail, but I think that’s the gist of it.  And at least in part, that’s why the idea of degrading our “small town” quality of life, for MAC, makes no sense to Town of Vienna residents.   In a nutshell:  100% of the burden stays here, but 85% of the financial benefit goes elsewhere.  We’re not in the same situation that Falls Church is in.  What (arguably) may make sense for Falls Church may or may not make sense at all for Vienna.

As a final point, the excellent Falls Church economic modeling appears quite helpful for understanding what might happen here in Vienna.  Anyone interested in the tax impacts of MAC zoning should read at least the summary report cited above.   They address, for Falls Church, many of the questions raised at the last Town Council meeting.   Just glancing at the introduction of the report cited above, they show that the net revenues from redevelopment (i.e., gross tax receipts less additional costs to the City) are just 35% of gross revenues.  But that mixed-use development resulted in a roughly 20-fold increase in gross tax revenues.  (My estimate for Vienna MAC projects has been just over a 12-fold increase, so I will try to reconcile my estimate against the actual observations from Falls Church but that is plausibly due to the additional floors allowed in these Falls Church buildings versus the four-floor limit under MAC.)

I highly recommend, for example, looking at their table of tax revenues for various types of property, per square foot of ground (pdf).  A quality hotel is at the top of the list.  Assisted living is near the bottom.   If tax revenues are driving the Town’s push for MAC, that analysis from Falls Church City is mandatory reading.

Finally, their table of commercial densities (pdf) underscores what makes the new mixed-use projects such winners from a tax perspective — and such losers from a congestion perspective.   Buildings similar to current Vienna low-rise construction are at the bottom of their tables (Rite Aid, for example).  Their new buildings are at the top.  Those new MAC-like buildings manage to cram 15 times as much billable floor area onto an acre of ground, compared to low-rise construction like a traditional Rite Aid store.  That’s a lot more tax revenue.  But also a lot more of everything else.