I did a brief description of this in Post #482. Tonight (12/9/2019) there will be a public hearing on this proposed bond issue, as part of the Town Council meeting. So in this post, I’m doing my homework to get up to speed on it.
The key questions are a) what are they going to spend that money on, and b) how are they going to pay it back. The short answer to a) is, a lot of sewer and water pipes, and a police station. The answer to b) is, I’m not sure. So the point of this posting is to nail all that down.
To cut to the chase: Can they really pay that back? I think the answer is a qualified yes. Yes, you can do a big bond issue like this, once in a long while. If you stretch out the payments to 20 years, and spend a chunk of your existing reserves, and assume that some large capital projects will be free (meaning, paid by others, such as the Patrick Henry library garage), then yeah, it looks like the Town can borrow this much money at a time, and make the payments. As near as I can tell. And they appear to be doing it honestly — by using the meals tax, and spending accumulated reserves, and not by transferring money out of the increased sewer and water revenue stream. Again, as far as I can tell.
The Town certainly can’t borrow like this on a regular basis. So a bond funding of this size is unlikely to be repeated (and indeed, not scheduled to be repeated) in the next couple of decades or so.
The bottom line is that this proposed 2020 bond funding appears to strain but not break the Town of Vienna capital budget. As long as they promise not to do it again for a good long time.
Separately, the Town’s total bond fundings are higher after 2020 than before. But a good chunk of that appears to be due to higher spending on sewer and water infrastructure. And that spending should be more than adequately covered by the increase in the Town’s water bills (Post #448).
So between the higher water bills paying for the increased investment in the sewer/water infrastructure, and the Town’s throttling back any non-water/sewer borrowing after this 2020 bond issue, it all appears to work out.
The basics of the Town bond issues.
First, you can find a copy of the Town budget at this link (.pdf). I’m not going to go over the budget, except to say that the capital budget and the prior bond issues and such are listed at the end of the document.
Briefly: The Town of Vienna borrows money (issues bonds) every two years, mostly to pay for large capital expenditures. Historically, those amounts were on order of $5M to $7M, as you can see from the graph above. So, historically, the Town would borrow that much, every couple of years, to pay for big capital expenditures. And then pay that back over time.
An example of such an expenditure would be building the addition to the Community Center, or building the new police station. The town also uses money from these bond sales to cover planned sanitary sewer and water pipe replacements and similar infrastructure costs.
You might ask why I didn’t include streets, curbs, sidewalks, storm drain and such, in the list above. The answer is that that town uses some bond money to pay for those, but largely it gets state funds and other sources to pay for those. So while the Town spends a lot of money building and rebuilding all that road and drainage infrastructure, by and large it doesn’t borrow a lot of money to do that. Instead, most it gets the money from other sources such as state grants, and uses bond funding to only a minor extent.
Typically, the Town pays back that borrowed money (the bond), with interest, over a fifteen-year period. The Town dedicates the revenues from the town meals tax and lodging (hotel) tax to paying back those bonds. (The tax rate for both is currently 3%). In addition, it transfers money out of sewer and water revenues (i.e., payments from your water bills) to cover the costs of borrowing for sewer and water projects.
FWIW, the town has a top bond rating (low risk of default), and pays reasonably low interest rates, on order of 2% to 2.5%, for the most recent issues. (Sometimes the actual interest rate is difficult to calculate, due to a “premium” amount being offered on top of the bond amount, but that’s an extras-for-experts that I will skip for now.)
Page 358 of the FY 2019-2020 budget (reproduced below) provides a concise summary of the Town’s current obligations to repay its existing bonds. Below, the columns are the individual bond issues and some totals, and the dollar amounts are the “debt service” amounts (i.e., payments the Town is making to pay back those bonds).
So, e.g., looking below, the schedule of the Town’s repayments for the bonds issued in 2006 started in 2007, and they will be fully-paid-off in 2021. Similarly, the 2010 bonds will be fully paid off in 2026. (There was no 2008 bond issue.)
The last three columns below show the total of repayments due, for all bonds, and then, where that money is coming from. For 2019, the Town owed $3.3 million in “debt service” payments, of which $0.6M was transferred out of sewer and water revenues, and $2.7M was covered by meals tax and lodging tax.
Source: Town of Vienna FY 19-20 budget, page 358.
N.B., Don’t make anything out of the declining payment totals toward the bottom of the chart. Those are an artifact of methods. You’d see those if and only if Vienna never issued another bond. In the real world, as time moved forward toward those years, you’d see the earlier bond issues drop off the table (as the 2006 issue will in 2022), and columns of additional payments, for new issues, added to the right of the 2018 column.
So that’s a quick summary of where things stand today, prior to the proposed 2020 bond issue.
For completeness, I need to mention three other things.
How much bond debt is outstanding currently. For this, I have to turn to the Comprehensive Annual Financial Report (2018 edition). There (page 5) it states that the Town owed about $27M in outstanding bonds and notes. There’s some uncertainty there, as other town documents put the current figure closer to $24M-ish? Possibly that’ due to the year, possibly that’s due to some difference in definitions used.
Pension liabilities. But those bonds are not the only long-term liability on the books. From that same source, the Town has a long-term obligation in the form of future pension payments that it must make. The current estimate of that appears to be about $16M.
Cash balances. The only other thing to note is that, at least by eye, the Town has lots of cash reserves. Again, from that same source, assuming I’m reading it correctly, the Town has about $28M in cash reserves.
I’ll go out on a limb here, but if we ignore pension debt, and ignore non-liquid assets like land and buildings, I think the Town is in roughly a break-even position right now. It has about $27M of outstanding debt, and it holds about $28M in cash reserves.
The 2020 bond issue and capital improvement plan.
The Town Council passed the final 2020-2036 capital improvement plan at the 10/21/2019 Town Council meeting. A link to the relevant materials is given here.
What will they spend it on? The Town’s capital spending plan lists about $28M worth of capital spending that requires bond funding (borrowing) in 2020. That list was posted with the 12/9/2019 Town Council meeting materials, and can be found at this link (.pdf). Let me paste in a copy that in below, but briefly:
- $15M for a new police station
- $8M for sewer and water projects (of which $2.5M is a transfer to Fairfax County that the Town of Vienna is obligated to make).
- $1.6M to buy into a Church Street parking garage (with the assumption that the Northern Virginia Transportation Authority will pay for the bulk of costs on that project.)
- $1M or so in paving and other street projects.
Those items account for more than $25M, and the remainder of the proposed $28M is a collection of miscellaneous items.
project listing 2020So answer the question about how the Town will spend the money is straightfoward: Police building, water and sewer projects, part of a parking garage, and some road work. And then a collection of small items.
Some of those expenses are going to take place over several years. So it’s not like they’re going to spend the $28M in 2020. They’re going to borrow it in 2020, and spend it over the next few years doing those tasks.
In addition, Town staff would like to borrow roughly another $7 million to cover contingencies. Or, at least, that was true the last time I looked up the information on this issue. For example, if the Town of Vienna has the opportunity to buy a piece of land, it would like to have the funds available.
If you want more detail on those individual tasks, I think you can find that in Town discussions of its Capital Improvement Plan. A link to the relevant materials is given here. For example, from that, you can see that the sewer and water expenditures consist of 30 to 40 small, separate projects. A water line here, a sewer line there. Nothing big. Looks very much like business as usual.
How will they pay it back? Here’s where it gets a little interesting, because off the crack of the bat, the Town looks like they are pushing the envelope a bit.
First, assuming I have this right, they are planning to stretch out those easy monthly payments. For every other bond issue, the Town had a 15-year payback period. But for this one, it’s a 20-year payback period. Presumably they wouldn’t have done that if they hadn’t needed to, in order to get the payments to match available revenues.
Second, they have assumed that a couple of large projects are free or mostly free. They assume that the Northern Virginia Transportation Authority will pay for our shopping/dining parking at the Patrick Henry garage. And they assume NVTA will pay for two-thirds of our shopping/dining parking garage on Church Street. NVTA has no business paying for either of those, but plausibly they will be sloppy enough to pay for them anyway (Post #447).
Anyway, either those projects are wired, and somehow the Town knows it will get the money, or the Town is taking a significant risk there. Plausibly, that’s why Town staff would like to borrow an additional $7 for reserves, but I have no way to know that.
Third, the Town plans to use short-term bond anticipation note of $4.8 million to tide it over until the actual bond sale planned for September 2020. So there’s short-term stopgap funding of about $5M built into this. I don’t know enough about typical practices in the Town of Vienna to know how often they do that, but I have the feeling this isn’t normal practice. Looking in more detail, tbe bulk of that is for a $2.5M payment to Fairfax County, presumably our share of payment for capital costs of the entire sewer and water system.
Fourth, assuming I’m reading the charts right, the Town plans to eat through about $5M in existing reserves, in the first decade of this bond issue (2020 – 2029). Well, that’s what reserves are for. But it does show that funds available for debt service are not adequate to cover the debt service for this issue and the prior outstanding issues, for the first few years. The graph below is from the CIP, and the green line is labeled “balance”, so I assume that’s the balance in the Town’s capital fund.
So that’s a bit unusual, but not necessarily a red flag. The point of having reserves is to use them from time to time. This appears to be a time.
That said, when I look at the proposed sources of funds, I can’t quite get my mind around how this will all work out. The issue is having the meals (and lodging) tax revenues cover the debt service that is unrelated to water and sewer. The last time I looked at this, the Town had very nearly maxed out the meals and lodging taxes. That is, my recollection is that debt service, right now, consumes most of the meals and lodging taxes. This 2020 debt issue will roughly double the Town’s outstanding debt. And then, in the years thereafter, they will be replacing old bond issues of around $6M each, with new bond issues of around $12M each.
Part of the answer is that the large 2020 bond will be a 20-year bond. So the increase in annual payments will be smaller, dollar-for-dollar, than if this had been a 15-year bond. In fact, a little back-of-the-envelope with Excel says that they might have risked running the reserves down to zero if they’d had to use a 15-year bond. So spreading the payments out appears to have been a necessary part of this package.
Part of the answer is that the Town will incur little debt, other than for sewer and water projects, from 2022 forward until well into the future. So, in effect, the Town is overspending its debt service capacity (out of meals tax funds) for this big 2020 bond issue. And then it’s paying for next-to-nothing out of that category for the next decade and a half, to balance that out. Like so, taken from page 8 of the most recent CIP.
And so, I think there’s no magic here. The Town is going to spend beyond its means for the 2020 bond issue. But not recklessly so. Best guess, looks like meals and lodging taxes are going to fall maybe $1M short of the required amount to service all the outstanding bonds, in 2021. But as the Town then throttles back its borrowing (other than for sewer and water projects), as long as the economy remains stable, that should eventually right itself. Just as the Town’s projections show.
Total bond funding appear to be systematically higher in that years after 2020 than in the years before, but a good chunk of that is due to a pickup in funding for sewer/water projects, consistent with our higher sewer/water bills. The 2018 CIP had just $2M in Vienna-based sewer-water projects (that is, excluding a $2.5M payment to Fairfax County). The 2020 CIP has about $5.5M of such projects, and that amount continues to grow modestly moving forward.
(As an aside, that said, I could not tell from the numbers whether or not the Town was counting on sewer/water rate increases, for the next three years, that are planned but have not yet been enacted into law.)
In short, best I can tell, yes this is a significant strain on the capital budget. But it’s not reckless. By stretching the payments — and promising not to do something like this again, any time soon — it looks fiscally sound to me.
Final note: The police station cost looks reasonable to me.
The police station build is the most expensive item in the capital budget. Some people have questioned that size of that expense. But I looked at it a year ago and determined that it met industry norms. The cost of it appears completely in line with other new police stations.
The trick here is that, to meet current standards, you have to build a police station like a fortress — fireproof, riot-proof, earthquake-proof, bomb-proof, you name it. So anything built to the modern standard is going to cost a chunk of change.
A lot of the numbers in that post are out of date, but you can read my somewhat outdated analysis by clicking this link. Ignore the part about the 4% meals tax – the Town nixed that at some later time. And at the time, this was still being referred to as a renovation. I would hope that by now, this is being called a new building, not a renovation.
