I’m going to start a series of pages that wander through the Vienna Town budget. This is the FY 2018-19 Adopted Budget — for the year starting July 1 2018. At first glance, it’s just a welter of numbers. But if you study a while, a few interesting stories emerge.
I started this with the idea of looking at the Town’s revenue sources, but found much more interesting things in terms of planned capital expenditures. So this is a brief report on the things I found most interesting in the capital expenditures portion of the budget.
Summary: The Town is planning to double its debt load three years from now ( 2021), from about $20M to about $40M. At that time, it plans to raise the meals tax from 3% to 4%. The proceeds from that additional debt issuance will mostly pay for a $16M renovation of the police station, and $6M to put a parking garage up at Patrick Henry Library.
The most recent (2018) bond issue wasn’t for $7.9 million, it appears to have been for $9.2M, but the other $1.3M doesn’t yet show up anywhere in the budget. And the entire increase in our water bills went to pay for increased debt service for that 2018 bond issue. (And a good part of that debt will be used to pay for sewer and water repairs, so that’s not entirely unreasonable).
I had mistakenly thought the Town would do either the Mill Street garage or the Patrick Henry garage. But in fact, it’s going to do both. That suggests that the Town is pretty firmly committed to having a lot of development on Maple Avenue.
Detail follows.
Let me start with the Water and Sewer Fund. That’s interesting because the increase in the water and sewer rates appears to have gone entirely to cover the higher debt service incurred in 2018. Comparing FY 2017-18 and FY 2018-19, Vienna expects water bills to go up by $0.5M (456,190). They then transferred $0.5M (528,970) to some other part of the budget.
So where did that $0.5M end up? Most of it (494,73) went to cover the big jump ($600,030) in the Town’s debt service — payment on its bonds. Most of the rest ($100,00) comes from an unexpected uptick in meals tax revenues.
Why did the debt service jump? And that’s clear enough — that’s due to the newly-issued (2018) bonds. In fact, the increase in debt service would have been closer to $900,000, instead of $600,000, but for the fact that the town skipped a large portion of its annual savings (Reserve/ line).
What’s that money for? In looking for that, I stumbled across probably the single most interesting number in the entire budget document. The Town is planning to double its debt load in 2021. Looking around a bit more, that seems to be for $16M to renovate the police station, and $6M to build a garage at Patrick Henry Library.
That’s page 366, for anyone interested.
We are still far below the statutory limit of 10% of the assessed property values in the Town. The Town puts that limit around $450M.
Still looking for the 2018 bond issue, I find that the Town apparently has firm plans to build a parking garage on the Patrick Henry parking lot, and will raise the meals tax to pay for it (page 346). (The Town has done that in the past, so this is not unprecedented.) So the Town isn’t just buying one new garage (Mill Street), they’re actually buying two new garages.
But what’s the 2018 bond issue for? I found the following large items: $1.7 toward the policy station renovation, $1.5M toward water projects, $2.5M for sewer projects. Still not clear why the payment is so large.
And I finally found the 2018 bond issue, and it’s exceptionally odd. At first glance, it looks like the interest rate that the town paid spiked up. That is, the ratio of interest to principal on the 2018 is about 50% higher than it was for a similar issue in 2014). But, see below, that’s wrong.
If I do a simple net-present-value calculation in Excel, the implied interest rate on the 2018 bond is about 4.5%, which is not even remotely possible. Typical Aaa municipal bonds are paying around 2.5%, and have been for some time, more or less.
So whatever the Town is reporting there, that’s not interest. As it turns out, the story is stranger than I would have guessed.
The bond issue is described here. Although it looks like the Town borrowed $7.9M, in line with prior years, it appears that the Town actually borrowed an additional $1.3M that literally does not appear in those accounts. From the link just above, emphasis mine:
“Vienna Town Council approved this afternoon the issuance of $7.9 million in general obligation bonds … The winning bidder for the Town’s bonds … provided a 2.45% interest rate on the bonds as well as a $1.3 million – or 17% – premium, which is additional funding, not subject to interest.”
So the reason the “interest” column looks so large, I assume, is that they are also paying back the additional $1.3M … which does not appear on the accounts. What’s odd here is that this is such an unusual thing that the Town’s accounts can’t quite handle it properly.
So, if I net out the presumed repayment of the additional $1.3M, then I can arrive at a reasonable-looking interest rate of around 2.6 percent.
Here’s where it gets odder. I can’t find that presumed additional $1.3M in the Town’s capital budget. When I add up all the individual line items starting page 368, I end up with just about exactly the $7.9M of the bond issue. So the additional $1.3M in borrowings does not show up anywhere in the Town budget. Yet it is clearly being repaid in the “interest” column in the 2018 debt issue.
The sole mention of the additional $1.3M is this: “The Town issued $7.9 million in new debt in the middle of FY 2017-18, which generated a premium of more than $1.3 million. This premium will be used to offset future borrowing needs.” That sounds nice, doesn’t it. I decipher that as: The $7.9M bond came with an additional $1.3M interest-free loan, so we banked that.
By itself, I think that shows how unusual the transaction was. It was so unusual that it doesn’t fit into the Town’s existing accounting model. Where the Town Budget shows that it borrowed $7.9M, the Town actually borrowed $9.2M (including the $1.3M “premium”). While the $7.9M was allocated out to current and future capital projects, the $1.3M is just … nowhere. It doesn’t even show up as increased reserves, as far as I can tell. It’s sitting in an account somewhere, and presumably will get entered into the budget when the Town decides how to spend it.
That’s it for today. Tomorrow I’ll get around to my original purpose here, which was to look at the Town’s sources of tax revenue.