Re: FFX County Budget $58 million shortfall
Posted by:
SAY NO TO ALL BONDS
()
Date: October 21, 2008 04:22AM
Vote NO on the bond referendum
--$100 million annual interest payment for what?
The Washington Post cites FCTA opposition to Fairfax County's 2008 bond referendum: Economy Dims Prospects for Fairfax Parks Bond Issue. Thursday, September 25, 2008; Page VA04 (Fairfax Extra). The following supplements the FCTA's quote in the Post.
Fairfax County is wasting about $100 million annually on interest for its $2 billion debt because, for most years, the amount borrowed (bond revenues) is about the same as the cost of borrowing (debt service). See bars on the graph.
When the county does this, its debt (red line on the graph) increases. Between 1983 (first year for which data is available) and 2008, Fairfax County inflation-adjusted debt has increased from about $1.5 billion to $2.3 billion. The $2.3 billion in debt does not include interest owed, which is another $800 million.
If the county had not borrowed, it could have used the debt service funds to pay for capital improvements. Capital spending would have been about the same as with bonds, and there would be no debt and no annual $100-million interest payment.
The high cost of interest for bonds is justified only when the revenues from bond sales significantly exceed the annual debt service payment. While it depends on interest rates and the repayment period (20 years, 30 years, etc), the amount you can borrow is about ten times the annual debt-service payment. This is called "leverage." To get leverage, you cannot sell more bonds until previously sold bonds are paid off. You would have one year where revenues from a bond sale are ten times the annual debt-service payment. Then for the next twenty or thirty years you would pay the debt service but sell no more bonds. However, Fairfax County, except for 1989, sells bonds every year.
If you sell bonds every year you get no leverage. You can only borrow approximately the same amount you paid back. However, the amount you owe increases by the amount you borrow plus interest. This is what Fairfax County is doing. For the county, whose repayment period is usually twenty years, interest costs are about half the amount borrowed. So if the county borrows $200 million through bond sales, it owes another $100 million in interest.
In 1994, the county sold an extra $117M of bonds to purchase the Herrity and Pennino buildings adjacent to the Government Center. The total amount borrowed was twice the debt service. In this case borrowing would have been justified, assuming that the purchase, which was controversial, was justified.
The county did not include the 1994 bond sale for the Herrity and Pennino buldiings in its total debt figure until 2002. That is why there is a jump in the red line in 2002.
(With the purchase of the Herrity and Pennino buildings the supervisors bypassed putting the bond to referendum by having the Fairfax County Economic Development Authority (EDA) sell the bonds. The county also used the EDA to bypass referenda for the South County High School and the new school administration building bonds. The county is not legally obligated to pay off bonds unless they are approved by referendum. Bonds not approved by referendum are therefore riskier, have a lower credit rating and a higher interest rate, and consequently cost the taxpayers more.)
Having gotten itself in the situation where the cost of borrowing about equals bond revenues, the county cannot easily dig its way out. To reduce borrowing, the county would have to reduce operating expenses by $250M to free up money to replace bond revenues. The county should not have gotten into this situation in the first place.
The county should start getting out of debt and should eliminate non-essential borrowing. The bond referendum, for example, pays for maintenance of county recreation centers and golf courses. The county should not be using taxes to compete with the private sector. If golf course and recreation center maintenance cannot be paid for from user fees, then they should be privatized or divested. Funding for the "countywide sportsplex", artificial turf, trail enhancements, development of new parks should wait until they can be funded on a pay-as-you-go basis.
Last June, the Fairfax County Taxpayers Alliance emailed to the supervisors a request to include the projected interest costs for bonds and the annual amounts for bond revenues and debt service in the county's "2008 Bond Referendum Information for Residents" pamphlet.
The county declined to do this.
Moreover, the county's pamphlet states that bonds do not increase taxes. This is false. In FY2009 the county is paying $106 million in interest on its $2.3 billion debt. This $106-million interest payment accounts for 4.6 cents of the county's 92-cent real-estate tax rate. (Each penny of the real estate tax rate generates $22.8 million in tax revenue.)