In 1923, Virginia voters rejected a referendum that would have borrowed money to build roads around the Commonwealth. More than handing a political victory to then State Senator Harry Flood Byrd, the vote ratified a pay-as-you-go public investment philosophy for Virginia.
While the Commonwealth later took on debt for public investments, debt is a controversial issue at every level of government. Suggestions that debt is too high or frivolously issued is common fodder for political campaigns.
Nevertheless, debt is an essential tool of nearly every household, corporation or government entity in our nation.
My children attend elementary school in the oldest school building in use by the City today. Debt ensures "generational equity." Without debt, the taxpayers at the time of school construction would be footing the entire bill, as opposed to spreading the cost of financing a public improvement over the decades of life of the school.
As in my household, too much debt is a bad thing. In order to ensure discipline for the City's debt level, the City has self-imposed debt limits. These limits measure the City's debt against the fair-market value of our property tax base, the income of our residents, and our overall government expenditures.
For example, Arlington County limits its debt to 4% of its Fair Market Real Property Value. Both Fairfax and Prince William Counties limit their debt to 3%. Alexandria's limit is 1.6%, and this budget year we achieved 1.45%.
The median for other similarly rated and sized jurisdictions is 2.42%.
Each year, the Council must make a decision about the mix of debt to cash funding it will employ in the capital budget. Much like a home mortgage, the cash funding is the down payment, and the remainder is financed with debt.
This percentage has historically fluctuated, depending on the financial condition of the City and the priorities for capital spending.
In the budget guidance the Council adopted for the City Manager last year, we asked the Manager to present a budget that preserved the current cash funding level for our Capital Improvement Program. Said another way, we refused to take the easy alternative of simply increasing debt to make it through a difficult budget.
In the current fiscal year, the City is spending $18 million of current year tax dollars towards our capital budget. We are then borrowing another $30.9 million.
During the low points of the recession, it was a far different picture. In 2010, we spent $4.4 million of then current year dollars towards the capital budget. We then borrowed $54 million. The year before, in 2009, we spent $2.1 million and then borrowed $47 million.
With the high debt rating that the City enjoys, we borrow at among the lowest interest rates possible for our debt.
Yet, the debt service we pay is still a significant expenditure for us.
In the current fiscal year, we are spending $64 million of our General Fund dollars on debt service. This is 10% of all of our General Fund spending. Five years ago, our debt service was 7% of our General Fund spending. Ten years ago, our debt service was 4.5% of our General Fund spending.
While these payments cover two decades of public investments (T. C. Williams High School, a new Public Safety Center, Charles Houston Recreation Center, new fire stations, new DASH Bus facility, etc), they also create pressure on other priorities in our budget.
As we move forward, we will need to carefully consider how we balance the burden of our many community needs, between the taxpayers of today and those of tomorrow.
When we do make the decision to borrow, it must be for investments proven to generate value far and beyond the costs to service the associated debt.
Each month the City Council is provided with a Monthly Financial Report, detailing the previous month's financial performance and identifying any emergent fiscal concerns to be discussed. Generally these reports are very useful to spotlight new trends that may dominate upcoming budget cycles.
The most recent report received by the Council detailed the final month of the last fiscal year, June 2014. In closing out the year, we saw significant tax shortfalls in sales taxes, recordation tax, transient lodging (hotel) tax and revenue from the Federal government. While the City Manager and his Staff carefully managed expenditures to adjust to the projected revenue levels, we are still forced to expend one million dollars that was set aside by the Council last year to cover any potential revenue shortfalls. One of the more challenging expenditures was overruns related to costs associated with the many inclement weather days the City experienced last year. The City's budget for snow removal last year was $840,000. The City spent over two million. This Fall, In advance of Council's adoption of new budget guidance for the City Manager, the Council will receive updated forecasts for the revenue that we depend upon. In addition to the relatively slow growth in the real estate market and the drops in many "consumption-based" taxation, there are other storm clouds on the horizon. The continued budget challenges underscore the importance of creating more diversity in Alexandria's economy. Failing that, our budget will continue to be subject to the vagaries of Federal budget decisions, with very little recourse from other areas of our local economy.
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