A Discussion of Debt
Excerpt from Justin's December Newsletter
Along with Councilman Paul Smedberg, I am a member of the City's Audit Committee. One of the duties of the committee is to supervise the City's annual financial audit.
When our audit concludes, the City issues a Comprehensive Annual Financial Report, also known as the CAFR. Last month, the Audit Committee and the Council accepted the CAFR for Fiscal Year 2016 which concluded on June 30th.
The CAFR includes audited statements of the City's financial position and can be useful to fully understand the financial condition of City government.
The report shows that the City now carries $522 million of outstanding General Obligation debt. This is actually a reduction of $18 million of debt the City had outstanding at the conclusion of the previous year.
By law, the City must have a balanced budget each year. Unlike the Federal Government, we are simply not allowed by law to run a deficit. The debt we do incur is only used to fund our capital expenditures, primarily basic infrastructure, school facilities, transportation, sewers, etc. It is not used to fund the day to day operations of City government.
In July the City's AAA/Aaa bond rating was reaffirmed by both Moody's and Standard & Poor's. The City has held these ratings for 24 years and it might be easy to dismiss this as business as usual. However, this is no small achievement. As of 2009, we were one of only 54 cities in the nation who held this rating.
We should never take for granted the fiscal stewardship required to maintain these ratings. These classifications qualify the City to borrow at rates lower than most jurisdictions in the country. In July, the City did just that, issuing $73.7 million of new General Obligation bonds at one of the lowest rates in modern history. This saves millions for the taxpayers of tomorrow in the cost to service that debt used to finance improvements that further benefit the City's finances and standing.
The City has even taken the opportunity to execute the municipal equivalent of "refinancing," by replacing higher interest bonds with new, lower interest bonds. These actions have saved the taxpayers millions of dollars.
Last year, the Council adopted our 10 year Capital Improvement Program, covering fiscal years 2017 - 2026. Over the 10 year period, the program calls for $1.672 billion in capital investment throughout the City. Over $1 billion of those funds go to new investments in transportation and school infrastructure.
Our capital budget is funded primarily through a mix of debt and current year funding, also known as "cash capital." If you think of your home mortgage, the cash capital is the down payment. We also pay interest each year on the debt that was issued in previous years.
Alexandria is very conservative with our use of debt.
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 self-imposed limit is 1.6%, and this budget year we achieved 1.37%.
The median for other similarly rated and sized jurisdictions is 2.42%.
There are a few ways the City regulates our debt level. The state has a legal debt limit of 10 percent of the assessed value of property in a community. For Alexandria, that would give us the ability to borrow up to $3.8 billion, far beyond the $522 million that we have oustanding today.
The City also applies a series of self-imposed debt guidelines which impose restrictions to our debt level using a few metrics. Two years ago, I successfully proposed that the Council adopt a "Cash Capital" Policy. This policy now ensures that the City Manager proposes budgets that fund at least 2% of the cost of capital expenditures proposed for each year, thus limiting the growth of debt and ensuring generational equity. During the worst of the recession, we allowed nearly all of the costs of our capital budget to be borrowed. This new 2% floor will prevent the City from taking shortcuts during difficult times.
Buried in the back of our Capital Improvement Program is a table that lists the capital projects that were requested but were not funded. These unfunded projects total $260 million and include school initiatives, road paving projects, DASH Bus fleet expansions, City building maintenance funds, and much more.
This list does not include the recent proposal by the ACPS Superintendent of a $515 million, 10 year plan to address our school capacity challenges at every level. It also does not include the new Capital Improvement Program proposal scheduled to be presented today by the WMATA General Manager to the WMATA Finance Committee. That proposal requests an additional $23 million from the City next year alone!
On Tuesday evening, the Council received the latest assessment of the condition of our municipal facilities and learned that an additional $30 million would be required simply to bring our facilities up to a grade of "C."
Taken together, these unfunded projects are essentially additional debts for the City. They constitute deferred needs that grow in cost each year they are not addressed.
Last month, the Council adopted our budget guidance for the City Manager. The resolutions provide the City Manager with the Council direction necessary to prepare his budget.
In adopting the guidance, the Council included language that I proposed requesting that the City Manager present a plan for addressing these deferred capital projects. That plan can include revisions to our debt policy guidelines to allow for greater borrowing.
With those alternatives coming before the Council in February, expect an extensive community conversation on the revenue, debt, and spending alternatives.
For the past few years, I have advocating addressing these long-deferred capital needs. I will continue that focus during this upcoming budget process. Addressing decades of under investment will not happen in one year or even 10 years. However, we must continue to make progress.