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December 17, 2014 Published in Editorials

Getting It Right Again

Our City Manager may be moving on but he is still hard at work here. He and his staff have brought forth another significant idea in the budget debate. He has proposed capping the City’s direct contributions from the General Fund for capital projects to 12% annually. This action would save millions of dollars each year in an era where City expenditures are rapidly outstripping its revenues.

The City capital budget is supported from a number of sources but the City’s General Fund revenue accounts for the lion’s share. It is used to pay principal and interest on bonds the City has issued to finance capital improvements like new schools, recreation centers, roads etc. and for cash capital which is using general fund revenues to fund projects directly to avoid borrowing. The rationale has always been that it is cheaper in the long run to pay as we go and our AAA bond rating, which keeps our costs of borrowing low, is preserved by borrowing less.

During periods of strong revenue growth cash capital contributions grew greatly. In periods of revenue contraction they tend to be scaled back. For some reason, however, as the Manager and his team looked ahead they noticed that the City was planning hefty cash capital contributions over the next 10 years, a time when the money in the General Fund was just not there.

The Manager is proposing capping such support at 12% a year. He is proposing some modest additional borrowing to cover some of the lost money and a fresh look at the 10 year Capital Budget to cover the rest. Such a change would not adversely impact the City’s AAA rating and might enhance it as it would mitigate future tax increases.

Since the City’s fiscal picture has darkened, we have argued that the solution must be underpinned by doing things differently. We must redefine our priorities and find different and/or more creative ways to achieve them. Reducing cash capital is exactly that kind of initiative and it must be explored openly.

Cash capital is a two-edged sword in any case; capital improvements are, by their nature, long term. When they are paid for by bonding, the people in the future who enjoy the benefits of the improvement pay for them. Cash capital turns the process on its head. The projects are paid for by people who are here now and they will be a very different population from the people who will enjoy the benefits 20 years from now.

Cash capital is cheaper but interest rates have been at historic lows for many years and the City has been able to refinance many of its bonds or to issue them at very favorable rates. Low interest rates make cash capital less attractive as the cost savings is much smaller. Combine that with saving the two to three cents on the real estate tax rate that the higher rate of cash capital would require and it looks very attractive.

The Manager and his staff have requested that Council study the proposal and ask all the questions about it they can develop. That is the correct way to proceed. Council and our citizens need to be assured that we are not giving up anything of value in making this change and that the benefits will not conceal some unexpected negative consequences.

We applaud Council for its generally supportive reception to this initiative. We hope they will keep their attention on it and come to a resolution quickly. It means a great deal to the City and its taxpayers and the budget is just around the corner. We also applaud the City Manager and his staff for continuing to keep their eyes on the ball during this time of transition. Alexandria can ill afford to stumble with the financial stakes for its citizens so high.

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