Va. Supreme Court Nixes Request to Reconsider Appeal
“We’d already assumed the worst,” Falls Church City Manager Wyatt Shields told the News-Press in an exclusive interview Tuesday.
The worst, indeed, occurred Monday with the announcement that the Virginia Supreme Court declined to reconsider the earlier ruling of a three-judge panel that upheld the Fairfax Circuit Court’s decision against Falls Church’s long-standing practice of taking a “return on investment” from its water system.
The ruling brings to an end the tortuous, almost four-year-long legal process begun in February 2007 pitting the interests of the City of Falls Church and its water system against Fairfax County and its.
Falls Church, which launched the process by a unanimous decision of its City Council to prevent the much-larger Fairfax County (Falls Church has 11,400 residents and Fairfax County (1.1 million) from violating a service area boundary that separated the two water system for over 50 years.
Overmatched by legal and other resources of Fairfax County, the Falls Church found itself being counter-sued on matters that went far beyond the scope of the boundary dispute, and wound up with Monday’s decision having permanently lost its capacity to draw $2.2 million annually from its water system as a “return on investment” (ROI) to buoy its operating budget.
This week’s decision fully upheld the ruling by Fairfax Circuit Court Judge Nye not only prohibiting the ROI practice, but requiring the City to repay the ROI it took in the previous fiscal year.
The $2.2 million may not seem like a big number to the larger regimes in the region (including Fairfax), but it is equal to almost seven cents on the real estate tax rate for Falls Church citizens, and a sizable chunk of the City’s $66 million annual budget.
By removing the ROI from the current fiscal year budget that began July 1, the City had to pass on a significant increase in the real estate tax rate to its citizens.
If there is any bright side to the legal wrangling for Falls Church, it came in the form of Fairfax County backing off from attempts to force developers to sign on with Fairfax Water as a condition for zoning and other county approvals. The county was called out by Falls Church on that practice, and backed away as part of an earlier settlement that included the City’s acknowledgment that the former boundary separating the service areas of the two water systems was no longer applicable.
The result, Shields said, is that the City can now openly compete for new customers with Fairfax County without concern that the county may use a form of coercion to its advantage. “So far, we have not lost a single customer through the course of this dispute,” Shields said. “But what will happen going forward, especially with the plans for up to 100,000 new residential units in Tysons Corner, is anybody’s guess.”
Of the Falls Church system’s 120,000 customers served by its 450-mile system of pipes, over 100,000 are in Fairfax County, including those in Tysons Corner, Merrifield and Langley.
Another relative bright side to the ruling for Falls Church, it lies in the prudent action by its City Hall to anticipate this outcome and provide for its inevitability.
Shields told the News-Press that during the height of the City’s budget crisis, compounded by a much wider recession-related decline in residential and commercial real estate values, the City’s fund balance dropped precipitously low.
The fund balance, the sum of revenues “in the bank,” so to speak, a form of “rainy day fund,” dropped to $2 million in the spring of 2009, and is on track during the current fiscal year to build back to $4 million. It needs to go higher still to provide the stability it is designed for, Shields noted, and that is being built into discussions of the coming fiscal year budget.
Shields said when Judge Nye’s ruling first hit last January, the City had to immediately cough up $2.2 million out of its 2010 fiscal year budget, and that taxed the fund balance to the limit. “The best argument for restoring the fund balance is what happened earlier this year,” he said. “It saved the day.”
However, Shields did acknowledge that the City’s debt service-to-revenue ratio is substantially below the City’s own self-imposed limit of 12 percent, now standing at eight percent. The City’s debt service ratio is also far below the average for jurisdictions both in Virginia and nationwide.
Shields also dispelled the myth that the City can only borrow for capital improvements, replying to a question from the News-Press that there are no laws limiting what borrowed (or bonded) money can be used for.
However, he added, that the minute a jurisdiction borrows to pay for its operating expenses “the bond-rating houses in New York suddenly start watching very closely.”
The City currently has a AAA bond rating from at least one prestigious New York rating agency, and in the minds of many, protecting that rating is a top priority.
Nonetheless, the City’s capacity to borrow without violating its own established policy limit is a further sign of its underlying solvency and sustainability even with the double hits of the recession and the loss of its water fund ROI.
He noted, however, that if the City has to ante up $50 million for a new school facility, “We would go from the front to the back of the class” in terms of debt, and that contributed to the City Council’s enthusiastic support at its work session Monday for the School Board’s application for a zero interest federal loan.
According to Council member Robin Gardner, if the School Board got that loan, then the City would have until 2018 to build up its resources for further school capital improvements. Moreover, she added, economies could lower the cost of such capital needs if they’re examined more closely.
“There are a lot of jurisdictions nationally who are in far worse shape than us,” Shields told the News-Press. “They’re in the headlines almost daily across the range of local and state governments. These governments are going to look very different than they do now in the next few years.”
All Court rulings, including the Nov. 15 Virginia Supreme Court ruling, can be viewed on the City’s web site at http://www.fallschurchva.gov/
Today’s ruling can be viewed below: