Residents of the City of Falls Church are likely to save over $30 million in reduced debt service payments owing to the top-notch AAA bond ratings the City has received from Wall Street late last week.
The whopping savings are due to come from a combination of the AAA bond ratings and low prevailing interest rates. The savings are contained in the differential between the size of debt service that City officials modeled in advance of winning wide voter approval for a $120 million school construction bond in November 2017, based on a projected 4.5 percent interest rate, and current conditions with interest rates below 3 percent.
F.C. City Manager Wyatt Shields told the F.C. City Council Tuesday night that he expects the City’s $126 million bond sale now slated for next Tuesday to come in at a fixed rate under 3 percent, with the closing on the bond sale set for Nov. 7.
The expected rate will save City citizens over $30 million compared to earlier modeling projections, and that will add up to over $1 million a year, or 2.5 cents on the City’s real estate tax rate, over the 30 year terms of most of the loans (some are 20-year), a huge windfall for the City.
“This is the best good news we’ve had in a while,” quipped Council member Phil Duncan. Mayor David Tarter added it has been years of good fiscal management and bold visions of the City’s leadership that has produced this, from the managing of the City’s pension funds, the sale of its water system to Fairfax and aggressive economic development over the last 15 years.
Shields, Tarter and Chief Financial Officer Kiran Bawa went to Wall Street for face-to-face meetings with representatives from three ratings agencies. Despite the fact the City is about to incur its largest public debt burden in its history (to build a new high school and fund a public library renovation and expansion), their presentations were convincing and the City’s current AAA ratings were retained.
S&P Global Ratings and Fitch Ratings have reaffirmed the City of Falls Church’s AAA bond rating, and Moody’s Investors Service has reaffirmed the AAA rating. The City is preparing to issue a fixed rate, 30-year General Obligation Bond on October 22 for $126,825,000 to fund the high school and library capital projects.
It is expected that the bonds will sell at under 3 percent interest, compared to the 4.5 percent the City projected when it sought vote approval for the issuance two years ago.
“These top ratings are a validation of the sound planning and prudent fiscal policies of this community.” said Mayor Tarter. “These ratings will allow the City to finance the new high school and other capital projects at the lowest possible rates, saving taxpayers millions of dollars.”
“The bond issuance is the largest in the City’s history,” said Bawa. “The excellent ratings are the result of long-term planning for strategic growth and investment in capital projects.”
Bond ratings (expressed in letters from “AAA” to “C”), are grades given to bonds that indicate their credit quality. Private independent rating services provide these evaluations of a bond issuer’s financial strength, or its ability to pay a bond’s principal and interest in a timely manner.
In reaffirming the City’s AAA bond rating and “stable outlook,” Fitch cited that the City “maintains the highest gap-closing capacity and fundamental financial flexibility to manage through an economic downturn.”
Moody’s also noted a “stable outlook” with the top rating due to the City’s “diverse and moderately growing tax base with very high wealth levels, stable financial position and reserves, above-average debt burden that will increase given future borrowing plans, and manageable pension liabilities.”
S&P analysis of the “stable outlook” states that the City’s “budgetary performance is strong” with “prudent and proactive budgetary practices” that have “maintained sound financial operations.”
In April 2018, the City earned AAA ratings from all three agencies. Since then, the City has exceeded projections in all key areas. The high school project is on schedule and on budget. The West Falls Church economic development project final deal value is $44.5 million, more than the projected amount. The City remains financially strong with fund balances above the financial policy thresholds and fully funded retiree medical and pension plans.
To take advantage of the low interest rates, the Council approved issuance of the remainder of the financing required for the high school in one issuance rather than the previously contemplated two issuances. These funds will also be used to refinance the $20 million general obligation note issued in June 2019.