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Warning Issued to Slow Down School Construction

The county administrator warns that five-year building plans exceed debt cap guidelines.

The School Board’s plan to build 19 schools in the next five years could jeopardize Loudoun County’s AAA bond rating, unless action is taken to resolve the problem.

County Administrator Kirby Bowers has written a memo warning Superintendent of Schools Edgar Hatrick that the School Board’s five-year Capital Improvements Program (CIP) budget exceeds the Board of Supervisor’s cap on borrowing by $250.7 million. “We need to seriously consider cutting our projects, at least some of the planned projects, in the out years,” he said Friday. His reference to the “out years” targeted construction projects in fiscal years 2008, 2009 and 2010. The School Board could pursue avenues other than eliminating projects, he added.

Moody’s, Standard and Poor’s, and Fitch each gave Loudoun a AAA rating last week, providing the county with the ability to finance capital projects with the lowest interest rates.

“There are many things that take a county from AA to AAA,” Bowers said. “One of the more important things that Moody’s cited was the Board’s setting of guidelines and caps. … I think when the Board established the cap, I think it helped in moving us up to AAA.

“I don’t think the credit agencies would be expecting us to materially alter those guidelines.”

Mark Adams, director of Management and Financial Services, said the bond rating agencies could frown on any move to continue construction in disregard of the debt cap. “They want to make sure we don’t increase our debt too fast,” he said.

THE SCHOOL BOARD PLANS the timing and location of new schools based on enrollment projections, but it needs the Supervisors’ approval to build them.

Bruce Tulloch, vice chairman of the Supervisors, suggested the School Board could agree to change building priorities by scheduling construction of less costly elementary schools before more expensive middle and high schools. Postponement is another option. “Right now we have two high schools at 30 percent occupancy,” he said. “We need to look at the timing.”

Freedom High School in South Riding is scheduled to open in the fall with a 30 percent occupancy, but Briar Woods High School in Brambleton is actually slated to open with 50 percent occupancy.

School Board member J. Warren Geurin said it is not unusual to open new schools with low occupancy. To wait for more families to move into the area would mean overcrowding at current schools, he said. Developers have donated land for both schools, and new home construction is skyrocketing.

Geurin said that the prior School Board debated whether to open the two high schools in the same year. He and Chairman John Andrews had objected to the proposal, but supporters prevailed. The supporters said it would be better than having students attending three different high schools in four years.

Tulloch said the answer is not necessarily scrapping plans for a school, resulting in overcrowding. “Three years is a long way away,” he added.

School Board Chairman John Andrews agreed. “That’s really long-range forecasting,” he said.

The School Board could postpone building a school that was slated for construction in FY '09, only to have to bring it back on schedule, Andrews said. “We sit down and look at the first two years. When you get past that, anything can happen, [such as] a slow down in economic cycles and other things that could come into effect that could change things.”

ANDREWS RECOMMENDED adjusting the cap to reflect higher construction costs and inflation, because he thought the cap had not been changed in a number of years.

School Board member Priscilla Godfrey (Blue Ridge) shared the same view. “It’s been the same amount of money for years and years,” she said.

Bowers, however, said the Supervisors only set the cap last year during budget deliberations. They used the cap as a guideline in setting the CIP, but it has not been officially adopted as part of Loudoun’s fiscal policy.

Adjusting the debt cap for inflation still might be a possibility, considering the increases in construction costs, he said. “I would be concerned if there was too much of an increase.”

Adams said the CIP budget would still exceed the cap even if the Supervisors adjust the guidelines by the national inflation rate of 3 percent.

Godfrey said the situation is a “grave concern. We are coming to a real crux in this thing.”

Bowers said he issued the warning so the boards could consider action to protect the AAA bond rating. “It’s not that the sky is falling,” he said. “One of the reasons is because we have these early warning indicators. … I’m sure there are creative ways to address the issue.”

Bowers said another alternative would be for the Board of Supervisors to cut some of its building projects, or to postpone a combination of the two boards’ projects. The school district’s construction plans take up 70 percent of the CIP budget, while the county’s share is 30 percent. “I’m sure there are creative ways to address the issue,” he said. “That’s part of the budget deliberations.”

THE BONDING AGENCIES also considered debt ratios when they set the AAA bond rating. Debt ratio is the relationship between outstanding debt and criteria such as income, population and property values. These ratios are used to reveal trends and identify risks when compared to past periods and/or other municipalities. Past periods, which can be years, quarters, months, but mainly annual reviews, are monitored regularly. The debt ratios were fine in all of the criteria, except one dealing with average income. Bowers said the boards also should pay attention to this problem. He warned that the percentage exceeds the standard set for that ratio in FY '08 and is close to surpassing it in FY '09.

“However, the combination of debt ratios is well within the Board’s defined affordability index,” he said.

The affordability index uses an average comparison of the amount of debt that could be supported while maintaining three of the four debt ratio ceilings.