The bills that worry each side of the James City tax debate

dress@dailypress.com

It's not so much what's happening this year as what's coming down the pike that explains the heated debate over James City County's 7-cent real estate tax increase.

In the background of the political discord over James City County Supervisors' almost unprecedented decision to raise the real estate tax rate in an election year are two bills nobody has to pay yet.

One will come from the county's once-every-two year look at the value of real estate it taxes. This is what the opponents of the rate increase focus on.

The other is an expense County Administrator Bryan Hill expects will hit at least $120 million sometime in the next decade.

It's the cost of the treatment plants or waterlines and contract payments needed to make sure people in James City have enough water to drink. It comes on top of the county's catch-up work on a backlog of drainage projects. These big costs are what proponents of the rate increase worry about.

In the background are two longer running financial trends that few people talk about.

Declining real estate values have meant a series of cuts in residents' real estate tax bills that have totaled an average of 8 percent since 2008, county landbook records show.

And paying for that reduction in tax bills has meant, in part, dipping into reserves.

County budget documents show regular drawings on the debt service fund that reduced it from $11.6 million on July 1, 2013 to $3.5 million as of June 30 of this year. Without the tax rate increase, which funded a $1.5 million addition to the reserve, it was on track to dip to about $800,000 by June 30 of next year and $530,000 the year after that.

The tax hike impact

The tax increase itself, a 7-cent rise in the county's real estate tax rate that supervisors approved earlier this year, will show up as a 9 percent increase in property tax bills that will be mailed in the next few weeks.

For a home assessed at the current county average of $296,000, that translates to an increase of $207 a year, or an additional $17.25 on a monthly mortgage bill.

But that won't be the only impact on property tax bills, the three Republican candidates seeking seats on the board in the November election say in their campaign material.

The reassessment of the taxable value of property next year is likely to mean another rise in property owners' tax bills on the heels of this year's increase, Supervisor Mary Jones, School Board member Heather Cordasco and conservative activist Sue Sadler all argue.

All three are calling for a repeal of the increase.

None returned phone calls seeking comment about their stand on the tax rate increase, the reassessment or the county's capital needs.

Jones voted against the tax rate increase, but school board minutes show Cordasco voted for the Williamsburg/James City School division budget that included as its largest single source of funds a county contribution that reflected the tax hike, as did Ruth Larson, who is challenging Jones.

Supervisors John McGlennon and Jim Kennedy, who voted for the increase and who are seeking re-election, have said it was needed to address long term needs.

"For me the most important issue was wanting to reestablish some financial reserves. We knew we have some big costs coming and we needed to demonstrate to the rating agencies and the citizens that we had the resources to deal with those," McGlennon said, referring to the Wall Street rating agencies that recently gave the county their highest grade, a move that makes borrowing money for major projects such as the county's water needs much easier.

Kennedy said he had voted against earlier budgets that tapped the county's reserves for several years running, and felt the tax rate was necessary in order to get the county's finances back into balance, especially since the rating agencies had started warning county officials they needed to pay attention to the declining reserves.

"Looking long term, I wanted to pay down some debt because the water issue was going to be pressing on us again," Kennedy said.

He added that if next year's assessment shows large increases in taxable values, the supervisors would be able to mitigate the impact by cutting the tax rate.

While it is hard to know what the county assessor's staff will find when they complete their work in the beginning of next year, the county's budget officials are projecting a 1 percent increase in taxable value, said Suzanne Mellen, the county's director of financial and management services.

For that $296,000 house, a 1 percent rise next year would boost the annual tax bill to $2,512, or an additional $25 a year, on top of this year's increase.

The water challenge

If the impact of the assessment is not definite, neither is the question of exactly how much James City County will have to pay to deal with the cut state regulators plan to make in the amount of water it can draw from the wells that currently supply 21,000 homes and businesses, or roughly 70 percent of the county.

Here's what is known:

The state Department of Environmental Quality has proposed to cut the county's use of groundwater 25 percent below the amount residents and businesses now use, according to the latest annual report of the State Water Commission.

Even before that move started, county officials worried that the number of people moving to James City would outstrip the wells' ability to supply water, so the water utility borrowed $25 million back in 2009 to pay for the right to get additional water from Newport News.

It did so, even though it did not have – and still does not have – any lines tying into the Newport News system and even though the cost per gallon of any water it bought from Newport News would be nearly 50 percent higher than its current cost to pump and treat drinking water.

To hang on to that right, the county has to come up with another $25 million in 2019, under the terms of its agreement with Newport News.

Adding up the interest expense on the first payment, the likely expense to borrow for the second payment, and the cost of additional borrowing to pay for pipes and pumps to bring Newport News water to the county, the bill could top $120 million, county administrator Hill believes.

The county's only other option is to draw water from the Chickahominy or York rivers, and the cost of a treatment plant, pipes and pumps for that would also likely exceed $120 million – even before adding up interest on any borrowings, Hill believes.

Either approach could come on top of the money the county has already committed to capital projects, and borrowing for either one would come on top of the $226 million in interest and principal the county needs to shell out to clear away its current debt by 2033.

Borrowing money

The annual bill for that extra borrowing would run in the millions of dollars.

Bond buyers currently demand an interest rate of about 3.5 percent to 3.8 percent from top rated Virginia localities like James City County.

At those rates, if the county were to borrow $120 million just for its water needs, just the interest would amount to at least $4.6 million a year. It is a sum that is more than half of what the county currently spends on salaries for its police officers and is about 80 percent of what it spends on parks and recreation.

While it is a big sum, the county will be able to afford it without an additional tax increase, Hill said.

The reason is that the county is no longer dipping into reserves to cover its running expenses. That means it can start boosting its reserves – the money it needs to have on hand for unanticipated needs, such as cleanup after a hurricane or an unusually snowy winter.

A healthy reserve, in turn, is something financial markets like to see when a local government needs to borrow money.

That boost in reserves will come as the county's annual debt service payments start to decline.

Just between this fiscal year and next, the county's bill for principal and interest will drop by $3.2 million, or 13.5 percent, to $20.3 million. After another 10 years, the annual bill based on current borrowings, including borrowing for the new middle school, drops to less than $5 million, county financial records show.

The combination of declining debt service and healthy reserves would make a large borrowing for water and other big ticket projects easy to swallow without any additional tax increase, Hill said.

But without this year's increase, the county would have to dip into reserves yet again and cut spending, canceling work on stormwater drainage and asking the schools to give back the increase in payments for school operations and capital projects, Hill said.

"The county is trying to clear the deck," Hill said. "If we don't clear the deck, that ship ain't sailing. This is what triple-A communities do."

Ress can be reached at 757-247-4535

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