THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Tuesday, November 7, 1995 TAG: 9511070267
SECTION: LOCAL PAGE: B1 EDITION: FINAL
SOURCE: BY TOM HOLDEN, STAFF WRITER
DATELINE: VIRGINIA BEACH LENGTH: Medium: 90 lines
Faced with a school deficit that now tops $12 million, the City Council will have no choice but to cough up the money and pay off the debt.
In doing so, the council will set itself up for tough decisions to curb future discretionary spending, which in the past has allowed it to air-condition older schools and buy the property where it is building an amphitheater.
At 2 p.m. today, the council will receive its first formal briefing from the accounting firm of KPMG Peat Marwick, which audited the school district's spending for the 1994-95 fiscal year that ended June 30.
The report, which surfaced Friday, outlines a district in financial disarray, with budgets prepared on unrealistic assumptions about federal and state income, and supervisors who ignored their own budget documents and spent money they did not have.
The briefing is a prelude to the process of sorting out the impact of the school deficit on other areas of the city's budget, including future capital needs.
``If we had an unexpended balance, we would have put that into one-time projects like air conditioning in the schools or buying the Lake Ridge property,'' said City Manager James K. Spore.
``Those purchases were made possible because we wisely monitored the money and had strong revenues in those years. That's the kind of stuff that we won't have the luxury for next year.''
While it's too early to say what projects may suffer, Spore said, one that has surfaced recently is a plan being pushed by parents of Princess Anne High School students who envision expanding their fire-damaged school beyond repairs covered by insurance.
``That would have been a perfect opportunity,'' Spore said. ``That's the kind of unanticipated project that we could have funded if we had the fund balance.''
Discretionary spending is but one financial headache that will confront the city. Officials expect next year to make a one-time payment, anticipated to be $12 million, to the Virginia Retirement System to cover unfunded liabilities that were created by changes in the retirement law. Like all cities, Virginia Beach also is bracing for a possible reduction in federal money as a result of budget-cutting legislation pending in Congress.
But the presence of the school deficit and the city's obligation to cover it do not mean the city is in financial trouble - far from it.
The city's general fund balance reserve stands at $48.1 million.
The city has a policy to keep reserves that are at least 75 percent of its debt service, which is the amount of money it needs every year to pay for the money it borrows. The city is maintaining reserves equal to about 85 percent of its debt service, said E. Dean Block, the city's director of management services.
With a $12 million payout to cover the school deficit, it will drop to 81 percent, Block said.
``We will not fall below that, even if we provide the funds to schools,'' he said.
Three reasons exist for the policy, Block said. It evens the city's cash flow, it helps protect the city's AA bond rating, and it acts as a hedge against disasters, like hurricanes or downturns in the real estate market.
Bond ratings help determine the rate of interest that will be charged municipalities for borrowing money.
``The maintenance of our bond rating is very important,'' he said. ``It costs us a great deal of money if it were rated lower.''
A conservative fiscal policy is one reason the city's bond rating is so strong, said Edward Krauss, vice president in the public finance department of Moody's Investors Service in New York.
While a large deficit within the school district is frowned upon, he said, the more important issue is who backs the city's bonds and how well-run the city is.
``The ability of the schools to manage their budget does have some impact on what the city has to provide, but I don't expect there would be an immediate impact on the city's bond rating,'' Krauss said.
``But we want to see the extent of the problem and their proposed solutions before taking any action on the bond rating, because it is a long-term credit assessment.''
John A. Gill, first vice president of Scott & Stringfellow in Norfolk, agreed.
``It goes back to the structural soundness of the city,'' he said. ``If a city is financially sound, then that's what the bond holders are depending on for their repayment of debt and interest. Obviously, if there are bigger problems where they could not cover it, then their debt rating could be affected. I do not think that will happen with a problem of this size.''
KEYWORDS: BUDGET DEFICIT VIRGINIA BEACH SCHOOL BOARD VIRGINIA BEACH
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