Virginia Supreme Court Panel Hands F.C. Another Setback

The tiny City of Falls Church took another one on the chin in the Great Water Grab by its giant Fairfax County neighbor last week when a three-judge panel of the Virginia Supreme Court declined to reverse the order from earlier this year of Judge R. Terrence Nye of the Fairfax Circuit Court.

Among other things, the ruling could have adverse consequences for a number of jurisdictions in Virginia that extract profits from operating utilities, be they water, gas or electric.

According to Falls Church City Manager Wyatt Shields in a statement to the News-Press yesterday, “The consequences of the court’s ruling are that the any other municipally-owned utilities in the Commonwealth (water, electric, gas) that profit from their operations may now face similar legal claims in their local jurisdictions. A source of revenue for localities statewide is therefore at risk.”

The Sept. 1 Supreme Court ruling against Falls Church implies that the exact formulation of Judge Nye’s ruling shall be enforced. Short of a reversal at a higher level, potentially the U.S. Supreme Court, the “Little City” of Falls Church could have to refund over $2.2 million it extracted from its water fund as a “return on investment” in FY 2009 back to the water fund.

Such an outcome would be another major blow to the City’s struggle to manage record declines in revenues from, especially, its real estate taxes. Only 2.2 square miles and 11,500 people strong, the City is disproportionately dependent on residential real estate taxes, and record declines in property values has translated into a decline of over 10 percent in the City’s tax base.

The drop left the City almost penniless at one point last year, although a strategy to replenish its fund balance to within the parameters laid out in adopted City policy guidelines was accomplished in the City’s new budget adopted last April.

However, the budget, while is was achieved without a “return on investment” (ROI) from the water fund, did not include the prospect of having to refund $2.2 million to the water fund, which the latest ruling stipulates.

On the other hand, the City’s debt load is extraordinarily low. Following the announcement in June of the City’s achievement of a AAA bond rating from the reputed Fitch bond rating agency in New York, Shields noted to the City Council that the City’s debt is only 1.2 percent of its total value, less than half the national average for public jurisdictions of 2.8 percent.

Falls Church has suffered an array of legal setbacks since it sought a legal remedy to the encroachment of the traditional service area by the Fairfax Water Authority in 2008. The City’s area of service has, since the 1930s, included significant portions of Fairfax County adjacent to the City, including most of Tysons Corner, Merrifield, McLean and Langley.

In fact, of the City system’s over 120,000 customers, more than 90 percent are in Fairfax County. The City’s system has maintained, repaired and improved for 75 years its elaborate system of pipes and pumps totaling more than 450 miles. A sequence of formal and informal agreements between the City and Fairfax County reinforced the City system’s territorial domain.

That was the case until 2007, however, when the Fairfax Water System began to change the rules by offering its services to new construction projects within the Falls Church territory in Merrifield.

Falls Church officials saw the handwriting on the wall if they did not act to prevent Fairfax from muscling in on its territory, and eventually capturing the enormous yields that are due to come from the development explosions expected in both Tysons and Merrifield.

In closed-door meetings, the Falls Church City Council agreed unanimously to launch a legal offensive designed to prevent the Fairfax takeover. What’s happened since then is, so to speak, “history.” The powerful county interests have prevailed in the county-based circuit court, and the three-judge State Supreme Court panel has now decided not to overturn.

“The City is disappointed with this decision and will be filing a petition for rehearing for consideration by all members of the Supreme Court,” said Shields last week. While the City’s petition for a rehearing is pending, the stay of Circuit Court Judge Ney’s ruling against the City will remain in effect until a final order is entered by the Supreme Court, according to the City.

Falls Church’s longstanding return on investment transfer from its water fund to its general fund is at issue especially in Count 5 of the Fairfax Water suit, and the City has reiterated that “this is something that many cities have done for many years throughout Virginia,” Shields said.

In fact, Loudoun County is having its similar policy scrutinized by the full Virginia Supreme Court, something that could offer hope for Falls Church, especially as it petitions to have the three-judge panel’s ruling reconsidered by the entire Supreme Court.

Meanwhile, the News-Press has learned the City’s legal costs will continue to be covered by the Virginia Municipal League.