These pages address a few critical questions for any debt exclusion:
- How much debt does Lexington have today?
- How much debt is reasonable for a town to carry?
Debt and Equalized Valuation
Lexington had about $116 million in debt in FY2016.
With an equalized valuation (EQV) of $10 billion, Lexington’s debt is today at 1.2% of the total value of all taxable properties in the town.
At a 1.2% debt load, Lexington is among higher debt communities, but not nearly the highest. Some poorly performing communities such as Worcester approach the maximum permissible debt levels under state law: 5% of EQV.
If voters pass the December 2017 debt exclusion articles, the projected debt level will increase by $60-$85 million to about $190 million, or 1.75% of EQV. This level of indebtedness would be above average for Massachusetts towns.
Unfortunately, the December 2017 debt exclusion leaves unaddressed three known capital issues:
- New or replaced Lexington High School
- Seventh elementary school (addressing expanding enrollments)
- Police station replacement
Even with state subsidy, the cost of these three projects might be expected to be around $400 million. Today, the town does not have sufficient real estate value to take on this additional debt.
State law prohibits any town from having debt in excess of 5% of its equalized value. Not only is borrowing near 5% of equalized value financially unsound, but it may hurt Lexington’s bond ratings and increase borrowing costs.
Lexington voters are offered debt exclusions one at a time, without a long term financial projection which incorporates the largest ticket items.
Would passing the December 2017 debt exclusion jeopardize more important projects for the educational system in the near future?
We have been asked can Lexington grow its way out of debt, just as a homeowner’s mortgage shrinks as real estate prices increase?
The answer, is possibly, depending on macroeconomic conditions.
For example, if the town increases its debt to from $100 million to $500 million, but at the same time the Lexington Equalized Valuation were to increase from $10 billion to $50 billion, then the town would still be borrowing 1% of its valuation.
There are two important issues to consider:
- First, for the town to have a five fold increase in valuation means every residential property in town would be costing five times more. For example, the median home would not be $941,000, but instead would be $4,700,000. Since the median home in Lexington cannot have that much value alone, it implies that prices in the greater Boston area would have increased by a similar amount. So when one thinks about larger macroeconomic conditions this seems unlikely. The recent Republican tax proposal to limit property tax and mortgage deductions is expected to negatively impact housing prices in high tax areas like Lexington, so if anything the base valuation of the town could decline.
- But, suppose for a moment we are wrong, and home prices in Lexington shoot up through the $1 million, $2 million, … into the $4 million area, and the town elects to borrow at these more significant levels. If this were to occur in only ten years or so (the time frame for the high school), then these rapidly accelerating prices would produce significant demographic change, and many of those who chose to remain in Lexington might struggle to pay the tax hikes suggested by the fact that they would be now sitting in more expensive properties.
The debt and equalized valuation by year shows that equalized valuation is not always increasing for Lexington, and town management cannot take for granted that Lexington will simply be able to absorb more debt by virtue of economic growth. Very significant growth would have to occur to make absorption of ever increasing debt possible.