Webster Woods – Can the City Afford It?

On November 12, 2019, the City of Newton Community Preservation Committee (CPC) voted to recommend that the city should borrow $15 million, backed by future revenue from the Community Preservation Act (CPA), to purchase Webster Woods.  On December 2nd, the City Council gave final approval to the plan.

Newton Conservators Director Dan Brody, who is also Vice Chair of the CPC, has prepared this analysis showing that this purchase will still leave more than 90% of CPA funds available for other purposes. Brody has served as Deputy State Budget Director for the Commonwealth of Massachusetts and as Chief Financial Officer for the Harvard Kennedy School.  He has extensive experience developing complex financial models.

Brody presented a similar analysis at the November 12th CPC meeting.  However, the analysis represents only his views, and not necessarily those of other CPC members.


Analysis by Dan Brody, Newton Conservators Board of Directors

Opponents of the proposal to preserve Webster Woods have raised two financial arguments against it:

  1. The City shouldn’t make the purchase at a time it is facing other financial challenges, such as teacher salaries and unfunded pension liabilities.
  2. The City shouldn’t make the purchase because doing so would use up too much of the City’s CPA revenue, leaving little or no money for other open space, recreation, affordable housing, or historic preservation projects.

1. Meeting Financial Challenges

Boston College Vice President Thomas J. Keady made this argument in the Boston Globe, writing that “the city seeks to seize this land at a time when Newton residents already face increased expenditures for such costs as teacher salaries, school buildings, fire stations, and employee pensions and medical benefits.

This argument is misleading.  State law permits CPA revenue to be used only for four purposes:  open space, recreation, affordable housing, and historic preservation.  All City funding for Webster Woods in Mayor Fuller’s proposal comes from the CPA.  None of this money may legally be spent on any of the costs that Keady mentions.

2. Using Up CPA Revenue

At the CPC’s November 6th public hearing on Webster Woods, BC Vice President Keady said that “The use of all of the CPA funds for purchase of Webster Woods would preclude investment in other projects involving recreation, affordable housing, historic preservation, and [leave] the 26 projects already in line for CPA funding in jeopardy.” In addition, Boston College has commissioned a poll of Newton voters.  Poll-takers have been telling voters that the purchase would “completely wipe out” the CPA fund.

Keady repeated this argument in a November 11th letter to Newton “neighbors”:

“The Newton Community Preservation Committee has $14 million in a fund for affordable housing, historic resources, open space and recreation land, currently with at least 28 projects vying for funding.  All of those projects–from affordable housing and public parks/playgrounds to historic preservation–would lose out if the Mayor and City Council proceed to direct the entire fund to pay for Boston College’s land.” [emphasis added]

The letter also claimed that “the current value of the property is likely far in excess of the amount budgeted by the City.”  Read a rebuttal of this claim.

These arguments are based on a complete misunderstanding of the proposal. The Mayor’s proposal would fund the full acquisition cost from the proceeds of 30-year bonds.  The bonds will be paid off with future CPA revenue.

While the Mayor does propose to use a portion of the money currently in the CPA fund to pay legal and other costs of the taking, her plan would use less than 5% of the current CPA fund balance for this purpose.  It it totally false that the Mayor proposes “to direct the entire fund to pay for Boston College’s land,” as Keady’s letter alleges.

Since Mr. Keady attended the November 6th public hearing at which the proposal’s funding mechanism was explained, I can only conclude that his November 11th letter intentionally misrepresents the proposal.

Bonding the acquisition cost would leave the vast bulk of future CPA revenue available for other purposes, as well. My analysis of the impact of the Webster Woods proposal indicates that paying off the Webster Woods bonds is likely to require just 8% of total CPA revenue over the 30-year term of the bonds.  While this is a significant commitment of funds, it would leave 92% of CPA revenue available for other open space, affordable housing, recreation, and historic preservation projects.

I set out to answer the question, “What percentage of CPA revenue over 30 years will be required to pay off the Webster Woods bonds?”  The answer to this question depends on four factors that are unknown, but capable of reasonable prediction:

  1. The interest rate (referred to as “True Interest Cost”) paid by the City on the bond issue
  2. The level of state matching funding for local CPA revenue in FY21
  3. The change in the state matching rate over the next 30 years
  4. The rate of increase of property tax revenue from new growth

Assumptions

My analysis uses the following assumptions for these factors:

Interest Rates

The interest rate the City pays on the Webster Woods bonds will be determined based on market conditions when the bonds are sold next spring.  Interest rates are at historic lows.  (“Muni bond yields remain at record lows”) Newton’s AAA bond rating gives it access to funding at lower rates than other municipalities must pay. According to multiple sources, the current average rate for an issue of AAA bonds maturing over 30 years is now approximately 1.9%. (MuniNet Guide  Bloomberg  FMS Bonds)  To be cautious, this analysis assumes a slightly higher rate of 2.3% .

State Matching Percentage

The state provides matching funds for all locally raised CPA revenue.  In 2019, the Legislature more than doubled the fees that provide matching funds.  The matching percentage is estimated to be 30% in FY21, the first year of bond repayment.  In the past, the state matching percentage has fallen as more communities have adopted the CPA, and as the dedicated source of state funding has failed to keep pace with the growth of local CPA revenue.  The analysis assumes that the state matching percentage will decline over the life of the bonds.  I base this assumption on the fact that the matching percentage declined substantially during the first two decades of the CPA’s operations, reaching a low of about 11%.  Some decline from the FY21 level of 30% therefore seems likely in the coming years, although there is no precise way to estimate its likely magnitude.   The analysis makes the pessimistic assumption of a large decline of 0.75% a year, with the state match falling to just 8% by the final year.

Increase in Property Tax Revenue from New Growth

When Newton voters adopted the CPA, they approved a 1% surtax on property tax bills.  The surtax will grow as the tax levy grows.  Under Proposition 2 1/2, the tax levy is permitted to grow by 2.5% a year, plus whatever increase is due to the value of new construction. Over the past 30 years, the growth due to new construction has averaged 1.3% a year.  The City’s FY21-FY25 Financial Forecast uses this value of 1.3% as its estimate for growth over the next five years.  The analysis projects growth at the same rate, 1.3% a year.

Results

The results of the analysis are as follows:

This graph compares the debt service cost to total CPA revenue over the 30 years of the bond issue:

The table and graph show that only a small percentage of CPA revenue will be needed to pay debt service on the bonds.  The required percentage is 18% of all revenue in FY21, falling to just 4% by FY50, the last year of debt service.

Comparison to Allocation Targets

The CPC has established “allocation target” ranges to guide it in allocating funds among the four allowable purposes.

The largest target range, for affordable housing, is from 30% to 40% of total CPA revenue.  The target for acquisition of open space and recreation land is from 15% to 25% of total revenue.

The following chart compares the fraction of CPA revenue required for Webster Woods debt service to the open space allocation target range.

Even in the first year, when debt service on the bonds is largest, the percentage required for the Webster Woods bonds is less than the 20% target for open space.  Over the entire 30 years, the average percentage is just 8%, which is less than half of the 20% open space target.

Conclusion

The analysis indicates that 92% of CPA funds over the next thirty years will remain available for projects other than Webster Woods.

I believe that the importance of this project justifies the allocation to it of a significant portion of the open space allocation target.  But my analysis indicates that more than half of the open space target revenue will remain available for other open space projects.  And the Webster Woods debt service can be repaid without touching the target allocations for affordable housing, historic preservation, or recreation.

Therefore, I conclude that the CPA Fund can afford to pay the debt service on the bonds for Webster Woods without negatively impacting other important CPA-eligible projects over the life of the bonds.