Fairfax County officials said that financial difficulties among area developers and savings and loan institutions could leave taxpayers liable for millions of dollars in roads and other public improvements that the developers have promised to build.
A federal regulatory agency has repudiated more than $2 million in letters of credit, issued by failed local savings and loans, that would have guaranteed completion of any unfinished improvements promised by bankrupt developers.
So far, the county has lost $73,000 on failed projects. But officials say the potential for loss is far greater -- $2.6 million and climbing -- if more developers fail and their banks do not provide the money to complete the projects.
"The bottom line is that the county is vulnerable for a lot of money," said Irving Birmingham, director of the county Department of Environmental Management, which regulates construction.
In Fairfax County, developers must pay for public improvements such as roads and parks in return for getting permission to build their projects.
The county requires the developer to provide a guarantee in the form of a letter of credit or a bond so the county can finish those public improvements if the developer does not.
"The letters are a guarantee to the county that improvement will get built," said William Lauer, a spokesman for the Northern Virginia development industry.
But as some local savings and loans have been taken over by the federal government's Resolution Trust Corp., those agreements are being routinely repudiated, according to county officials.
A lawyer with the Resolution Trust Corp. said the agency is using its "extraordinary powers" granted to it by Congress to cut taxpayer losses.
The agency was set up by Congress to take over failed thrifts and oversee their dissolution or help get them back on their feet. The effort is expected to cost U.S. taxpayers hundreds of billions of dollars.
"In layman's terms, if the contract's a bad deal for the institution, then we repudiate," said Jose Ceppi, senior counsel with the trust corporation. But he added that decisions are made on an individual basis, not as routine.
Ceppi said the agency's general policy is to repudiate the letters of credit before any demand has been made for money. In theory, that gives notice to a developer that he must get a new letter of credit somewhere else, but that is easier said than done, say Fairfax officials.
In recent months, the county has received 11 notices from the Resolution Trust Corp. disavowing $2.6 million in letters of credit. Because no new letters of credit have replaced them, the county is at risk of having to pay for those improvements should the developers go under.
"This is very unpalatable," Birmingham said. "The RTC is acting like the biggest gorilla in town and that's what they're treating local government like."
One expert on the subject said the trust corporation has been taken to court in recent months and asked to make good on the letters.
The agency "would like to weasel out of these contracts," said Reade Ryan, an expert in letters of credit with Shearman & Sterling, a New York-based law firm. "They can't do that. Many banks have been taken to court and forced to honor the letters of credit."
In December, Birmingham asked United Federal Savings Bank, formerly known as United Savings Bank, to make good on a letter of credit and give the county $73,200 to finish public improvements at the Pinecrest Research Campus near Reston in northwest Fairfax.
About a month ago, the trust corportion told Birmingham that it would not honor the letter of credit. The bank pointed out that the Office of Thrift Supervision, which oversees the trust corporation, had closed United Savings Bank last July 31 and said the bank "has elected to disaffirm the letter of credit to the full extent."
Fairfax County will now have to foot the bill unless it successfully challenges the agency in court. Birmingham said the matter has been referred to the County Attorney's Office.
But Ceppi said the county can recover a portion of the $73,000 if it files a claim with the Resolution Trust Corp.
"You take a risk, especially with a financial institution in this day and age," Ceppi said of the county's complaints. "There are a lot of people that get hurt when S&Ls taken over by the RTC go broke."