Falls Church has decided to put its water system up for sale in response to a long-running conflict with Fairfax County over the city’s service to county residents who live outside Falls Church’s borders, officials said Tuesday.
City officials — citing increased financial risks since Fairfax acted in December to assume greater authority over the rates its residents pay for water — will start the bidding Wednesday at $44 million for the utility that has supplied city and county residents with water since the 1930s. The vote was 6 to 1 authorizing the sale.
“I think the situation we’re in is that the recent political and legal hurdles have made it riskier for us to provide water service,” Wyatt Shields, the city manager, said in an interview Tuesday afternoon. He said that, hypothetically speaking, a court could uphold Fairfax County’s amended water ordinance allowing the county to set water rates for Falls Church’s water at a level that might not be feasible for the city.
Councilman David F. Snyder, who cast the only nay vote on Monday, said that at just $44 million, the city would be giving away a valuable asset on the cheap, compared with the debt and labor the city invested to build and operate the system.
“I felt it was an utterly inadequate return for the risk that the city has run for 50 years to provide water to its citizens and those of Fairfax County,” Snyder said Tuesday evening. He said the city should push for at least $8 million more.
Earlier this year, Falls Church invited expressions of interest from potential buyers, and 10 entities responded, the city manager said. Among them was county-controlled Fairfax Water, which suggested a friendly merger to end the county’s water wars. Such a merger could put to rest the conflict that has existed between the county and the city of Falls Church for many years. But other municipalities, such as the City of Fairfax, could also affected by the county board’s move to assume greater authority in setting water rates.
The Fairfax County Board of Supervisors last year assumed authority for water rates of all county residents, including those who receive their water from the city of Falls Church or other municipal systems. In amending its water ordinance, the county also claimed the right to establish exclusive service areas for Fairfax Water, the county-controlled utility that supplies most water in the county. The ordinance was immediately challenged by the city of Fairfax, which has filed legal papers challenging Fairfax County’s decision. So has the City of Falls Church, Snyder said.
Shields said prospective buyers would have to agree to a series of conditions as part of the sale, leaving little leeway on the terms of the purchase agreement except for price.
Bidders will have 45 days to respond, with sealed bids due May 25. The city will also give bidders a chance to raise their bids afterwards in an auction that will be conducted according to state law, Shields said. Any sale would have to voted on by the City Council and, ultimately, by city residents through a referendum in the Nov. 6 election.
In authorizing the city manager to explore the sale to a public water supplier, the Falls Church City Council said bidders must meet conditions that include a list of all assets to be sold, a one-year guarantee of employment for the utility’s 55 employees at comparable pay and benefits, and a one-year rate freeze.
The utility also has about $30 million in outstanding debt and other obligations, such as employee pensions, Shields said.
The system supplies about 34,500 customers, most of whom are located beyond the city limits, and reports annual revenue of about $20 million. The sale would not include Falls Church’s sewer assets.
“Over the past several months the City Council has conducted an extensive evaluation of options with the goal of securing the best results for the City’s water customers and tax payers,” Mayor Nader Baroukh said in a news release Tuesday. “The City has a long history of careful management of the water system, a strong customer base, and a very talented work force. We look forward to the response from the private and public utility industry.”
The dispute’s origins arise from the city of Falls Church’s treatment of customers who live in Fairfax County but receive water service from the City of Falls Church. The city’s water utility serves about 34,000 accounts. Ninety percent of those are in Fairfax County, or about 100,000 county residents. Most water service elsewhere is supplied by Fairfax Water Authority , which is a separate legal entity, with the ability to issue bonds and own land. The authority’s members are appointed by the Board of Supervisors.
In years past, Falls Church billed customers in excess of the cost of providing service and transferred the surplus revenues to the city’s general fund. From 1981 to 2008, the City of Falls Church directed more than $58 million in surplus water revenues to its coffers — a practice that city officials say is common among municipal utilities.
The collection of surplus revenues came to a halt in January, 2010, when Fairfax County Circuit Court Judge R. Terrence Ney ruled that the Falls Church utility’s practice was, in effect, imposing an unconstitutional tax on county citizens. His order also forbid Falls Church from collecting profits on its water in the future.
Though the city has desisted, its officials on Wednesday defended the practice, saying most municipal utilities return excess revenues to their general funds because its taxpayers guaranteed the capital bonds that helped build the water utility.