Lower than forecast tax revenues from data centers and a huge anticipated demand for funding from the school system can mean supervisors have to make tough calls when working on the county’s next annual budget.
County staff are still struggling to understand why data center tax revenues – which for years have grown even faster than expected – this year have grown more slowly, but the difference appears to be a combination of impacts of the COVID-19 pandemic such as microchip shortages, and, more worryingly, perhaps a long-term shift in the industry.
The estimated total value of IT equipment inside Loudoun’s data centers – the source of most of the county government’s tax revenue from these operations – was about $ 1.1 billion lower. forecast in 2021, at $ 10.1 billion against $ 11.2 billion. according to a report presented to the Finance Committee of the Supervisory Board on July 13. This equates to about $ 60 million less tax revenue than expected.
While the deficit is large, Deputy Director of Budget and Finance Caleb Weitz noted that it accounts for less than 3% of the county’s general fund revenue overall.
Predictions based on how quickly new buildings had been filled with servers in the past were wrong this year as data center operators took longer to outfit these buildings, as well as replace older equipment. in their existing buildings. This material depreciates rapidly: fiscally, the first year, it is valued at 50% of the purchase price, decreasing each year until from the sixth year, it is valued at 10% of the purchase price. purchase.
The county has spent years trying to fine-tune the fiscal forecast for its data centers, with those revenues generally exceeding the county’s high expectations. While this is a good problem, it is an issue that supervisors and county staff have feared in the past because the money is not being used as efficiently as it could be. Trying to fill a hole in the budget, said finance committee chairman Matthew F. Letourneau (R-Dulles), is an unknown position for Loudoun.
“We are in a somewhat unenviable situation,” said Létourneau. “We’ve worked really hard to accurately predict our data center revenue, and then use more of it, only to now find ourselves in the position where we’ve ended up overestimating for understandable reasons. “
County staff members hope to close the $ 60 million hole with a combination of bonuses from bond sales and possible higher-than-expected income offsets in other areas. With Loudoun’s perfect credit rating, bidders on Loudoun bonds often offer more than the face value of the bond, resulting in additional financing for the county. In addition, the county government generally tries to estimate future tax revenue conservatively, possibly offering a little more money.
It remains to be seen whether the deficit is more attributable to the COVID-19 pandemic, and therefore a one-time problem, or caused by larger changes in the industry, Weitz said.
“I think it’s really too early to say until we at least see the tax levy next year, and maybe the tax levy in the year 2023, to be able to distinguish what it was. COVID noise compared to changes in the industry, ”Weitz said. “What I think I can confidently say is that it’s definitely a mix of the two.”
Loudoun’s Executive Director of Economic Development Buddy Rizer said the data center industry has evolved as large cloud providers like Microsoft, Amazon and Google build new facilities to allow them to accommodate sudden demand and are able to bear the cost of maintaining these facilities as they are not immediately filled to capacity with server racks.
“The other problem is that we’re way ahead of everyone, so we don’t have anything to report, you know, where there’s a test case elsewhere,” Rizer told the finance committee. “I think for me, you have to look for a trend. … I think it’s hard to predict at this point without knowing more about just how seismic it was that happened due to COVID. “
It was also another warning to supervisors about overdependence on data centers – this year, data center taxes brought in enough money to cover the entire county’s operating budget, roughly a third. of the overall operating budget, the other two-thirds going to schools. In the past, supervisors have decided to hedge their bets on data center revenue by sending some of that money to one-time expenses, in hopes of insulating the county from small drops. Nonetheless, the county has become increasingly dependent on industry to balance the budget of the local government, as data center revenues are poised to eclipse property taxes, the primary source of revenue for towns in Virginia. The county also hired a consultant to review the county’s tax policy and forecasts for the data centers, Weitz said.