Dependence on Sole Tax Stream Worries Officials

For the first time Tuesday, City Hall officially conceded that the value of residential real estate in the City of Falls Church has fallen below expectations during the past year, dropping by 2.77% and subtracting almost $1 million from what the City budgeted to receive in tax revenues.

Chief Financial Officer John Tuohy delivered the news to the Falls Church City Council at a work session Tuesday night in a preview of the financial numbers that will go into the preparation of the next fiscal year budget. Also, he said he expects the trend to continue through the coming year.

The news is particularly troubling for Falls Church, as 75% of its total revenues come from real estate taxes. That represents the greatest dependency on real estate taxes of any jurisdiction in the region. In neighboring Arlington County, Tuohy noted, the mix between residential tax revenue and other forms, including business property, sales and gross receipts taxes, is almost 50-50.

Tuohy said that as the result of the worse-than-expected news about Falls Church’s real estate values, projections of overall revenue growth for the City that will be factored into the upcoming budget have dropped from 3.5% to 3%.

All that revenue growth is coming from new mixed-use construction projects in the City’s commercially zoned districts, as well as healthy growth in sales tax, personal property receipts from car sales, and the meals tax resulting from stepped up activity in the City’s many fine restaurants.

It caused Council member David Snyder Tuesday to stress the need to continue to “diversify” the revenue stream to the City. Vice Mayor Lindy Hockenberry also stressed how important recent years’ efforts to encourage mixed use development have been.

The imbalance in Falls Church’s ratio of residential tax income to all other forms developed through a combination of a general business tax stagnation over the past decade and, even more dramatically, the enormous surge in residential real estate values since 2000. In the early 1990s, the ratio of business to real estate taxes was near 50-50, but that was also at a time when the total size of the annual City budget was closer to $25 million than its current level of $67 million.

The good news Tuesday, aside from the health growth in sales and meals tax revenues (combined with personal property tax totals, they net $450,000 in growth), was Tuohy’s pronouncement that stabilization measures with respect to the City’s water fund have been successful. The City-owned water system, that serves a total of 120,000 customers, mostly in Fairfax County, has an annual budget of $17 million.

While the City reduced, dramatically, its annual return on investment transfer from its water fund to its operating budget from $4.6 million annually to $2.4 million last year, Tuohy said the City can now expect the $1.9 million annual transfer to be sustainable.

 (In a related matter, the Council discussed borrowing $6 million for a replacement of all 28,000 of the water system’s meters with new, automated models. It also received a report on the on-going effort to catch up with the system’s customer billing after a major hiccup last year set that process behind by months).

Tuohy’s other news related to a higher-than-expected increase in the City’s fund balance, resulting from, among other things, savings of $750,000 in personnel costs. That has been due to unfilled vacancies, including three in the police department.

 Overall, the fund balance (roughly the amount of money the City has sitting in its bank account), is $447,000 more than expected. But, in accordance with adopted City policy that among other things impacts its Wall Street bond rating, the fund balance is not available for buoying the annual operating budget. By policy, it can only be used for one-time, non-recurring expenses, such as capital improvements.

Technically, there is no law prohibiting the use of the fund balance in the operating budget, such as using it to help lower the real estate tax rate in the subsequent fiscal year, but it is a matter of sound fiscal practice. Some Northern Virginia communities, such as Middleburg, are in the midst of a political fight over just this issue right now.

Falls Church City Manager Wyatt Shields is expected to present his recommended FY2008 budget, covering the period from July 1, 2007 to June 30, 2008, in early March. He will get a final projection of real estate assessments from City Assessor Mel Peterson around Feb. 1. Property owners will receive notice of their individual assessments by mid-February. The City Council will finally adopt the next fiscal year budget, including the component for the City schools and with adjustments to tax rates, if any, by the end of April.