The City of Falls Church will face its toughest financial squeeze in memory with the onset of the new fiscal year next summer, City Manager Wyatt Shields told a joint work session of the City Council and School Board last week. The sharp downturn in housing values is the culprit, especially as Falls Church has always been overly dependent on taxes from its residential real estate.

While preliminary work has begun on a new budget that anticipates the smallest revenue growth in decades, a half of one percent, Shields also hammered out a list of 17 cuts in the current fiscal year budget that will take place immediately to overcome a $577,000 shortfall.

Shields presented his list of cuts to the Council at its work session this Monday. The biggest savings will come from leaving open positions in City government unfilled, delaying the purchase of a new dump truck and shaving $75,000 off a $450,000 budget for services contracted by the Division of Environmental Services.

Also, the City’s parking enforcement officer position will stay part-time, and $28,000 will be cut from the Department of Recreation and Park’s uniforms, supplies, replacement equipment, turf maintenance and other functions.

Council members were especially concerned by the inclusion of a $10,000 cut in provision for overtime for City employees, especially as winter weather approaches.

But these cuts will be considered modest by comparison with what the Shields, the City Council and School Board will face next spring, as shaping the budget for the next fiscal year comes to a deadline in April.

After years of robust, double-digit growth in revenues to the City arising from the real estate boom, the real estate slowdown, now well into its second year, will hit the City with a vengeance, according to assessment estimates presented by the City’s Chief Financial Officer John Tuohy last week.

Revenues from residential real estate taxes grew from $17,879,932 in Fiscal Year 2002 to $36,210,889 in Fiscal Year 2007 last ended last June. The five-year run-up saw annual residential real estate assessment increases of 13.27%, 11.85%, 19.83%, 16.56% and 14.86%.

For the current fiscal year, that growth rate had declined precipitously to 1.56%, but the launch of some major mixed use projects in the commercial corridors of the City bailed out the City Council such that it was able to balance a budget without a tax rate increase. The budget was buoyed by $1.6 million in new construction related revenue.

Still, however, the revenue assumptions in crafting the current budget have fallen significantly short, leading to the immediate cuts that Shields announced this week.

The next budget, however, will not enjoy the same kind of boost from the commercial sector of the City’s real estate base. With $1 million less in new construction related income, the City can expect only $600,000, according to Tuohy’s estimates, while the value of condominiums will drop by 7.1%, townhouse values will decline by 4%, single family detached homes will drop by 2.9% and multi-family dwellings will decline by 1%.

The estimates are based, Tuohy said, on “best case new construction,” since there has been a lul in new construction start-ups since The Broadway, The Byron, The Spectrum, Pearson Square and the Read Building have been launched. The Byron continues to hold unsold condo units, Pearson Square switched its residential units from condos to rentals and The Spectrum is only now beginning to launch a condo sales effort.

City officials hope that the construction launch of the now-approved Hekemian mixed use project on N. Washington, a Young Group office building in the 800 block of West Broad, and timely approvals for the Akridge mixed use project on N. Washington, and especially Atlantic Realty’s City Center launch will begin kicking in significant new revenues in time for the following year’s budget, especially important if the residential real estate market does not rebound by then.

Other pressures on the next fiscal year budget include an increase of $750,000 in state-mandated post-employment benefit obligations.