Tuohy Cautions Costs to Be Up, Revenue Down

A tightly-worded, two-page single page memo issued last week by the City of Falls Church’s Chief Financial Officer John Tuohy cautioned that losses in the market investments of both the City and Virginia’s pension and retirement funds could drive a significant, unavoidable increase in costs that will have to be born by local taxpayers, beginning with the next fiscal year budget. The flat economy will also lead to a significant drop in tax revenues, it added.

The memo was presented to the meeting of the City’s “Gang of Eight” that met last Thursday night to begin charting a course toward next spring’s Fiscal Year 2011 budget. The “Gang of Eight” is composed of the mayor (who was absent for last week’s meeting) and vice-mayor, the chair and vice-chair of the School Board, the city manager and Tuohy, and the superintendent and chief financial officer for the City’s schools.

“Funding the City’s three defined benefit pension plans is likely to be the single largest cost driver for the next several years,” Tuohy stated in his memo. “The basic and police plan trust funds have experienced less deterioration in assets than their peer group, but never the less, the losses have been significant.”

He said that while some of this effect was felt in the current budget, approved last spring, it “will result in further increases for FY 2011 as the full effect of the losses is recognized.”

He also noted that since the State of Virginia operates with a biennial budget, the Virginia Retirement System (VRS) plan which covers most school employees “lags in recognizing the asset losses, and thus the resulting increases in required contributions (from the City budget-ed.) will be budgeted for beginning in FY 2011.

He noted that “each percent increase in the rate used to figure pension contributions equals approximately $120,000 in the City’s general fund, and $250,000 in the school fund.”

The News-Press has learned that this translates into what could be an unavoidable seven or eight cent increase in the real estate tax rate, all by itself, come next spring.

While this will have a major impact on the cost side of the City’s budgetary ledger next spring, on the revenue side, the news is also not good, Tuohy’s memo indicated.

It stated, “The market for commercial real estate, especially office buildings, has deteriorated since last year. Preliminary estimates using data through June indicate that the values of some commercial properties will decline by double-digit percentages.”

Noting that “each dollar decline in the total commercial base translates into 25 cents in the total assessed value of real estate,” the memo adds that “there are no projects under construction in the City to offset this decline.” A double-digit drop in commercial real estate assessments next year would lead to a very substantial drop in revenues for the next budget.

Tuohy noted that the only commercial project now under construction in Falls Church, the BJ’s Warehouse on Wilson Blvd., is slated for opening in the first half of 2010, but will have no effect on the assessed value of real property, since the property it is replacing is of a similar nature. It will provide significant increases in sales and gross receipts taxes, however.

In the case of other sales tax revenues coming into next year, the memo noted that “the decline in sales taxes has very probably reached its nadir…but has now stabilized.”

If there is any silver lining in the current economic recession, Tuohy’s memo noted, it is in the 1.4 percent drop in the Consumer Price Index (CPI), meaning that the projected cost of many of the City’s contracts will come in lower than expected. A drop in oil prices will also lower projected costs, including the City’s required contribution to the Washington Metro Area Transportation Authority, which is based on gas costs.

But, Tuohy cautioned, “We are entering unknown territory when discussing contractual changes resulting from a negative CPI.”

Another positive in the current environment, he noted, is “due to the virtual standstill in commercial construction” throughout the region, which means that “contractors are submitting extremely aggressive bids for local government capital projects. The City has been able to undertake several projects, especially for the water system, at well below engineers’ estimates.”