Miscalculation of Revenues Spurs Council Action
Reeling from the unexpected news last Friday of a $4.2 million shortfall out of the $66 million budget year that concluded June 30, the Falls Church City Council, School Board and City Hall officials have been engaged in a frenzy of activity, with the latest move an announcement late yesterday of plans to hire an outside consultant for help.
“In response to the dramatic and unanticipated FY 2009 budget shortfall that surfaced in the past week, the Falls Church City Council has announced plans to retain an outside expert on municipal finance and governance to provide an independent assessment of the City’s financial policy procedures and practices,” the City Hall press release issued yesterday stated.
Falls Church Mayor Robin Gardner told the News-Press after release of the statement that the Council decided unanimously in a closed session late Monday to take the action, which she stressed was limited to examining the City’s financial reporting methods, and not to recommending budget policy.
In fact, the use of projected rather than actual numbers by the City’s Financial Office to calculate estimated revenue has been identified as just one of three culprits in the $4.2 million shortfall. The other two are the overall impact of the economic recession, and an adjustment made by the Virginia Department of Taxation that cost the City $1.5 million in back sales tax revenues and another $1 million from last year, with that annual loss now permanent going forward.
The shortfall was disclosed by the City’s Chief Financial Officer John Tuohy in an otherwise innocuous routine report with final numbers buttoning up the fiscal year that concluded on June 30. City Manager Wyatt Shields called the unexpected shortfall “jaw dropping.”
However, the News-Press had learned in advance there was imminent news of a big shortfall, quoting in its lead story last week Vice Mayor Hal Lippman only that it would be “bigger than last year,” when the shortfall was $800,000.
It turned out that Lippman and the entire City Council was stunned by the actual number, and in a joint work session Monday night involving both the City Council and School Board, a mood of disbelief permeated the room.
While civility generally prevailed, School Board members made it plain they were not happy with the prospect of absorbing unexpected cuts to their budget and capital improvement resources.
The School Board, at its own work session the next night, reviewed a detailed presentation on the situation by City Manager Wyatt Shields, and a set of small budget cuts accumulated by Superintendent Dr. Lois Berlin that would contribute $300,000 to solving the problem.
But Shield’s proposal to eschew over $754,000 in capital costs in the current fiscal year for on-going repair and replacement projects in the schools, such as maintaining elevators, roofs, boilers and generators, was not greeted favorably. Nor was his plan to cut capital expenditures for the City’s Parks and Recreation Department from $1.1 million to $64,000.
Mayor Gardner told the News-Press yesterday that Shields’ plan to overcome the shortfall with quick action taken by the end of the month did not necessarily meet with her favor, or that of others on the City Council, as well. The idea of freezing all non-essential capital expenditures, including $754,000 for the schools, was not met with favor by many at the work sessions.
Shields laid out a plan based on postponing indefinitely all non-essential capital expenditures by the City as well as the schools, not filling any currently vacant City positions, and taking $1 million in City and school operating budget cuts, which would bring the FY09 budget into balance without personnel layoffs and with a restoration of the City’s fund balance to within the City’s policy guidelines of eight percent of the total operating budget.
That plan, if it can be resolved by the end of October, Shields indicated, would clear the decks for the even more difficult task of preparing for the upcoming deliberations on the FY11 budget, the one that would become effective next July 1. However, some objected that there is no way to cleanly separate one budget from the next, because assumptions in this month’s short-term decisions will impact the next budget and vice-versa.
“We can’t make short term changes now and not be concerned about needs for deeper structural changes,” Councilman Dan Maller told the “Gang of Eight.” Peppe said the decisions on fixing the current shortfall “will bleed into FY11.”
Vice Mayor Lippman noted that the idea of furloughs of City employees would not make a significant difference, since a day of furloughs would capture only $16,000. But at the Tuesday School Board work sessions, the Schools’ Financial Czar Hunter Kimball noted that his calculations were that a one-day furlough would be worth closer to $60,000.
The shortfalls in the next budget, due to the stagnant economy, are expected to be worse than for last year and the current year. Also, the full extent of the shortfalls for the current year’s budget is not yet known.
Mayor Gardner told the News-Press that faced with the realities of the upcoming budget, she would not rule out, as other jurisdictions seem bent on doing, a tax increase.
Gardner brought two articles with her to Monday’s work session. One was an article by the National League of Cities entitled, “Financial Condition of Cities Worsening Across Nation,” citing severe losses in revenues due to the recession all across the U.S. The other was a Washington Business Journal article dated Sept. 14, noting that Falls Church’s neighboring County of Arlington will face a five to 12 percent decline in real estate revenue this year, with commercial real estate values dipping by 17 percent.
These stories were on top of the Washington Post report last weekend that the nearby District of Columbia will be laying off 229 teachers for budgetary reasons.
School Board member Joan Wodiska, in daytime a director of education and early childhood programs for the National Governor’s Association, noted a Reuters report that state and local governments nationally experienced a 12 percent revenue decline in the first quarter followed by an 18 percent revenue decline in the second quarter, combined to be the worst ever drop, and that it won’t be until 2013 that things might improve. It will be worse in FY11 and even worse, still, in FY2012, she projected.
In that context, she argued, “It is important to preserve the quality of our most important assets (i.e. the schools-ed.) while moving forward.”
Tuohy’s report for Falls Church last Friday indicated that the sharper-than-anticipated decline in real estate tax revenues (7.5 percent overall) came principally from a precipitous double-digit drop in the value of commercial real estate in the City, an ominous portend of what could be the next round of the national economic crisis.
In comments to a meeting of the City’s “Gang of Eight” (two City Council members, two school board members, two School Division leaders and two City Hall leaders) Tuesday, Tuohy said that while his office “didn’t re-calibrate” the real estate revenue numbers from projections to actual figures, which added to the size of the reported shortfall, “despite what (Federal Reserve chief) Bernanke says, the economy has not gotten where it needs to be.”
He said that while it is easy to estimate numbers when the economy is growing and generating surpluses, it is “very hard to guess” when the economy is down.
He said that the large decline in commercial real estate values was “entirely unexpected,” and that assessors in other jurisdictions are saying the same thing. “It’s way beyond what we anticipated,” he said. “I can’t guarantee there won’t be further declines.”
At the joint work session Monday, Mayor Gardner said, “There are two issues, the dismal numbers and figuring out what to do, and improving the internal workings developing our numbers.”
School Board Chair Ron Peppe said it is essential for the School Board to “have confidence in the numbers going forward,” and School Board member Kathy Chandler pressed the Council to be more forthcoming on actual numbers to deal with.
Such comments were followed Monday by the closed Council session that led to the decision to retain an outside expert to review the calculating process at City Hall and make recommendations. Hopes are that the consultant will be retained by the end of October and that the work will be brief. “The consultant will have a very brief window to do the work,” Mayor Gardner told the News-Press.
In that context, School Board member Kieran Sharpe stated that the citizens of Falls Church “deserve an apology” for the miscalculations. “We blew it,” he said.
However, others pointed out that while the projections were off in developing the budget last spring, and could have impacted decisions made then, the City is in essentially the same place it would be now, either way.
The other recalculation that cost the City $1 million a year, retroactive two years and going forward, was done by the State Department of Taxation in Richmond and had nothing to do with local officials.
It was the result of an audit by Fairfax County officials eager to scrape up more cash. They found that the State was inadvertently crediting to Falls Church’s account sales tax money from the small shopping center in Burke, and the correction was made.
On the plus side, Tuohy credited Falls Church’s Commissioner of the Revenue Tom Clinton with finding $200,000 a year in tax money that was being mistakenly sent to Fairfax County.