F.C.’s Fund Balance Could Fall Below 0 Without Big Tax Hike

Judge’s Injunction Adds to Shortfall Due to Recession

The grim parameters of a budget slammed by sharp recession-driven revenue shortfalls and a court order prohibiting use of profits from its water system was presented to a joint work session of the Falls Church City Council and School Board Tuesday night.

The City of Falls Church’s fund balance could actually go into the red by summer if a hefty tax increase is not instituted in the Council spring budget decisions and reflected in tax bills that will be due in May, the group was told. That “worst case scenario” will prevail if the injunction by Fairfax County Circuit Court Judge R. Terrence Ney issued earlier this month is meant to deny water profits to the City for two fiscal years, not one.

Given an apparent discrepancy between the content of the judge’s decision and the wording of his injunction, the matter remains unclear pending a clarification, City officials were told. The judge’s decision could cost the City either $2.2 million, or double that amount.

Even though the Council has authorized a court appeal of the judge’s ruling, it cannot await the outcome of that to make plans to address the shortfalls in the current fiscal year budget, and those projected for the next.

The bottom line is that the Council will be forced to consider a combination of deep budget cuts, including layoffs, and real estate tax increases. School Board members present stressed that decisions on cuts will need to take into account their impact on the students in the City’s schools.

“This is a perfect storm,” exclaimed Vice Mayor Hal Lippman Tuesday. “This is worse than awful. There’s going to have to be dramatically higher taxes, reduced services and we’re going to have to fire people.”

Mayor Robin Gardner said, “Last year, we didn’t have to take a real bite out of everything, but this year we will have to cut much deeper. It’s a big nut, but we signed up for this job.”

“This means that the City will not be able to do things it used to do,” said Councilman Nader Baroukh. “It will take years to come out of this.”

“This is an extraordinarily difficult financial situation” said City Manager Wyatt Shields, noting that the fund balance will be drawn far below the Council’s policy limits, “and now we’re at the bottom.”

He said the City faces three major challenges: resizing the operating budget, capital planning realism and “guarding the City’s overall financial condition.”

In his “FY 2010 Mid-Year Report of Financial Condition” presented Tuesday, Falls Church’s Chief Financial Officer John Tuohy built his numbers on the expectation of a $2.2 million deduction from water profits, and under  that scenario, the City faces a current-year shortfall $9 million below the amount in last spring’s adopted budget.

That is, instead of the expected $67.4 million in revenues this year, Tuohy now estimates the number will come in at $58.4 million. That is a 13 percent drop. Even with deep cuts in outlays already instituted this year, through freezing all capital expenditures among other things, the deficit currently stands at $5.7 million.

Aside from the water ruling, the biggest cause of the deficit, Tuohy said, is an anticipated steep decline in commercial real estate assessments, with sales and use tax receipts also expected to be well below the numbers included in the adopted budget. Other factors include low yields on the City’s deposit accounts and the fact that a major winter storm wiped out  retail sales on the weekend just prior to Christmas.

Even while freezing $4.698 million in capital improvements and not filling any existing City positions, the shortfall will leave the City with only $1.882 million in its fund balance, or approximately 3.25 percent of revenues. This is in contrast to the City’s official policy of keeping at least 8 percent in its fund balance.

But if the judge’s ruling means the City must deduct not $2.2 million, but $4.4 million from its revenue column, then that would draw the fund balance below zero. Matters could worsen, as well, if revenues from the state fall significantly below current expectations.

The only recourse to avert insolvency, in that case, will be to vote a hefty tax rate hike in the spring to raise more revenue.

Tuohy presented an array of tax hike scenarios, indicating how they’d impact the budget bottom line. For example, an increase in the real estate tax rate of 20 cents (above the current rate of $1.07 per $100 of assessed value) will still leave the City with the need for $3.567 million in cuts, and that is based on the lesser number being involved in the water profits decision.

Councilman Dan Maller noted that with the median income in Northern Virginia being $100,000 for a family of four, a stiff added tax bite would be affordable. “After all, such a hypothetical family has children going to the schools, as well” to cause them to support a tax hike, he noted.

“We’d have to balance this hypothetical family with reductions in the salaries of City employees,” he suggested.