Barry:  “In business or government, surprises are something you want to avoid.  Sometimes they are inevitable, but if we can minimize the number of surprises we face, we will be better off.  That’s what we are attempting to do here.  We want a budgetary and financial system that is predictable.  Discussing and laying out the steps of how to accomplish this are critical.”

According to Baroukh, other Council Members are reviewing the draft in order to add their input.

The new Council session starts tonight, when Barry and Kaylin and Member-Elect Ron Peppe will be sworn in.  Current Council Members returning are Baroukh, Webb, Robin Gardner and David Snyder.

The discussion draft document appears below.

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Discussion Draft

Organizing Principles
Blueprint for Action

The purpose of the working document is to outline the priority areas of the City Council with a view to initiate specific actions.  These areas are:

—Budget: Expenditures and Revenue

—Economic Development

—Change Council review processes that permit more careful (not necessarily longer review) analysis of proposed projects/actions (i.e. not deadline driven).  Recommended changes will be described in a companion document.

The Blueprint for Action recognizes the impact of excellent schools on the City’s housing prices although difficult to quantify, and certainly positive and the City’s sense of community.  The overall impact is the inter relationship between overall revenue and cost generation.

The Blueprint for Action recognizes the need to expand and address such issues as green spaces, arts and community events, and library capital improvement needs.  Nonetheless, the City’s budget and economic development issues must be given priority in order to properly develop and implement such items.

Budget

Based on recommendations previously made to the City Council and enhanced and expanded by the Long-Range Financial Planning Working Group (“LRFPWG”) the following course of action is suggested:

Expenditures

—A five-year projection of the City’s financial situation.  Projections should be based on current financial data.  These projections are to be provided by the City and will serve as the basis of budget decisions.  The City can use an in house model or that of the LRFPWG, but the City must take ownership (i.e. they are to be considered official City projections).

—Once the “gaps” are identified the City and the School System should seek multi-year long term cost reductions to narrow or eliminate funding gaps.  Expenditure reductions to close these “gaps” should be distributed in an equitable and fair manner.

—No analytical model has been developed by economists that can measure the tradeoff between the School System’s benefit to housing values (and City revenue) and the dampening impact on housing values of increasing real estate taxes.  As such, these factors should be given equal weight.

—City side expenditure reductions should be based on a comprehensive review of the City’s operating structure and organization.  The City Council should prepare the scope for the work to be performed with inputs from the City side.  The review should be undertaken by a consulting firm specializing in organizational structure.

—The City’s Fund Balance needs further recapitalization especially for the large anticipated Capital Improvements Program (“CIP”).  Providing the School System with needed Capital Improvements is also a priority.

Revenue

—The City has less control over the revenue side than it does over expenditures.  Revenues that can be increased are those cost savings such as elimination of redundant functions between the City and School System, and further outsourcing with adjacent jurisdictions and/or private sector.  Some user fees can be increased, which may lead to a more equitable allocation of costs.

—Further efforts at greater utilization of existing retail and office space should be aggressively pursued as well.

While the above will assist in increasing revenues, none of the revenue enhancers will materially improve the City’s short or long-term fiscal situation.

For the City’s long-term financial viability to be assured; that is, our independence and our Schools, the City’s economic base must be prudently expanded.

Budget Process

—Adoption of a three-year rolling budget (within the parameters established in the longer term strategic plans).  This is essential.  A quote from the LRFWG is merited, “A multi-year rolling budget will provide financial discipline and show the effects of decisions made today.”

—City budgets would be approved on a yearly basis as is required.  Three-year rolling budget projections are to be used as a decision support tool and are not to be taken as binding.

—The City and School budgets should be considered at the same time; not sequentially.  In that regard, the School System budget process has been undertaken in a timely basis and should be used by the City to gauge the timing of its budget preparation.

As recommended by the Gerhart Report and the LRFPWG, the City should prepare and distribute to the City Council the following:

—Monthly & Quarterly financial reports.  Better financial management and forecasting should be possible if the City’s financial staff regularly generates timely financial reports.

—Minimum Effort Policy for Capital Investment.  The City Manager slashed the CIP and capital outlays in recent years in an attempt to balance the budget, thus putting aging infrastructure at risk for the City and the School System.  This will cause significant safety and financial problems for both the City and the Schools within 3 years.

—Adopt a “Rainy Day” Reserve/Stabilization Fund Policy:  The City currently has no dedicated “rainy day” fund to offset one time spikes in expenditure needs.

Economic Development

The long-term financial sustainability of the City depends on its ability to expand, diversify and sustain its economic base.  Specifically:

—While greater occupancy rates for existing commercial/retail space will generate additional revenue it will still be insufficient to close the expected budget gaps, even at 100% occupancy.

—An active City, which includes a vibrant night life, readily accessible restaurants, etc., would complement the City’s effort to attract larger commercial investors.  To expand the City’s presence within the region, additional resources should be provided to the EDO to proactively and creatively market the attributes of the City.

—The land available for commercial/office construction has been identified for years.  The City is fortunate that the three logical development zones (Metro stops and S. Maple) are already in commercial/business corridors; thus future development need not impact the residential core of the City.  It is recognized, however, that wherever the development is located it will border on some homeowner’s property and this must be taken into account.  The City must complete “revitalization plans” for key commercial areas (East End, EFC Metro, WFC Metro, and Downtown).

We are aware that Arlington County’s planned development for the East Falls Church Metro area is already underway and the subject of public hearings.  This planned, high density development, which is intended to optimize the area’s commercial and residential location, will impact the City’s landscape and development options and should be, to the extent possible, jointly conceived and executed.

—Given the projected size of the City’s budget shortfalls, future development will be, by necessity, of a higher density and should be better planned than is currently the norm.  Such development should retain a sense of proportion and harmony with existing residential neighborhoods and must be economically sustainable.

—The challenges of undertaking such an approach are well known and are not to be trivialized or dismissed.

Background

In the early to mid 2000’s, the financial consequences of inhibiting commercial/office development were obscured by the housing bubble.  The City is exposed to considerable revenue volatility since approximately 80% of the City’s real estate assessments are residential.  Expenditures, however, are not as volatile and tend upward even in poor economic environments, as is shown in the analyses of the LRFPWG.

With the good times rolling, fundamental structural imbalances between the growth in revenues and the growth in expenditures, though recognized in many quarters, were not effectively, if at all, addressed.  The City’s apparent financial well-being was not based on sound fundamentals of having a diversified revenue base.

The economic situation today is radically different from that of 2007. Continued reliance on residential real estate taxes that fueled the City’s revenue and expenditure growth is now an impediment to the improvement of the City’s financial well-being and a challenge to the discretionary household incomes of our citizens.  The City’s structural imbalances are now clear and evident.  The likelihood of a reemergence of the housing market as a growing revenue generator, in the near or medium term, is remote and cannot serve as the basis for the City’s long term financial sustainability.

There are claims that no commercial developers are interested in investing in the City and future efforts are likely to produce the same result.  However, there remains some question as to how energetically and creatively the City actually pursued commercial development, especially in light of the housing boom.

Conclusions

The long term choices confronting the City lie between the: 1) commitment to significantly expand the City’s economic base or, 2) eventually incurring significant reductions in the quality of services provided by the City and its School System.  In the worst case, but plausible, scenario the independence of the City would be at risk.

Significant reductions in the quality of City services will result if we continue along our current development path.  Underlying these choices is the assumption that while some increase in real estate taxes may need to be absorbed in the short-term, continued real estate tax increases is not an economically viable long term solution.

The best solution is to strategically expand the City’s economic base in a carefully planned, thoughtful manner that maintains and enhances the high quality of life that we currently enjoy.  The City’s current financial situation does present opportunities.  Falls Church has real and viable development opportunities.  We should begin a well-focused “Area Planning Process,” including City financial support, and with a clear City financial commitment to pursue such development (including other sources).  Once a Plan is developed the City must adhere to the Plan.  The City must also develop an implementation plan as part of this process.

The City has commissioned and ignored previous plans, including some that were well conceived.  There appears to be justifiable “Studies” fatigue.  However, if the planning process is to be correctly done we should seek the professional service of a recognized firm specializing in revitalization programs.  To accelerate the process and broaden our options the previous studies should be presented to the selected firm in order to take advantage of already completed work.

The above focuses on two salient issues (i.e., the Budget and Economic Development).  Of course, there are many other activities that are essential.  However, if future budget discussions produce results similar to that of FY 2011, the City’s sustainable future will be compromised because continued deterioration of City services will be the norm rather than the exception.

Recommendations

The following is a summary of the recommendations contained above:

1) The City will develop a five-year projection of the City’s financial situation.

2) A comprehensive review of the City’s operating structure and organization will be undertaken.

3) Revenue enhancing measures in the form of cost savings and additional net revenue from appropriate application of user fees will be developed.

4) The City will adopt a three-year rolling budget though the budget approval process is undertaken on a yearly basis.

5) The City’s budget preparation will coincide with that of the School System in order to identify possible long term funding gaps (starting with the 5-year financial projections).  Budget reductions should be done on a fair and equitable basis.

6)  Monthly & quarterly financial reports will be provided to Council.

7)  A minimum effort policy for capital investment will be developed.

8)  A policy for a “Rainy Day” or Reserve/Stabilization Fund Policy will be developed.

9) The City should continue to proactively and creatively market the City, including additional resources for the EDO.

10) The City will adopt an Area Planning Process.  A Working Group, which would report directly to the City Council and include the Planning Commission, Planning Staff, EDO, and the EDA, will be tasked with developing the scope of work for developing the plan. The scope of work should include consideration of retaining a consultant with proven success in urban revitalization programs.