Tax Increase? Service Cuts? “Gap” Debate Continues

The Town Hall meeting this Thursday, Feb. 12, at the Falls Church Community Center will be one of the most important city government meetings in months, as Falls Church residents hear details of an expected budget gap and the city’s plans to address it. The discussion will be the most visible acknowledgment yet of budget problems foreshadowed last November in a memo from city Chief Financial Officer John Tuohy — problems that could conceivably result in a tax increase of up to 50 percent by the year 2012.

Tuohy’s sobering November “Revenue/Expenditure Gap” memo to the Mayor and the City Council projected flat revenues amid increasing costs over a five-year period. “An unrestrained budget is not sustainable,” he concluded.

The scenario Tuohy envisioned indicated a shortfall of $3.9 million for the fiscal year beginning this July, which, if made up through revenue increases, would likely require an increase in the real estate tax rate from the current $1.03 to about $1.14. That would rise to $1.24 in July 2010, to $1.34 in July 2011, and to $1.51 in July 2012. Tuohy’s projection assumed that the total value of real estate in the city would neither increase nor decrease.

Many observers predict, however, that given the ongoing global deflation in property values, a more likely outcome is that property values will continue to decrease for a time. If, for example, property values decrease by 10 percent this year, in the absence of any new property added to the rolls, an additional $3.65 million deficit would arise, requiring a tax rate closer to $1.26 instead of $1.14.

On the other side of the ledger, the Tuohy memo assumed that city spending would continue to increase as usual, with a 5 percent per year increase in personnel costs, 8 percent increase in benefits, 3 percent increase in other operating expenses, and a 5 percent increase in the school budget. In a dire economic climate, at least some of these hypothetical increases likely would not occur.

Following the release of Tuohy’s memo, Assistant City Manager Cindy Mester told the City Council that the memo did not include some revenues the city can expect to receive. Some note, however, that likely expenditures also were not reflected in the memo. “The City’s shortfall numbers are not conservative” said Falls Church Economic Development Authority member and former Inter-American Development Bank Chief Risk Officer Ira Kaylin. He pointed out that school budget requirements needed to maintain the quality of City schools are not fully addressed in the City’s numbers and that the tax rate will have to increase just to maintain real estate revenues at constant levels, given that assessments will certainly decline. “When I look at the numbers I see a big hole,” said Kaylin. “I am concerned about our fiscal situation.”

Indeed, speculation is that the budget gap has widened since Tuohy prepared his November memo. On Thursday night, Tuohy is expected to provide more current projections, and City Manager Wyatt Shields will suggest budget cutbacks to at least partially reduce the budget gap. City insiders say his list will include non-essential items such as skate parks and streetscape improvements, but may also include more important areas such as storm water management. It is not known whether Shields will suggest cutbacks of sufficient size to completely address the budget gap.

School costs are a major aspect of the debate. One former school board official suggested as early as 2007 that future facility updates could run as high as $60 million, and a city resident who has studied school construction costs, speaking on the condition of anonymity, suggested that school construction costs could approach $70 million in the next few years — significantly more than the City government has anticipated. A big factor in school costs will be student enrollment growth, which became an issue in the May 2008 City Council elections when opponents of mixed-use real estate developments circulated school data indicating most city schools would soon reach enrollment capacity.

Another issue in the debate has been the proposed affordable housing project, City Center South Apartments (CCSA). A number of City officials, including members of the City Council, Planning Commission, and Economic Development Authority, have raised concerns over CCSA costs to the city during a period of projected budget shortfall.

The only certainty regarding the “Gap debate” seems to be that the debate will continue. “I’m afraid we’re going to be talking about this for some time,” said Kaylin.

To read the Tuohy memo from November, click HERE. Neither Tuohy’s updated financial projections nor Shields’ suggested budget cuts have been released at this time. They will be posted on Falls Church Times if released prior to the meeting.

(George Southern also contributed to this article.)

February 9, 2009 


5 Responses to “Tax Increase? Service Cuts? “Gap” Debate Continues”

  1. Andy Rankin on February 9th, 2009 4:52 pm

    I have heard the comment before that the new mixed-use development projects would add students to the schools, which I’m sure they will. I assume they will also add tax revenue and some families without school children. Is there reason to believe that the mixed-use projects will attract a different balance of student to non-student families than the rest of the housing in the city?

    Or is the issue that the mixed-use residences generate less tax revenue than existing housing?

    Or is the issue that increasing the number of students will push us over the edge of capacity, requiring us to build more classroom space?

  2. George Southern on February 9th, 2009 7:20 pm

    Andy, thank you for your questions. As a new member of the Economic Development Authority, you are to be commended for seeking the community’s pulse, which you do in a very calm manner. I don’t claim to be an expert on the questions you raise, but the following is my understanding of the situation. Others may wish to provide their own take.

    I see your main question essentially as: Why the fuss over mixed-use development? Why look at it any differently than the rest of the city’s housing?

    Here’s my answer: Because the recent mixed-use projects have, I believe in every case, been built on what was previously designated as commercial property, not for residential use. Even if that commercial land was vacant, it was not property where someone could live and send their children to school. As the above article points out, the City is in a precarious financial position, and as the tax base shifts further toward a residential component, the tax burden necessarily does as well. Over the past several years, the City has authorized construction of hundreds of new residences on commercial land. Yes, the nominal term is “mixed-use,” meaning there should be new tax revenue from the commercial side as well. But when a building is 10 stories high, and only the ground floor is commercial, that’s not much of a “mix” (even less so when the commercial storefronts are vacant).

    I understand that the City’s cost to educate 1 student is now in the neighborhood of $19,000 per year. It is no secret that many people are interested in living in Falls Church because of our schools’ superior ratings. So developers have seen a gold mine here. Even in a down market when no one wants to buy a condo, developers can make a lot of money by building high-rise rental apartments. That’s why groundbreaking is to begin next month on the Northgate apartment complex (on what was formerly mostly commercial real estate).

    So, to return to your questions, the issue is not whether mixed-use development will generate less tax revenue than existing housing. It’s not even really over whether we will need to build more schools. (More students cost money even in existing facilities.) The issue is that mixed-use construction on formerly commercial land is tilting our already dangerously skewed residential/commercial tax base toward an even higher residential component. As the City’s Chief Financial Officer warns, this could become unsustainable.

  3. Andy Rankin on February 10th, 2009 2:49 pm

    George, thanks for your take on things. All that makes sense to me – I guess the part of the equation I’m missing is what residents end up living in these apartments and condos?

    For example, if 70% of the residents of Pearson Square do not have kids going to the schools then we’re getting tax revenue from them but we don’t have to spend it on schools (obviously there are other things we have to spend some of that revenue on). It gets complicated, but it at least seems possible that the net revenue generation of Pearson Square is better than what we were getting from the old duck pin bowling alley – even if the retail component stays empty.

    Now, if 99% of the residents of Pearson Square have kids in the public schools then clearly it’s creating a pretty big burden. Is there any way to get these numbers?

    I will say that I’m generally in favor of mixed use development because I personally like the vibe of a city where people live, work, and shop all in the same area. I’m sure a case can be made that over time a mixed use approach could help us attract more business to the city – but I can also see the risks.

    I’m not sure what, if any, alternatives there were to something like the Pearson Square development. If the main alternative was to leave the bowling alley there then I think the right choice was made. Also, I’m sure the Tax Analysts building generates a lot of revenue for the City.

    Anyway, now that I’m on the EDA I hope to have more insight to how some of these things work. I certainly want to make sure the City survives and prospers (including the schools, which one of my kids will be attending in the fall) so I’ll be doing what I can to promote favorable development in the City.

  4. Gary on February 11th, 2009 11:36 am

    I would think that Transwestern’s residential rental company could give you the number of school age children living in Pearson Square. It would be a very interesting exercise to see what the actual mix of Person Square is. I would guess that it is much less that the number of three bedroom houses you could place in the same acreage.

  5. Barry Buschow on February 16th, 2009 11:23 am

    The issue anymore is not school costs. We will see school costs even if the population should receed. The issue is how do we get meaningful new business in the city. The EDA has been tackling this problem for years and has leaned much. Now we must use the tools ourselves and do the things that a Fairfax County does and does successfully recruiting and targeting businesses, to first fill the retail inventory we have created and then to expand it in a manner that is sustainable for our little city. At the same time we must create inventory that is in scale and adds character to the city, where you can park onces and shop…….and become a destination….not a massive drive through…………The subject is complex, but do we have the horsepower to tackle it??

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