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Economic Outlook Grim

Things are going to get worse before they get better. That was the message Fairfax County’s Chief Financial Officer Ed Long delivered to the Board of Supervisors Aug. 5, the Board’s last meeting before its summer recess, as supervisors discussed the county’s budget during FY ‘02.

The county received $13.3 million less than it had projected during FY ‘02, which ended June 30, because revenue from sales tax and interest in investments were lower than expected. Revenue from the state last year was also $10.5 million less than projected.

Long said the FY ‘02 budget had been approved with the expectation that the national and the state economy would bounce back from the economic slowdown that started before Sept. 11.

“We assumed there would be a certain level of economic recovery,” he told the supervisors. “That recovery has been anemic at best.”

The economy grew at a rate of 1 percent last year, he said, slower than the projected rate of 5 percent.

“THE FORECAST that we’re seeing is that [the recovery] is still going to be moderate,” he added. “We’re still waiting for it to take place.”

The county has redrawn the budget for FY ‘03, the current fiscal year, to take the slow recovery into account.

“Things are continuing to deteriorate,” Long said. “We have to be very cautious how we proceed.”

Despite the slow recovery, the county ended up with $42.14 million more at the end of the last fiscal year than it had anticipated. According to Long, this is primarily due to reduced spending by county agencies and an increase in revenue from the real-estate and property tax. He attributed that increase to the county’s more aggressive collection of delinquent taxes.

Taking into account expenses for which the county has not been billed yet and the $13.3 million loss in revenue, the county had $600,000 left over from last fiscal year. Of that, $240,000 was placed in the so-called “rainy day fund,” and $180,000 was directed toward the public schools.

Supervisors said they were dismayed by the bleak economic outlook. Board Chairman Kate Hanley (D-At large) said the reductions in revenue were “truly staggering.”

“It’s going to be very difficult,” she added, noting that the economic situation for the county is actually worse than during the recession of the early 1990s.

Back then, she said, “we had more cushion than we do now. … We have abolished positions.”

In the past decade, the county has added 130 facilities to help serve the 180,000 new residents but has added fewer than 100 positions.

“Our budget is going to be strained again next year,” warned Supervisor Elaine McConnell (R-Springfield). “I don’t want people to be shocked again.”

HOW WILL the economic outlook affect the real-estate tax rate? After double-digit increases in assessments last year, the Board cut the real-estate tax rate by 2 percent and directed the county executive to prepare a budget that includes additional rate cuts if assessments continue to increase.

As the housing market remains very strong, it is likely that assessments will increase again this year, which might force the Board to cut the amount of income from one of the few sources of revenue it has control over. The real-estate tax, which is set by the Board, is the single largest source of income for Fairfax County. This year, 57 percent of the county’s income is coming from the tax.

Hanley would not speculate on potential changes in the real-estate tax rate next year, saying she would wait until the real-estate assessments are completed in early 2003. But she added that the heavy reliance on real-estate tax revenue made it necessary for the county to diversify its revenue stream. She cited November’s referendum on raising the sales tax to finance transportation projects as a first step in this effort.

“We’re stuck between a rock and a hard place,” said Supervisor Sharon Bulova (D-Braddock), who chairs the Board’s Budget Committee. “It’s a difficult situation because while we’re experiencing a diminished revenue stream from every other source, the real-estate assessments are still high.”

Bulova said lower real-estate tax rates in light of rising assessments was a guarantee.

“It’s something we have to do because we don’t want to impact homeowners,” she said. “We don’t want to drive them out of the county.”

A SYSTEM OF USER FEES for some county services could be implemented to offset the loss in revenue, she added.

But a real-estate tax rate cut is far from a given, said Supervisor Gerald Connolly (D-Providence).

“We can’t guarantee anything yet,” he said. “If we fall back in the recession, all bets are off on what could happen. … We’re not going to jeopardize essential services, the schools and public safety.”

Connolly also addressed a warning to the schools. “I would hope that that would be a sobering reminder to would-be claimants in the budgets that we’re not going to have a lot of money in the budget,” he said, noting that the school system has already spent the $12 million windfall it announced at the end of FY ‘02.

“How is that prudent fiscal policy?” he asked. “[School Board members] all could use a good refresher course in managing a fiscal budget.”