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Tightening the Purse Strings

Mayor's tax restructuring package included in town manager's proposed budget.

Borrowing heavily on the mayor's call for tax restructuring, Town Manager Steve Owen unveiled his proposed fiscal year 2004 budget at a Monday morning press conference.

The proposal, if adopted, would reduce property tax rates by 4 cents and, to help pay for the real estate tax reduction, would institute a 2.5 percent meals tax on Herndon restaurants.

In drafting the budget, Owen said he was looking to offset skyrocketing residential real estate assessments and a corresponding drop in commercial assessments while still providing the "high level of service expected by residents" and continuing the pursuit of major capital improvement projects.

"The fiscal restraint that has characterized the town's past fiscal policies is maintained and will help ensure the town's viability, which is critical to the future growth and health of the community." Owen said, in his letter to the mayor and Town Council.

The total proposed budget is $35.4 million. The figure represents a 5.1 percent decrease from last year's amended budget, or a 3.8 percent decrease from the adopted budget of $36.7 million.

The recommended FY 2004 budget also includes $6,666,700 for the capital improvements program (CIP) projects in all funds, down from $9,413,400 for CIP projects in last year's 2003 budget. According to the town manager, a $7.3 million bond issue will fund construction of the fourth phase of the Herndon Community Center and a new Herndon Police station.

FOR OWEN, who wasn't sworn in as town manager until February, entering the budget process mid-stream was like "trying to jump on a moving train." Now completed, Owen said he is happy with his first Herndon budget.

Owen's budget proposes a dramatic restructuring of the town's tax structure, including the adoption of the mayor's controversial 2.5 cent meals tax proposal. Last week, the council passed one of the mayor's suggested measures when it voted to enact a $3 per month cell phone user tax.

Town Finance Director Mary Tuohy stressed the importance of the new revenue sources. The meals tax would, Tuohy said, generate an additional $1.5 million into the town's coffers.

"I think 2.5 is a good and fair number," Owen said, acknowledging that the average meals tax is between 3 and 4 percent. "The trick is to find a number you can get consensus about."

Each proposed tax must be approved separately by council and each one must get at least five yes votes from the council of seven.

To date, several members of council, including Vice Mayor Carol Bruce, have been reluctant to embrace the proposed meals tax. "My position on that hasn't changed," Bruce said on Monday. "As for the rest of the document, I will refrain from comment until I have read it fully."

Council will get its first say at Owen's proposed budget during the April 15 work session.

Asked what would happen if the meals tax was voted down, Tuohy shrugged. "I guess the council has to decide that."

Owen said, while he strongly supports the meals tax, a revenue source in all of the state's 40 cities and major towns, there are other options should the council decide to pass up on the $1.5 million in new revenue. "Clearly, we couldn't be as aggressive on rolling back the real estate taxes," Owen said. "We would need to revisit other taxes, as well."

The finance director said she believed the tax restructuring proposal was sound and necessary. "The net fiscal impact is we have $830,000 more coming into the town next year, but you have to balance that off with the fact that a lot of our other major revenue sources are decreasing quite dramatically," Tuohy said.

In addition to the meals and cellular taxes, the proposal also recommends raising the town's cigarette tax by 5 cents.

A reduction in real estate tax without a meals tax, or similar measure, to augment the lost revenue could threaten the town's bond rating, Tuohy said. "To reduce the real estate tax and not replace it with anything else and not have any other funding sources than we already have than they are going to start asking us, 'What are you doing? What are you doing?'"

The bond rating agencies, like Moody's and Standard & Poor's, like to see communities having multiple sources of revenue available to them, Tuohy said.

"LOCAL ECONOMIC conditions have made this the most difficult budget to balance since the early 1990s, when a recession forced layoffs and a restructuring of the town's work force," Owen said. "Most local jurisdictions would be very pleased with roughly half of its tax base in commercial property. But when a large part of that is office space sitting empty, the tax revenue loss to the town can be dramatic"

"In a nutshell, the town is facing some of the economic realities that some other high-tech businesses have faced over the couple of years. Some of our major revenue sources are our business license fees, transient lodging taxes, the town's share of the state's sales tax. Those three revenue sources have decreased quite a bit. The business license tax, for example, in March was $1 million less this year than it was last year," said Tuohy.

A lone voice on the council, Connie Hutchinson has argued against a cut in the real estate, citing the current economic climate and the number of big ticket items on the town's wish list.

"I think [Hutchinson] has a valid point, but I think the expectation for the tax payer is that there would be some relief," Owen said.

Given that residential real estate assessments rose 14 percent this year, while corresponding commercial assessments decreased by 7 percent, Owen agreed with the mayor and a majority of the council that Herndon homeowners did not need to carry the burden of the today's sluggish economy "on their shoulders."

"It needs to be equitable," Owen added.

If adopted, the reduction in real estate taxes would be the third such decrease since 1990 when the rate was lowered from 34 cents to 32 cents per $100 of assessed value. The town's real estate rate has not been increased in more than 30 years, according to personnel in the Town Manager's Office. The 4 cent decrease which would lower the rate to 26 cents per $100 would constitute the largest drop in over three decades.

"The average FY 2004 residential assessed property value in the Herndon area is projected to be $219,596, an increase of $24,915 over the FY 2003 average value," explained Owen, in his letter to council. "The average FY 2004 residential tax bill is projected to be $570.95, a decrease of $13.09 from the average FY 2003 amount."

With the current 30 cent tax, homeowners would expect to pay $87.84 more on their real estate property tax.

Agree or disagree, Herndon residents will have their say at the Town Council public hearings on Tuesday, April 22 and Tuesday, May 13, at 7:30 p.m., at the Town Council Chambers located at 765 Lynn Street.

"We want people to come out, most definitely," Owen said.