One-Two Punch To Area's Budgets

Housing Woes, Past Spending Test Officials

When the Washington area's housing market boomed at the turn of the century, so did local government spending. Now a cooler market is creating budget gaps in a region that until recently was spared leaner times.

The troubles have been accelerated by the collapse of risky subprime mortgages, which have spawned thousands of foreclosures. Fairfax County officials said last week that they face a $220 million budget hole for the fiscal year that begins July 1. It is part of the area's nearly $1 billion shortfall, which includes budget gaps in Montgomery, Loudoun and Prince William counties.

Other jurisdictions, including Prince George's County, are still running the numbers but will almost certainly join their neighbors. Arlington County officials expect their broad commercial tax base to carry them through as the housing market declines. Only the District, with its heavier reliance on income tax and revenue from a still-robust commercial real estate sector, remains fat with surpluses.

Localities are paying the price of profligacy during the good years, critics say. Area budgets mushroomed from $3.7 billion in 2000 to more than $6.3 billion this fiscal year. Spending in Arlington has risen an average of 7.4 percent annually, or twice the rate of inflation. Fast-growing Loudoun's outlays have tripled in that period.

A record $401 million deficit predicted in Montgomery "is not a revenue problem," said County Council Vice President Phil Andrews (D-Gaithersburg-Rockville). "Our revenues are solid and strong. It's primarily the rate of spending at an unsustainable level that reveals itself when the economy slows down."

Signs of the housing slowdown have been in plain view for a couple of years. But the mortgage crisis, which experts say has yet to bottom out, has transformed what local officials had expected to be a cyclical dip into something more protracted, possibly a recession.

The winter budget season always features political theater, in which contending factions rail about proposed cuts and tax increases before coming together to cut a deal. Some government watchdogs said they view the fiscal scenarios with a cynical eye.

"Quite frankly, it looks like they're trying to make the situation look worse than it is so when they fix it, they will look smarter than they are," said James T. Parmelee, president of Republicans United for Tax Relief, a Fairfax group.

But the implosion of the home-finance sector has injected an element of bona fide anxiety into this year's deliberations. The effects of foreclosed properties can linger in a neighborhood for years, driving down the sales prices of surrounding properties, depressing assessments and, ultimately, limiting tax revenue.

Loudoun officials, facing a deficit of at least $251 million, estimate that without cuts in spending, they would have to raise the average home's property taxes by $940 a year. School districts, accustomed to relatively generous annual increases, are bracing for much slower rates of growth. In Montgomery, Superintendent Jerry D. Weast has proposed a budget with the smallest annual increase since 1997. John E. Deasy, head of the Prince George's school system, has told employees not to expect raises.

The budget angst is a throwback to the 1990s, when many governments faced a similar crunch. Fairfax, for example, was on the ropes in winter 1996. A flat housing market had driven down property-tax revenue, creating a $200 million gap in the budget.

The county executive at the time, William J. Leidinger, recommended deep cuts in services and a thumping tax increase. The Board of Supervisors, stunned by the austerity of Leidinger's plan, acknowledged that even in a county where government pockets were historically deep, it needed to put new limits on spending.