By Bill Turque
Washington Post Staff Writer
Monday, December 17, 2007
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.
"We can't just continue to afford a Cadillac level of service," said then-Supervisor Gerald E. Connolly (D-Providence), who would become board chairman in 2003. "We will have to settle in some cases for the Chevy."
Fairfax never did trade in that Cadillac. Nor did other area localities that depend heavily on property-tax revenue.
Now Fairfax has begun a "lines of business" review that will break its budget into hundreds of sub-categories for closer scrutiny and possible cuts. In Prince William, supervisors are considering eliminating $370 million in road improvements, and other outer counties still financing basic infrastructure face deepening challenges.
Connolly said that as long as localities are heavily dependent on property taxes -- they account for nearly 60 percent of Fairfax's general fund -- the boom-and-bust cycles are inevitable.
"When real estate catches a cold, local government budgets in Virginia are at risk of catching pneumonia," he said.
But given that everyone understands the predictable ups and downs of the revenue cycle, what did officials do during the good times to prepare for the bad? Some but not much.
Although voters preach the virtues of fiscal prudence, most don't want to do without the services that their taxes underwrite, lawmakers say. During his campaign this fall for the chairmanship of Fairfax's County Board of Supervisors, Republican Gary H. Baise continually denounced what he called the county's "spending frenzy." Connolly rolled easily to a second term.
Even some Republicans, who enjoy decrying the "tax-and-spend" habits of Democratic rivals, said pressure from constituents to part with big surpluses is overwhelming.
"The reality is, when additional revenue comes in, the nature of government is to spend it," said Prince William Board of County Supervisors Chairman Corey A. Stewart (R-At Large). Some goes back to residents in the form of lower tax rates to offset soaring property assessments. Much of the rest goes toward basic services and popular programs.
"The nature of elected bodies is that they are there to meet immediate demands," said Fairfax Supervisor Michael R. Frey (R-Sully). On the whole, he added, "we've been pretty prudent."
That last point is debatable, some say. One factor driving spending is the tendency of elected officials to treat employees as potential voters and campaign contributors. Since 2004, Fairfax firefighters, as a group the county's leading donor to local campaigns, have received annual pay increases averaging 10.8 percent, counting merit increases, for which half the force is eligible annually, according to county data.
Montgomery, which unlike Virginia localities can impose an income tax, derives only 33 percent of its operating revenue through property taxes. This year, it negotiated labor agreements that give some workers cost-of-living increases totaling 17 percent over the next three years in addition to annual step increases of 3.5 percent, one reason why spending has grown an average of 7.8 percent annually since 2001. The accord was finalized this spring by County Executive Isiah Leggett (D) but is largely the legacy of his predecessor, Douglas M. Duncan (D).
"This is what drives the budget: salary and benefit packages," said Andrews, who called the pact "larger than necessary."
Other lawmakers said bureaucratic flab persists despite efforts to reduce it.
"If you look at the world through the eye of the bureaucracy, every program is wonderful and serves an essential public need," said Fairfax Supervisor T. Dana Kauffman (D-Lee). He says that the county could save money by merging the information technology, human resources and personnel departments.
But officials from area counties said they've hardly been using the tax windfall to pave the streets with gold. Loudoun has built 34 schools in the past 15 years to accommodate explosive enrollment increases.
Since 2001, half of Fairfax's $1.1 billion increase in property-tax revenue has gone to schools. The county has also built -- and spent the money to staff and operate -- three fire stations, two libraries, a police station, a shelter for homeless families and 41 new or expanded child-care centers. Fuel costs have risen 107 percent during the same period.
But the counties in question are not down to their last dime. Fairfax, for example, has two reserve funds, totaling nearly $170 million, that it is required to maintain at 5 percent of the general fund. There are specific guidelines governing their use, and it is possible, although not likely, that officials will tap into them. Draining cash reserves would make Wall Street nervous and jeopardize the county's ability to borrow at advantageous interest rates.
In winter 1996, Fairfax supervisors heeded Leidinger's message. They reduced bus service and subsidies to single parents, closed some libraries and shuttered some government branch offices. They also raised the tax rate by seven cents.
But the supervisors didn't much care for the messenger. They fired Leidinger the following October.
Staff writers Kristen Mack, Rosalind S. Helderman, Sandhya Somashekhar, Kirstin Downey and Ann E. Marimow contributed to this report.