Virginia Error Helps Fuel Wave of Red Ink in Falls Church

Falls Church is grappling with an unexpected budget hole that could force the small city to cut services, raise taxes and lay off employees.

In addition to falling property values and the poor economic climate, city officials said a major contributor to the $4 million surprise in red ink could be attributed to a mistake by state tax collectors: The Virginia Department of Taxation had wrongly credited a portion of sales taxes to Falls Church over three years although the money had actually been collected from businesses in Fairfax County. Even before the correction, city officials had forecast a 15 percent decline in sales tax revenue.

In a memo dated Oct. 5, Chief Financial Officer John Tuohy told City Council members that revenue in the city's $70 million budget had come in about 10 percent below projections, largely because of declines in real estate and sales taxes. Although the decline in home prices has leveled off, he said, the value of commercial properties has continued to plummet.

On the positive side, the city has spent about $2.9 million, or 4 percent, less than it had planned.

"We're not broke," Mayor Robin S. Gardner said Wednesday. "It's not affecting our bond rating, so it's fine. It's not affecting our ability to pay our bills, so it's fine."

Officials in the city have called on its 11,000 residents to help find ways to close the gap before a public hearing Oct. 26. Gardner said a tax increase in the next budget is possible, as are layoffs.

"Nothing's off the table," Gardner said. She said council officials were alerted to the problem about a week ago. Late Wednesday, officials announced that they plan to hire an outside expert to review the budgeting process.

In his memo, Tuohy said sales tax collections were $2.6 million below projections, with most of the falloff attributable to the state's error. The one-time correction is $1.4 million.