Local governments in the Washington area are generally in good fiscal health despite the uncertainties of the national economy, but they are going to have to make difficult economic decisions and politically painful choices soon.
Aided by declining school enrollments and by rising prices and property values that boost tax revenues, local jurisdictions have balanced their budgets without major tax increases or the kinds of service reductions that would arouse public dissent. Even the District of Columbia, chronically short of cash and saddled with a cumulative deficit of $184 million, expects to end the current fiscal year with a surplus because of rising tax revenues.
The suburban counties and Alexandria have generally retained their favorable credit ratings, and were actually able to reduce their property tax rates for the current fiscal year.
Prince George's County, its resources limited by the TRIM charter amendment, and the deficit-plagued District face special problems, but even they have been able to maintain essential services while trying to shave costs. At the other end of the scale, Fairfax, Montgomery and Arlington counties are benefiting from the affluence of their residents as real estate values soar, sales generate tax revenue, and new industries and shopping centers expand the tax base as the relatively small percentage of low-income residents limits the demand for public services.
James P. McDonald, deputy county manager and chief financial officer of Fairfax, says, "The fiscal health of the county government is superb." In Montgomery, Finance Director Albert W. Gault says, "We are in very good shape financially." Arlington's chief fiscal analyst, A.S.(Tony) Gardner, says his county is "very healthy economically and financially," as shown by four consecutive years of property tax reductions that have cut the rate from $1.43 per $100 of assessed valuation to 96 cents.
But three dark clouds hanging over the District and all the suburban governments threaten a fiscal storm that could break out early next year:
Cuts in the federal budget, which will reduce funds to state and local governments for welfare, health care, transportation and education.
Probable revenue loss as a result of the new federal tax bill.
Record interest rates, which will either greatly increase the cost of borrowing for construction projects or force local governments to defer long-planned highway, water, sewer and health-care projects.
The full impact of the federal budget cuts is expected to be felt only gradually as the new spending levels are imposed over the coming year. But when they are in place, they will force the local governments either to abandon some public services or to pay for them out of their own revenues.
As Arlington County Board members John G. Milliken and Ellen M. Bozman wrote recently, "the hard decisions are yet to ber made. In future years, programs previously funded by the federal government will have to compete with other local programs for limited resources . . . Most people want services continued, but no one wants taxes increased, and new development will not provide an easy out. This essential dilemma will face local government throughout the 1980s."
One major difficulty all the local governments confront is trying to plan their future budgets without firm data on the full scope of the budget cuts and revenue losses. Last month, a group of local finance and budget officers calling themselves the Professional Urban Management Association of the Washington Metropolitan Area, or PUMA, met to compare notes, and found that each jurisidiction is making different projections on the impact of the federal budget reductions.
According to Diana Carsey, a financial planning aide to D.C. Mayor Marion Barry, who organized the meeting, Arlington has a $1 million contingency fund to pay for services no longer financed by the federal government; Fairfax has reserved $7 million; the city of Rockville has set aside $100,000; but Prince George's and Loudoun counties have not reserved any funds to compensate for the loss of federal grants.
In the District, Carsey said, her initial projection of more than $60 million in lost federal funds has been revised downward to about $50 million, based on the spending levels authorized by Congress in the budget reconciliation bill. She said, however, that actual federal appropriations will probably be even less than authorized, especially since the Reagan administration is making a new effort to reduce the anticipated deficit, and the revenue loss to the District could be $70 million.
In Maryland and Virginia, estimates of reductions in federal aid range upward from $50 million in each state, and it is not yet clear how much, if any, of that loss will be absorbed by the state governments and how much will be passed down to the local jurisdictions. In addition, the White House is reported to be planning to call for reductions in -- and eventual elimination of -- federal revenue sharing with municipalities in its next round of budget cuts.
According to a report by the Metropolitan Washington Council of Governments, cuts in federal aid to education could cost Washington area local governments $43 million in fiscal 1982, and reductions of mass transit subsidies could eliminate another $28 million. "Reductions have been identified in public assistance programs such as welfare, food stamps and housing for a total of $24 million a year," the report said. "There are other programs for which the reductions cannot yet be estimated."
The COG report said the potential impact of the federal budget cuts on local government goes far beyond the loss of direct aid and program grants. COG said the federal government could eliminate as many as 12,000 federal jobs in the Washington area over the coming year, reducing the spending power of the affected families and also reducing the sales and income tax revenues they would have produced.
Also uncertain are the scope and timing of the revenue loss that will be caused by the new federal tax law. It seems certain that both Maryland and Virginia will lose tens of millions of dollars in tax revenue, but they will not begin to feel the real impact until they are into their new fiscal years, which begin next July. The overall impact on the District is likely to be less.
Virginia and Maryland are among the many states whose tax codes are linked to the federal code, so that their revenues automatically fall as federal tax rules are liberalized. By adhering to the federal formula for depreciation of business assets, the states stand to lose tens of billions in revenue over the next five years.
In addition, reductions in personal federal income taxes will also affect state tax revenues, because Maryland and Virginia use the federal adjusted gross income as the basis for calculating their state income tax. Montgomery and Prince George's counties are also likely to be affected because they count on the revenues from a 50 percent surcharge on the state income tax.
The District of Columbia, which is not heavily industrialized and does not link its personal income tax to the federal formula, stands to lose only about $2.5 million in tax revenue in fiscal 1982, according to finance and revenue director Carolyn Smith.
In Virginia, state officials have projected a revenue loss in the corporate income tax of $16.5 million in 1982 and $35.1 million in 1983. Maryland officials have not yet made detailed projections, but a similar impact is inevitable unless the state legislature rewrites the tax laws to cut the state's link to the federal formulas. That would amount to a major tax increase in an election year.
The third source of potential difficulty for local governments is the high cost of borrowing. County and city governments and regional agencies such as the Washington Suburban Sanitary Commission routinely borrow money, through long-term bond issues, to finance capital projects, but the cost of doing so is approaching prohibitive levels, local officials say.
Montgomery County, for example, which has the highest possible credit rating, sold bonds at 4.31 percent 10 years ago and at 5.16 percent five years ago, but is now facing interest rates approaching 13 percent. This winter it is scheduled to float $85 million in bonds.
County executive Charles W. Gilchrist told a congressional committee recently, "We actually paid more than $6 million in 1981 to borrow $70 million," twice what it would have cost 10 years ago.
"We have just witnessed 11 consecutive weeks of increases in interest rates to be paid by municipalities, seven of them each a record high," he said. "In effect, the increase between 1979 and March 1981 cost the county more than $2 million in interest payments in the first year of the bond's life."
The choice the county faces, he said, is to raise property tax rates to pay the interest charges or cut back on needed construction projects.
Maryland Gov. Harry Hughes complained recently that the state's borrowing costs have doubled despite its excellent credit rating. Maryland is planning a $120 million bond issue in October, and if the patterns of earlier sales this year are followed it may have to pay interest rates approaching 10 percent. Three years ago the state was borrowing at 4.7 percent.
"All communities are facing a weak market for municipal issues and forbidding interest rates," said Arlington's Gardner. He said Arlington is tentatively scheduled to sell $10 million in bonds this winter, but he would consider substituting bond anticipation notes if interest rates remain at their current levels.
Those notes would be short-term, so that even if the rates on them were very high the impact would be limited; if interest rates subsequently went down, long-term bonds would be issued at the lower rate and the short-term debt retired out of the bond proceeds.
In Alexandria, budget director James Randall called the city's overall fiscal condition "healthy," but he was not optimistic about the bond market. "We anticipate issuing bonds some time next summer," he said, "and obviously, market conditions will have some effect on the timing. Thank heavens we don't have to go out with a bond issue right now."
The interest rates present a special problem for the District. The city has never issued any bonds; it does all its capital borrowing from the U.S. Treasury. With Treasury interest rates near record levels, the District's debt service costs are soaring.
The city's overall financial strategy calls for entry into the bond market for the first time during the coming year -- hardly an appealing prospect for a debt-ridden city government that is unlikely to command the high credit rating enjoyed by Montgomery and Fairfax counties.
All the local jurisdictions share the problem of how to finance the growing cost of operating the Metro transit system.
The Virginia jurisdictions will cover much of their obligation through an increase in the regional gasoline sales tax from 2 percent to 4 percent, effective next July 1. In Maryland, the state picks up 75 percent of the operating subsidy costs, but Montgomery and Prince George's must cover the rest. The District is obliged to pay its share of the subsidy out of its general fund revenues. For the 1982 fiscal year, which in the District begins Oct. 1, the cost is expected to be about $79 million, and city projections show that it is likely to rise sharply in subsequent years.