As Housing Slumps, Fairfax Budget Could be Worse than Loudoun

Officials Predict $220 Million Gap With Wide Impact

By Amy Gardner

Wednesday, December 12, 2007

A worsening housing market, including rising foreclosures, has rapidly pushed Fairfax County government into a budget crisis that probably will last several years, pinching spending by hundreds of millions of dollars on schools, public safety and human services, officials said yesterday.

The crunch on government spending is expected to be worse in other communities, including Loudoun, where housing values are slumping more dramatically and foreclosure rates are higher. But the news that Fairfax, an inner suburb with more stable property values and a robust job market, is suddenly feeling such profound consequences of the housing bust suggests that the effects on the regional economy are just beginning to be felt and could last for years, county budget analysts said.

“Things have shifted in a relatively short period of time,” Edward L. Long Jr., a deputy county executive, told the Board of Supervisors and state lawmakers from Fairfax at a legislative breakfast.

County officials put the budget shortfall at about $220 million and cited a series of telling statistics, including a steep drop in housing sales and a sharp increase in the number of houses languishing on the market. Most dramatically, Long said the number of home foreclosures in Fairfax County has jumped from 198 in 2005 to about 4,000 this year.

Loudoun supervisors are scheduled to get a report today on next year’s budget outlook.

A rise in foreclosures has been seen across the country this year as borrowers have faced the consequences of financing housing purchases with unconventional loans. Generally, the loans carry low interest rates that jump dramatically after two or three years.

Foreclosure rates remain dramatically lower in Fairfax than in other parts of the country, and they represent only one factor in the softening of the real estate market. But there is little argument that the impact on government services is direct: Fairfax County, Virginia’s largest jurisdiction with more than 1 million residents, depends on the real estate tax to finance 60 percent of its $3.3 billion annual operating budget. And real estate tax receipts rise and fall with the fortunes of the housing market. The average price of a house in Fairfax County was down 4 percent, to $500,462, last month, compared with the previous year, Long said. And the numbers will probably worsen next year.

Taken together, the news translates into a bleak revenue forecast for county government for perhaps the next three years, he said. And that, in turn, will mean no new money for school programs, police or such social services as child-care subsidies and mental-health care. It also could mean that bond-financed capital projects such as schools, libraries and county-built roads could be curtailed to avoid unaffordable new debt payments.

“It’s grim and getting grimmer,” said Gerald E. Connolly (D), chairman of the county Board of Supervisors. “I’m worried about the impact on education.”

Stephen S. Fuller, director of the Center for Regional Analysis at George Mason University, agreed that flat revenues will probably persist. But Fuller noted that part of the problem is government spending habits, including a dramatic new reliance on residential real estate taxes. Now that the real estate market is correcting after years of double-digit inflation, governments need to rethink their spending, he said.

“The cost of services is going up at a rate probably double the rate of inflation,” Fuller said. “Fortunately in Fairfax, the market will come back sooner than other places, but it’s going to be tough moving forward, and ’09 may be the worst year.”

Long said the county faces a shortfall of about $120 million for the spending year beginning July 1, considering only such programmed increases as salary raises and higher fuel and construction costs. The school budget, which is financed by the county, faces an additional $100 million gap.

School spending accounts for more than half of the county’s operating budget, so the only way to close those gaps is to reduce spending or raise county taxes. Connolly warned Schools Superintendent Jack D. Dale that he hopes to keep Fairfax’s tax rate at its current level of 89 cents per $100 of assessed value.

Dale agreed that some belt-tightening would be necessary but would not say what programs he is considering trimming.

“We have been well aware of the continuing decline in the revenue forecast that the county faces for some time,” he said. “The budget that I present on Jan. 10 will reflect some significant cuts to recognize our current economic outlook.”

Long offered some good news in the health of the county’s commercial property base. He also noted that Fairfax continues to enjoy job growth, unlike in the recession of the 1990s, when county revenues remained flat for nine years.

The turnaround in the county’s financial fortunes has been rapid. In recent years, Fairfax has been able to absorb higher fuel and construction prices, the cost of educating new children and other growing pressures on government services because property values, and in turn tax receipts, have grown so dramatically. Property values grew 23 percent in 2006 and 21 percent this year. In 2008, values are expected to be flat, and they are expected to drop 4 percent in the subsequent two years.

Similarly, county revenue grew almost 10 percent in 2006 and more than 4 percent this year. But Long predicted that county revenue will grow minimally next year and not at all the following two years.

By 2011, with no program cuts, the county would face a budget shortfall of more than $500 million if the trend continues, he said. And with each penny on the real estate tax rate generating $22.7 million, it would take more than a 20-cent increase to generate the money needed to close that gap.

Staff writer Kristen Mack contributed to this report.

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