ARLINGTON COUNTY, VIRGINIA County Board Agenda Item Meeting of November 14, 2006 DATE: November 8, 2006 SUBJECT: Fiscal Year (FY) 2008 Budget Guidance C. M. RECOMMENDATION: Provide guidance on the FY 2008 budget. ISSUE: Continuing to achieve the vision for the community by providing fiscally sustainable programs and services at a good value. SUMMARY: Arlington s diverse and balanced economy is strong. Healthy commercial and residential investment in the community continues. We have full employment and wages are high. The most noteworthy change in the economy over the past year has been reaching the inevitable and desirable plateau in residential values. After a 142% increase in value over the past five years, single-family and town home values have leveled this calendar year. Condominiums, which increased in value almost 200% in the same period, are currently seeing a market correction. Condominium values (excluding new construction) are currently showing a reduction in value of approximately 3% over the prior year, largely due to the number of new units on the market and the slowing of single-family home sales. Over this same period, commercial properties (including apartments) grew in value at much more modest rates and continue in the same, steady upward direction. If the current year trend continues, Arlington will begin to restore its 50/50 residential to commercial ratio, which was skewed by the recent super hot real estate market. Residential vs. Commercial Percentage of Tax Base 65% 60% 55% 50% 45% 40% 35% 59% 60% 56% 53% 59% 51% 52% 49% 48% 47% 44% 41% 40% 41% CY 2001 CY 2002 CY 2003 CY 2004 CY 2005 CY 2006 CY 2007 Residential Commercial County Manager: Staff: Mark Schwartz, Director, Department of Management and Finance Chuck Gubisch, Budget Director, Department of Management and Finance
The bottom-line: Arlington s balanced, mixed-use, smart growth policy continues to provide extraordinary stability for the County. This is most evident in real estate values, but spills over into our other highly diverse sources of revenue. Overall, Arlington tax revenues are expected to increase 3.2% in FY 2008, details of which are provided later in this report. In addition to locally generated taxes the most important component of the budget two other variables have a major impact: inter-governmental revenues and certain expense categories: Intergovernmental Revenues. In the current year we have experienced the frustration of the state s misguidance on federal human services funding and the loss of Community Development Block Grant funds. Given the rise in the federal deficit and anti-tax orientation of the Virginia General Assembly, we must assume that inter-governmental revenues will not keep up with either inflation or the service mandates imposed by state and federal governments. Expenses. Two categories of expenses create especially strong pressure on the Arlington budget. One is personnel, including healthcare. With full employment in the Washington region, all employers are challenged to be competitive in salaries and benefits. Arlington has traditionally distinguished itself by providing excellent healthcare for both active and retired employees. Rapid escalation in healthcare costs combined with accounting requirements to project long-term potential liabilities for retirees create a challenge. We are also completing the escalation of retirement contributions to the recommended actuarial level. The second category of expenditure is maintenance capital. We have made a strong investment in recent years in our long-term, bondsupported infrastructure and must continue our commitment to build a base of funding to sustain that investment. The convergence of these financial variables results in Arlington s ability to start from a very strong foundation. We must then make critical and strategic choices that provide for sustainability, a mix of services that supports our vision for the community, and good value. DISCUSSION. In the early preparation for the FY 2008 budget, I have operated from the following principles: Present a balanced and sustainable base budget within existing tax rates. Fully fund all debt, lease, and other contractual commitments including those that are subject to appropriation in the base budget. Add no new positions or programs supported by local tax revenues. Continue to increase our commitment to maintain infrastructure (maintenance capital). Provide the most sustainable compensation plan possible while retaining competitiveness in the region. Adjust fee and grant funded programs up or down, relative to available revenues. Comply with the Revenue Sharing Agreement with the Schools. Using these principles, particularly maintaining existing tax rates, will present challenges. A budget that maintains all current services at current levels should not be assumed. - 2 -
Recommendations for service reductions or elimination will be explicit so that the policy choices for the County Board are clear. Any revenue enhancements or service increases supported by new or expanded fees will be presented as policy choices for the County Board outside of the base budget. Our first effort, however, will be to create efficiencies that lower costs without reducing services. The recent change in healthcare administrator and options for employees is projected to reduce FY 2008 healthcare increases from 15% to as low as 0%, a savings of $4.0 million and, we maintain a high level of health coverage for employees and retires. We are also investigating efficiencies in wireless and desktop technologies and in fleet maintenance. Prior to the recent healthcare change, if we did nothing but continue with business as usual, we would have a projected gap between revenues and expenditures of $19.6 million without a market compensation adjustment for employees ($2.6 million for each 1%), without a retiree healthcare reserve (up to $29.0 million based on preliminary actuarial projections), and without an increase in maintenance capital ($6.6 million to achieve targets in the adopted Capital Improvement Program). BACKGROUND: The following provides current expense and revenue assumptions for FY 2008. Assumptions will continue to be revised until the County Manager s Recommended Budget is presented in February. After that, the County Board will receive two updates: the mid-year assessment in March and the third quarter assessments in April, which form the basis for County Board actions. For the recently completed FY 2006 budget, the third quarter projections used by the County Board in its April 2006 adoption of the FY 2007 budget were within 1.0% of the actual revenues received in FY 2006, ending this past June 30 th. Revenues As noted above, Arlington relies on a balanced and diverse mix of revenues. The working assumptions and most recent projections for each are outlined below. REVENUE CHANGE FY 2007 TO FY 2008 LOCAL TAXES % $ Change (millions) Change Real Estate Tax 3.4% $14.3 Personal Property 0.0% $0.0 Business Tax (BPOL) 4.0% $2.0 Sales Tax 3.8% $1.3 Transient Occupancy Tax 5.3% $1.0 Meals Tax 7.5% $2.0 Other Taxes 2.7% $0.7 Sub-total taxes 3.2% $21.3-3 -
NON-TAX REVENUE License, Permits & Fees (1.0%) ($0.2) Fines, Interest, Misc. 13.3% $2.6 Charges for Services 3.0% $1.1 State 2.1% $1.3 Federal (adjusted for LPACAP) 0.0% $0.0 Sub-total taxes 3.1% $4.8 TOTAL 3.2% $26.1 million Real Estate Tax: The growth in real estate assessment is slowing in CY 2006. The projections for CY 2007 real estate assessment growth used in the adopted FY 2007 budget were 5%. Revised projections are now 4.8%. Residential real estate assessment growth is expected to increase only 2% for CY 2007 and commercial real estate assessment growth is projected at 9% for CY 2007. Personal Property Tax: Current projections of personal property tax revenue are flat over the adopted FY 2007 level. Close to 90% of all personal property tax revenue is received by the County through the first part of November. Once assessment and revenue analysis is complete for the first quarter of FY 2007 the personal property tax revenue estimates will be revised in the Manager s Proposed budget. Business, Occupational, & License Tax (BPOL): BPOL tax revenue is generated by taxes levied on entities doing business in the County and are based on a percentage of gross receipts or fixed fee. This revenue source has been positive but fluctuating revenue over the last few years. For FY 2008, preliminary projections inflate BPOL revenue by 4.0% over FY 2007. Sales Tax: Sales tax revenue is the County s 4th largest revenue source. Arlington receives a local option tax of 1% on all items sold in the County. This tax has shown steady growth over the last several years. For FY 2008, sales tax is being projected to growth at the 7-year average of 3.8%. Transient Occupancy Tax: A 5.25% local tax is levied on the amount paid for hotel and motel rooms in the County. Since September 11, 2001 the hotel industry in Arlington has shown a strong recovery. Current average daily room rates are approaching all time highs. For FY 2008 it is projected that this growth will continue at 5.3%. Meals Tax: A 4% tax is charged on most prepared foods offered for sale. Growth in the economy and in the number of establishments in Arlington has significantly impacted the revenue generated by this tax in the County. For FY 2008 it is projected that revenue will grow 7.5%. Other Taxes: Other taxes collected by the County include cigarette, car rental, recordation, estate, consumption, and commercial utility taxes. Growth in these other taxes is projected to average 2.7%. License, Permits & Fees: Revenues in this category are levied to offset the cost of licensing certain trades, inspecting various types of construction, and providing related services. For FY 2008 this category is expected to decline due in large part to revenue losses in decal fees due to enforcement problems related to Fairfax County eliminating their automobile decal and fee requirements. Fines, Interest, & Miscellaneous: Fine revenue from tickets and court fees, interest income on bond and general fund investments, and other miscellaneous revenue sources - 4 -
are included in this category. Substantial increases in interest rates over the last two years have affected the interest income received. Charges for Services: This category encompasses revenues received for a variety of County services. Service charges are structured so that the users of a particular service are the ones to pay for a majority of its costs, as opposed to using general tax dollars to fund services that benefit a small segment of the population. Growth in this category assumes inflationary growth of these services provided. Intergovernmental Revenues: This category includes state and federal revenue received by the County. Arlington receives funds from the Commonwealth of Virginia for a variety of state-mandated and supported functions and services. The County also receives a portion of some revenues collected by the state. Most federal revenue is received in the form of grants. Beginning in FY 2007 the County will lose approximately $5.5 million in funding for a variety of human service programs. Budgeted Tax & Non-Tax Revenue Growth 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 8.1% 2.8% FY 2004 9.1% 4.1% FY 2005 7.8% 3.2% FY 2006 9.4% 6.0% FY 2007 3.2% 3.1% Budget Planning FY 2008 Tax Revenue Non-Tax Revenue Expenses As a full service local government, Arlington provides an extremely wide range of services that differ greatly in nature. We provide basic public works including water distribution, wastewater treatment, streets, and storm sewers. We provide a full array of public safety services, comprehensive and integrated human services, and extensive education and leisure services. We currently operate 65 county-owned buildings with 5 additional buildings being added by the end of the year and have services in 21 leased facilities. Consistent with this diversity of services, there is a diversity of expense pressures ranging from the cost of fuel and asphalt to the cost of software licenses. Most of these pressures can be managed in the normal course of events. Outlined below are the major pressures that apply to most of what we do. Personnel. The County has 3,436.8 full-time equivalent employees approved in the FY 2007 General Fund budget, the cost of which is 34% of the budget (55% if the school transfer is excluded). We are currently conducting a comprehensive review of employee compensation and benefits to assess how we can remain competitive in the Washington market and be financially sustainable. - 5 -
Salary: A typical budget would include a step increases that would increase the budget by 3.0%-3.5% (roughly $6.5 million to $7.6 million). Additional increases in the market pay line would cost $2.6 million per 1% increase. Health Care: A 15% increase in health care premiums (to keep pace with higher claims costs) would require an additional $4.0 million in resources. The change in healthcare administrator and certain plan changes envisioned for January, 2007, could reduce this increase to close to 0%. Retiree Health Care: If no changes are made to the County s benefit package, current actuarial estimates would require a significant increase in our annual premiums for retiree health care costs, currently running at a projected $8.5 million per year. An actuarial valuation of our current and future liabilities will be completed after the pending Compensation Study is reviewed. Defined-Benefit Retirement Plan. Employer retirement requirements as recommended by the most recent actuarial report an increase in employer contributions from 10.5% of salary to 12.6% of salary an additional $5.3 million (from $27.6.million to $32.8 million). Other Expenses. Operating expenses, in some instances, are controlled by multi-year contracts that require inflationary increases. Other expenses are affected by inflationary market increases beyond the control of the County agencies. Preliminary projections for operating expenses would include inflation on certain categories of non-personnel expenses and the full year impact of new and renovated facilities budgeted in FY 2007 for only a partial year. Additionally, the County is assuming that contingency accounts remain at current base levels (e.g., general contingent and affordable housing investment fund) and continuation of the set-aside of incremental recordation taxes for affordable housing programs. Additional expenses include: Metro. The County s contribution is based on the size of the Metro budget, and revenue support from user fees, state aid and gasoline taxes. The County s share will be determined based on the budget adopted by the Metro Board. The estimated costs for FY 2008 is $17.4 million, compared to $14.7 million for FY 2007 (18.4% increase). Debt service. For FY 2008, County debt service is projected to increase by $2.0 million to $48.2 million (4.3% increase), based on bonds already sold and those anticipated to be sold during FY 2007. Maintenance Capital (Pay-As-You-Go). For FY 2008, the County Board has adopted a Capital Improvement Plan (CIP) that plans $17.5 million for Pay-As-You-Go Capital spending. In recent years, one-time revenue sources, such as prior year fund balance, have been a primary source of capital funding. Better revenue forecasting has reduced the amount of these one-time funds available at year-end. Beginning in FY 2006, incremental tax revenue from the commercial utility tax rate increase and increases in ambulance fees were also used for capital investment. The FY 2007 capital budget is $10.9 million. An additional $6.6 million would be required to meet the CIP target (61.0% increase). Schools Revenue Sharing Agreement. The County Board and School Board have operated under a Revenue Sharing Agreement since Fiscal Year 2002. The current formula for FY 2007 allocates 47.7% of net local County tax revenue to the Schools. Based on a - 6 -
school enrollment increase of 40 students, the projected formula would share 47.8% of local tax revenues with the Schools for FY 2008. Subject to Appropriation Leases. The County enters into short term and long-term leases for a number of different County purposes. These leases are subject to annual appropriation. Unlike a typical lessee, the County Board is not able to legally bind future Boards. However, the County has always paid its debt obligations and is committed to meet these commitments each year. SUMMARY: Every year the development and adoption of the County s operating budget is challenging. The budget is where the County Board translates the vision and values and polices of the community into action. The discussion is always about striking a balance: obviously a financial balance, but also a service balance. Fiscal Year 2008 will be no different. - 7 -