Central Va. localities bracing for cuts in next budget cycle

The budget outlook for local governments in Virginia has taken a pessimistic turn, as localities continue to cope with falling real estate values, a slow economy, and increasing uncertainty about support from the state and federal government.

More than one-third of the 118 local governments that responded to the annual survey by the Virginia Municipal League and Virginia Association of Counties say they expect to be less able to meet their financial needs in the next budget year than they are today. Only 4 percent expect the situation to be better.

Their responses reflect the outlook in July, before the national economy faltered again and a bitter political battle over the debt ceiling set the stage for more than $2 trillion in potential cuts in the U.S. budget over the next 10 years.

"That's a lifetime ago compared to what's happened with the economy," said Neal Menkes, director of fiscal policy at the municipal league.

Localities responding to the survey had been feeling better about their fiscal prospects, with 23 percent saying that they were more able to meet their financial needs this year than last and 20 percent saying they were less able.

But next year looks gloomier for local governments, which have borne much of the brunt of budget cuts since the recession began. Local government employment is essentially the same as it was in fiscal 2007.

Federal stimulus funds have softened the blow, but that money won't be available in the two-year budget that Gov. Bob McDonnell will introduce in December or in the budgets that localities will adopt next spring.

Localities also are bracing for potentially big increases in teacher pension costs, as the Virginia Retirement System prepares to certify employer contribution rates on Thursday for teacher and state employee retirement plans.

Goochland County has put aside $600,000 this year in anticipation of higher rates for teacher pensions, a cost shared by the state and local governments.

The price could be especially high for Goochland because the county pays 80 percent of the cost of public education, including retirement contributions. Henrico County, in contrast, pays about 44 percent of the costs.

"Goochland is in the worst-case scenario," said John Wack, deputy county administrator for financial services.

Wack called the potential increase in teacher-pension costs the county's biggest concern for the fiscal year that will begin July 1.

"The moderate rate increase in FY2012 was challenging enough, but a major increase in FY2013 would probably need to be offset with a tax rate increase," he commented in the survey.

This year, localities have relied heavily on short-term solutions to tighten budgets — deferring capital projects, maintenance, and replacement of equipment; eliminating vacant jobs or leaving them unfunded; freezing salaries; and drawing on reserves.

Richmond alone eliminated or left unfunded 196 positions in this year's budget. The city was among 37 localities responding to this year's fiscal survey that eliminated 309 full-time positions and left unfunded more than 500. Most of those jobs were in public schools and health and human services.

Still, the number of positions dropped represents a substantial improvement over last year, when localities said they had eliminated or left unfunded 5,000 full-time jobs. "They're not in recession mode any more," said James J. Regimbal Jr., a fiscal consultant who conducted the survey.

But there also are fewer vacant jobs left to cut, as local governments attempt to avoid laying off employees. "They know that the most difficult thing to recover from is the loss of your workforce," Menkes said.

The deferral of capital projects and maintenance also is tough to sustain, local officials said.

This year, Hanover County deferred replacing the heating, ventilation and air-conditioning system in its public safety building for three years and replacement of elevators for two. It has delayed $5.4 million in planned public utility projects and reduced spending on solid waste equipment.

Deferred projects "may not even be part of the base budget anymore," said Deputy County Administrator Joseph P. Casey, who oversees finance. "There may not be anything in the budget to defer."

Henrico froze all capital projects in 2009 and 2010 but has resumed work this year, buoyed by the sale of bonds from a voter referendum six years ago.

Chesterfield County cited "deferred capital needs and funding for education" as its biggest spending concerns in the coming budget year.

Education funding is especially worrisome to Chesterfield officials, who don't know what to expect from McDonnell and the General Assembly.

County Administrator James J.L. Stegmaier said, "The biggest vulnerability we have is the apparent failure of the commonwealth to find solutions to its fiscal difficulties, and the tendency of the commonwealth to shift their budget problems to the local level."

For example, localities are wary about state discussion of possibly requiring counties to maintain their secondary roads, using money from state maintenance funds for cities and towns.

And they're concerned about funding of the retirement plan for teachers, which has dropped below 60 percent in its funded status as the state deferred hundreds of millions of dollars in contributions last year in order to balance the budget.

Local governments also were able to avoid millions in pension payments, but they know rates are likely to rise substantially as the state attempts to restore money to the retirement system.

"The biggest concern is the underfunded teacher plan," said Dean A. Lynch, deputy executive director of the Virginia Association of Counties.

The likelihood of substantial rate increases for teacher and state employee pension plans also will put pressure on the rest of the two-year budget that the governor and assembly will adopt next year.

If the state reduces its funding, localities don't have many places to turn for revenues. Real estate taxes account for half of local revenues, but property values are expected to be flat at best in the coming year.

Goochland expects its property values to be 2 percent lower in January than a year earlier. That would be the third consecutive year of declining values.

Real estate values also are continuing to decline in Henrico, especially in the commercial market, which County Manager Virgil R. Hazelett described as "nonexistent."

Even some bright spots, such as increases in sales and meals taxes, aren't enough to reassure county officials in preparing a budget they'll have to live with through the middle of 2013.

"I can't balance a budget on that," Hazelett said. "It can go away very, very quickly."