Local officials are already preparing for “one of the most challenging” budget talks in years due to inflation, the changing real estate market, and staff retention challenges.
Right before the Thanksgiving holiday, Fairfax County staff offered supervisors and the school board an early look at projected revenues, expenditures, and points of potential discussion as the county and Fairfax County Public Schools (FCPS) prepare to release proposed budgets early next year.
The fiscal year 2024 budget forecast that staff presented on Nov. 22 didn’t paint a particularly rosy picture, however.
Board of Supervisors Chairman Jeff McKay called the forecast “a real mixed bag.” County staff said that generated revenue remained “healthy,” but others weren’t so sunny.
“This is probably going to be one of the most challenging budgets in my 11 years on the [school] board,” Braddock District School Board representative Megan McLaughlin said. “It’s going to be a tough one.”
Springfield District Supervisor Pat Herrity concurred, saying there wasn’t “a lot of good news in here.”
As is the case across the county, the local real estate market has been slowing due to increasing interest rates and rising prices. While it increased from last year, growth is expected to flatten going forward for the rest of 2022 and into 2023.
Non-residential tax revenue is in even worse shape, at least partially due to the change in work-from-home habits resulting from the pandemic. It’s expected to increase by only 0.6% compared to last year when the growth was about 2.3% compared to 2022.
While hotel, retail, and apartment revenues are all expected to increase next year, office revenue is expected to decline between 5% and 6%, raising concerns among some supervisors and school board members.
Braddock District Supervisor James Walkinshaw said he has talked to companies in the county that have no intention of renewing office leases due to decreased need with more employees now teleworking.
He called it a “slow-moving crisis” that could create a “very significant hole” in terms of missing revenue.
“[This] is very troubling,” Walkinshaw said. “It’s a structural challenge now in our economy…I’m not confident we have our arms around what that challenge is going to look like over the next 5 to 10 years.”
New construction and transient occupancy (or lodging) tax revenue are also expected to grow, but at much lower rates than prior to the pandemic.
Real estate taxes are the largest source of revenue for the county, providing more than two-thirds of generated money. Last year, home values soared, while commercial tax revenue dropped, resulting in a 3-cent decrease in the real estate tax rate.
All told, revenue is predicted to rise by about $266 million, a 3.8% increase from last year, per the presented forecast.
However, revenue isn’t keeping pace with expenditures, due mostly to anticipated staff salary increases.
Between recruitment and retention challenges and inflation, an additional $159 million will be needed for salaries and benefits compared to the current budget — plus another $113.5 million for school staff. Adding in other costs, the county and FCPS are looking at a combined shortfall of about $125 million for fiscal year 2024, which begins July 1, 2023, staff said.
Since this is a baseline forecast, a number of county and school priorities were not taken into account, including infrastructure upgrades, increased investments in affordable housing, and an expansion of early childhood education programs.
As county staff and McKay both reiterated, the forecast is only an estimation subject to change.
“As the economic outlook is uncertain, staff is approaching FY 2024 revenue forecasting very conservatively,” the presentation said.
Adoption of the fiscal year 2024 budget remains six months away. Advertised budget plans for the county and schools will be released in February with final votes coming in May 2023.
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