The meeting marked the earliest starting point for an annual budget deliberation in Falls Church in the 50-plus year history of the City, and for good reason. The $7.5 million deficit, amounting to 11 percent of the $66.9 million size of current anticipated costs, even with hiring and wage freezes for both City and school employees, means that some combination of hefty tax rate increases and service, including employee, cuts is inevitable.

Perhaps the worst news that came out of Monday’s meeting was the prognosis by Falls Church’s Chief Financial Officer John Touhy that the deficit could easily be $3 million higher than the $7.5 million currently projected. That’s because the City does not yet know how deep cuts in federal and state contributions to its budget will be, how much health insurance and energy rates may go up, or how great the City’s obligation to state pension and retirement funds will be.

In addition, the City is counting on its annual $2.4 million “return on investment” transfer from its water system, but it does not yet know the outcome of a lawsuit against it from the Fairfax Water Authority challenging that practice.

The gloomy picture was exacerbated by Tuohy’s pronouncement that the following fiscal year’s budget “will not get any easier,” and that, assuming the beginnings of an economic recovery in 2010, it will take five to seven years for it to be complete.

It was little comfort, but important to underscore, that Monday’s presentation included data showing surrounding jurisdictions and the state and nation, as a whole, facing similar grim prospects. The state faces a $1.5 billion deficit by FY2012. Over 14 percent of U.S. mortgages are currently in arrears, and its getting even worse in the commercial real estate sector. Nationwide commercial rents are down 17 percent, Tuohy noted, and 50 percent in Manhattan. It’s so bad, he quipped, that Target has opened a store on Fifth Avenue.

Indeed, it is the collapse in the assessed value of commercial real estate in Falls Church that is the single greatest cause for the revenue shortfall in the projected budget. Assessments on the City’s 519 commercial properties are down an average of 18 to 20 percent, a level of decline matched by nine multi-family apartment complexes.

The fact that 2,384 single family detached homes in the City are projected to decline in value by only three percent has prevented an even further revenue gap, though the value of residential condominiums is projected to drop by 12 percent.

The assessed value of new construction has ground to a complete halt for commercial properties after

Assistant City Manager Cindy Mester told the Council and School Board members that alternative scenarios that are in play in the coming budget represent the parameters of the options, ranging from increases in real estate tax rates from zero to 25 cents (with one cent equaling $300,000 in the budget). Expenditure cuts could range from $7.5 million (based on current projections) if no tax rate increase is added, to $226,018 in cuts if the tax rate is increased from its present $1.07 to $1.32.

The choices will clearly fall somewhere in between those two extremes.

Concerns raised at Monday’s meeting centered on whether cuts in the transfer to the School Fund will be based on a strict percentage, or will be based on some formula devised by the schools to deal with issues of, for example, expected enrollment growth.

School Board Chair Ron Peppe said he hoped there could be “threshold funding” for the schools based on an “annual floor of funding based on per pupil costs, instead of “revenue sharing.”

Another issue pertained to the integration of the capital improvements (CIP) budget into the deliberations on the general fund budget. Council member Nader Baroukh argued that waiting until the  operating budget is adopted before considering the CIP would skew chances at the best possible array of expenditures, and the Council agreed to integrate CIP discussions into an exhaustive schedule of hearings and work sessions slated for the next five months.

The schedule released Monday was two full pages of single space, highlighted by the dates of the Superintendent’s recommended budget presentation to the School Board (Jan. 12, 2010), the report on final real estate assessments (mid-February), the City Manager’s recommended budget to the City Council (Mar. 8), the School Board’s budget adoption (Mar. 16), and the City Council’s final budget adoption (Apr. 26). In additon to a plethora of public hearings, work sessions and business meetings, two town hall meetings at the Community Center are included for Mar. 27 and Apr. 3.

Next week, on Dec. 9, City Manager Wyatt Shields will deliver budget guidance to department heads in the City government.