The Loudoun County FY 2011 budget process promises to be one of the most challenging ever.  Too much spending and too much borrowing during the housing bubble years of the past decade has elevated spending to exorbitant levels.  County bureaucrats want to keep it that way with a proposed 10% tax hike on Loudoun homeowners.

In a recent video promoting his bloated $764 million budget proposal - $32 million more than the adopted FY10 budget - LCPS Superintendent Ed Hatrick stated that in a “normal” year he would have asked for a staggering $815 million.  He has become accustomed to such exorbitant increases and surely would have asked for that much, or more, had the BOS not provided fiscal "guidance" limiting his budget to a 5% increase in local tax funding.  To put $815 million in perspective, it is enough to fund enrollment growth plus 6% at a time when inflation is just over 2% a year.  It would require a 17% tax hike.  Today’s bloated budget is a direct result of too many of those “normal” years in the past 10 years.  The following table details the adopted school budget history, as well as projected budget “needs” from the FY10 adopted school budget document, which would reach $1 billion dollars by FY13! 

Factoring out growth, Loudoun is spending 69% more per pupil in FY10 than in FY00.  It is hard to draw a conclusion that the current school budget is anywhere close to being underfunded, even after the FY10 correction in which LCPS received its first decrease in funding in 18 years.  If funding had just kept pace with enrollment growth and inflation since FY00 (2.8% a year on average), the FY11 school budget would need to be only $631 million, instead of the $764 million Hatrick is asking for.  The general county operating budget has also been overfunded.

While the budget has grown because of population growth, there has been an astounding growth in per capita spending over the past 10 years.  More people, plus twice as much spending per person is a recipe for a fat budget!

The funding increases from FY00 to FY08 were anything but normal.  In fact, it could well have been the biggest run-up in spending ever.  Increasing the rate of spending on a per capita or per pupil basis at 3 times the rate of inflation is excessive and unsustainable without massive property tax increases.

Housing Bubble Revenue Fuels Unprecedented Budget Growth

All homeowners are aware of the numerous double-digit property tax hikes during the housing bubble era, but it is lesser known that the county became dependent on other taxes and fees related to real estate transactions and development.  They proved to be just as cyclical as the real estate market itself and when the housing bubble burst, revenues plummeted as depicted in the following graph.



Then there are revenue sources that rose drastically in the first half of the decade and have since tapered off.  Many of these were related to wealth generated by the housing bubble, such as sales, personal property and income taxes.  The state coffers were also overflowing, fueled by rising incomes and a state-level tax increase enacted during Governor Warner’s administration, which resulted in a big jump in state aid to localities.



The BOS was able to use rising property values as an excuse to raise the average tax bill by as much as 18% a year.  There was little outrage from homeowners blinded by their newfound wealth.  It was analogous to when Walt Disney Company stock was flying high and Michael Eisner received nearly a billion dollars in stock options, but shareholders did not care as long as the stock price continued to rise and they were making money.

After the housing bubble burst and other revenue sources either declined or were flat, the BOS turned to their good ol’ reliable ATM – Loudoun homeowners – to make up the difference and continue spending at the level they had become accustomed to.  The fact that housing values peaked in 2006 and have declined every year since was not a hindrance.  It was time to work the other part of the tax bill equation – the tax rate, which increased a low of 89 cents in 2006 to a proposed $1.40 in 2010.

While the soaring tax rate was bad enough for homeowners, it was particularly hard on business owners because commercial property values were still rising.  Is it a wonder so many businesses have folded over the past few years?  How is sharply increasing the cost of business going to help attract new businesses to Loudoun to help relieve the disproportionate homeowner tax burden?

What happens during economic upturns is that the county will drastically increase spending and consider it normal.  Of course, county officials don’t like to remind folks of the good ol' days when spending was skyrocketing.   In the aforementioned video (actually, it’s more of an infomercial format) Hatrick has a chart of per-pupil spending that only goes back to FY06, which leaves out the biggest run-up in spending.

The Effects of Rapid Residential Growth

Many politicians and anti-growth activists claim that rapid residential growth is the main cause of our high tax bills.  We have already shown that spending has outpaced both population growth and inflation.  There probably is a cost of growth, but we have never seen it quantified.

Politicians often compare the average tax bill ($5,000) to the LCPS per-pupil cost ($12,000) and claim that every new house costs the county $7,000 a year, which must be recouped by raising taxes on every homeowner.  That would be a true statement if every house had an average of one LCPS student (the fact is there are 60,000 LCPS students and 105,000 residential units); if all school funding was from local sources (the fact is that federal and state revenue account for over 25% of LCPS funding); if the real property tax was the only local tax (While the real property tax is the largest revenue generator, the fact is there are dozens of other local taxes residents pay that really add up!)

If anything, the mismanagement of growth over the past decade has saddled the county with a high debt service burden.  Rapid residential development resulted in larger tax base, but the full fiscal impact of that development would not be felt for many years to come.  The county attracted a lot of young couples and families who did not yet have children in public schools.  These new residents were feeding the county coffers with new tax revenue, but had not yet begun using costly county services.  Residential new home building permits outpaced enrollment growth for many years.  It created the illusion that the county could afford to spend $13,000 per student.  Now many of those families have children entering the public school system and it explains why enrollment continues to increase, despite the dramatic drop in residential development.  The bill has come due!



Debt service payments now consume about $170 million a year and growing.  Loudoun built a lot of new schools and other facilities during the high-growth years, but very little of the cost was financed with cash (LTF - Local Tax Funding), as shown in following tables.  The BOS chose to finance nearly 90% of capital costs with bond revenue, which is a normal method of financing public capital projects. The only problem was that Loudoun’s growth was anything but normal!





More of the tax revenue windfall should have been used to pay for infrastructure improvements to support the new development.  Had they adopted more of a pay-as-you-go policy for capital projects – perhaps paying for 50% of the costs with cash, instead of just 10% - today’s debt load would be much lower and the county finances would be in better shape.  But what did they do?  They quickly raised schools operations spending to $13,000 per pupil, which is now proving to be unaffordable and the county is having to go through the painful exercise of cutting per-pupil spending. School enrollment growth is expected to continue at its current pace for several more years.  The School Board is already spending beyond its means, as evidenced by the $37 million in one-time funding sources in the propose school budget.  How does the county plan to replace that funding in FY12, other than another property tax hike?

The county will continue to need new capital projects and many have already been deferred.  There were no new projects appropriated in FY10 and only 1 elementary school is proposed for FY11.  The School Board recommended a Capital Improvement Plan (CIP) totaling $1 billion, but the county has cut that down to $452 million in order to stay compliant with self-imposed debt guidelines.  Many county projects are also being deferred indefinitely.  For instance, a new library has been planned for the Brambleton community on a proffered 3 acre site, but the $10 million in funding for building construction has not even been scheduled in the proposed 6 year CIP!  Loudoun’s share of the Dulles Metrorail Project is $252 million which is being appropriated in $40 million installments over a 6 year period.

Because of the budget crunch, no cash is being used to finance the $141 million in new capital appropriations for FY11, further increasing future debt service.

The Tip of the Financial Iceberg

While the FY11 budget process promises to be painful enough, there is no reprieve in sight.  Most economists predict the economy will probably remain stagnant for years to come and nobody is anticipating a new revenue bonanza like the stock market or housing bubbles.  County officials optimistically speak of better economic times and “getting through this slump”, as if the housing bubble will pick up next year where it left off in 2006, but they need to wake up from that dream and face the reality that we are likely in a prolonged slump.  In fact, there is a strong possibility of a fiscal implosion.

There is only one way out of this mess and that is to drastically cut operations spending.  Higher taxes will only promote more reckless spending and hinder an economic recovery.  Forget any increases in the school or general county operating budget this year.

Significant budget savings can be achieved by bringing employee benefits in line with what the private sector offers.  Employees should be required to pay the 5% employee share of the VRS retirement contribution.  Health insurance premiums are much higher than what the average private sector company offers and should be reduced.

Staffing levels are bloated.  The following table provides insight into how staffing levels have grown over the years.  The FY08 budget proposal called for creating 636 new full time equivalent (FTE) postions at a cost of $45 million for a projected enrollment growth of only 2,918 students!  That's 218 employees for every 1,000 students!  Only 86 of those positions were trimmed in the adopted budget.  It was increases like that that have caused the staffing levels to grow from 127 school employees per 1,000 students in FY00 to a proposed 138 in FY11.  That may not appear to be a large increase, but 770 positions could be eliminated in FY11 by returning to FY00 staffing levels.