Leesburg’s town staff and financial consultant are encouraging council members to include a new revenue stabilization reserve in the Fiscal Year 2022 budget.
The topic of the reserve was a focal point of discussion during the council’s Monday night work session. David Rose, the town’s financial advisor with Davenport & Company, said the council’s approved refunding of general obligation bonds in October, along with debt restructuring, freed up about $3.67 million that the council can use in part to establish the reserve. The council had moved forward on the refunding and debt restructuring at the recommendation of Rose and the town staff to take advantage of historically low interest rates.
The goal of the revenue stabilization reserve is to create a financial cushion so the town would not have to tap into its Unassigned Fund Balance, a rainy day fund that currently has $11.5 million—enough to fund the town government for three months, Town Manager Kaj Dentler said. The council has adopted a policy to maintain an amount equivalent to 20% of General Fund expenditures in the fund balance to ensure financial stability.
For Fiscal Year 2022, the reserve would be established using $2 million from the bond refunding. It would be replenished in following fiscal years using no more than 25% of available Unassigned Fund Balance remaining above the current 20% General Fund expenditure policy requirement in any given year. The total amount in the reserve would be capped at 3% of General Fund revenues from the previous year. Money from the reserve would be used in Fiscal Years 2022 and 2023 to help address revenue shortfalls.
Right now, there is approximately $2.5 million in excess Unassigned Fund Balance over the required minimum balance of 20% of expenditures, Management & Budget Officer Jason Cournoyer said.This fiscal year, $1 million of the fund balance is projected to be used to address current revenue shortfalls. The forecasted shortfall for Fiscal Year 2022 is $2.5 million and excess fund balance of $1.5 million and $1 million of the revenue stabilization reserve is proposed to be used to balance that year’s proposed budget.
“Part of the intent of the reserve is to give us flexibility,” Dentler said. “If it’s needed, we’ll use it. If it’s not needed the council has a choice of how to use it if the economy turns back.”
The reserve could be used for any number of unplanned expenses, including complinance with a federal wastewater treatment mandate or to fill in for lost revenue if assessments decline.
“There’s no way that I see a downside to setting this up,” Rose said. “We’re thinking of this as a safety net. It’s there if uncertainties continue. It allows the town to be in more control, and not tap into the Unassigned Fund Balance below the levels you have. We’re in a very strong position; we want to stay in that position.”
Staff emphasized that the current multi-year financial plan laid out as part of the reserve creation is a projection based on current information and could change along with the economy.
The town is working with a $5 million deficit it expects to close by the end of this fiscal year, June 30. That deficit stems from the economic impacts of the COVID-19 pandemic, particularly steep declines in consumer taxes, which make up 30% of the town government’s revenues.
The staff is looking to fund the revenue stabilization reserve with $1 million by way of a revenue sharing agreement with Loudoun County in both Fiscal Years 2023 and 2024. Although the details have still not been finalized, the town and county have been negotiating a boundary line adjustment that would bring the Compass Creek development and potentially a Microsoft data center campus into town limits. That deal is expected to include a revenue sharing agreement.
Several council members expressed concern that the staff was including those revenues in the reserve fund.
“We better be very careful with it because it could be gone,” Mayor Kelly Burk said of the revenue envisioned in the agreement. “The county could decide they don’t want to do it anymore. If we’re including that as an ongoing source of money, I think we could get ourselves in trouble.”
“I don’t know what our decision will be,” Dentler said. “If that deal isn’t worked out, we’re going to need to find a new revenue source or make some difficult management decisions or reductions.”
Clark Case, director of the town’s Finance & Administrative Services Department, said the council needs to find a new source of revenue that is not dependent on consumer or real estate taxes. Economic development, he said, is an ideal place to look.
“What we’re telling you here is in those out years you have a deficit situation of about $1 million in your ongoing revenues,” Case said. “We need to find a new source of revenue. What we’re looking for is economic development to generate new personal property taxes. Over 30% of [town government] revenue now is from consumer taxes, which are more volatile. We’re looking for a new revenue source that doesn’t revolve around raising taxes on homeowners. The one that we know about that would meet the need is data centers.”
While the town’s expenditures go up 2% annually, its revenues do not increase by that same amount, Case said.
“Even if we go back to where we were pre-pandemic it’s not enough to cover growth and the expenditure budget,” he said.
Rose echoed a point that Dentler has made often—the cuts made by town staff last spring to address the COVID fallout, which included freezing staff positions, postponing maintenance and management reductions, are not sustainable.
Dentler pointed out the very minimal additions to his proposed budget. The only additions to the General Fund are more money for snow removal; funding for an expanded outdoor dining program on King Street; and securing office space for use by the mayor and Town Council.
“My proposed budget in [Fiscal Year] 2022 is only designed to get us back to the full funding that we had. There’s no growth in the budget. We’re just trying to get back to where we started this current budget year. Eventually the town is going to have to address growth matters that are affecting us. We’re just trying to get back to square one at this point,” he said.
Monday’s work session discussion also touched on a proposal to rework the funding of management expenses for capital projects staff. As proposed, all indirect costs of $1.46 million, like staff training and vacation time, would be paid with cash, and direct costs hovering just under $1 million would be financed. This change would move the town away from its planned practice of eventually fully funding all capital management costs, but it would free up about $335,000 that could pay for an increased snow removal budget and Town Council office space.
The council is expected to continue its budget discussion at its next work session, March 8. A public hearing on the budget is set for the following night.