By Frederick A. Costello
Introduction. Increasing the real-estate tax rate hurts the moderately poor by increasing their housing costs. The purpose of this report is to present the analysis of the County and FCPS budgets and to propose tax cuts that would make the proposed 4-cent tax increase unnecessary.
Summary. My proposed budget resolution calls for a decrease in the tax rate of 1.24 cents per $100 of assessed value. This lower rate is made possible by limiting all salary increases to classroom teachers. Other employees would get no increase, thereby allowing the salaries of the private-sector employees to begin to catch up with the County and FCPS employees. Decreasing the rate will prevent burdening the moderately poor County residents—those most vulnerable to increased living expenses, whether as owners or as renters.
Appendix A of this report has a resolution embodying these points.
In our calculation of the potential saving, we have not taken into consideration any economy of scale. Normally, as the number of people served increases, as has the county population, the unit cost of those served decreases because management, supporting staff, and equipment costs do not increase as rapidly as the staff involved directly with the people served. The usual economy of scale is not present in the school and county budgets.
Discussion. The four-cent increase in the advertised real-estate tax rate is troublesome. Raising real-estate taxes hurts the moderately poor either directly or through increased rents, driving some into welfare and, as IRS data show, driving others out of the county. A tax increase takes money from these moderately poor and gives it to county and school workers—who are not poor. The poor are not the only people to be adversely affected by a tax increase. For the average wage earners living in Fairfax County, their inflation-corrected wages have decreased since FY2007 while taxes are now higher than the sharp peak in FY2007, at the end of the housing bubble—even in inflation-corrected dollars (Exhibit 1).
In inflation-corrected dollars, the County budget per capita has increased 0.9% per year from FY2000 to FY2017—a total of 16% over the 17 years (Exhibit 2). If there had been an economy of scale, there would have been a decrease, not an increase, as the county population increased 14%. Over this same period, in inflation-corrected dollars, the salary plus benefits (not including the health benefit) as paid from the General Fund to county employees has increased from $72,577 per employee ($648M for 8491 employees) to $110,365 ($1081M for 9795 employees), an increase of 52% in inflation-corrected, per-employee expenditures.
The average salary increase for county employees who worked from FY2006 to FY2015 but whose job title did not change was 3.4% per year, whereas the average increase in household income was only 1.2% (Exhibit 3). Notice that these years include the years after the housing bubble burst. The data on turnover indicates that retirees are replaced by entry-level employees; however, other employees that depart are frequently replaced by people of nearly equal salaries. We have not included herein the added savings possible if all departing employees are replaced by entry-level employees. In a separate study, we have estimated the added FCPS savings alone would be $20M.
If the County were to hold the sum of all salary increases to the relapse (retirement) saving (all employees would get some increase), the proposed amount for salary increases would shrink from $32.0M ($805.5M minus $773.5M) to zero. As shown in the same reference, benefits amount to 43.7% of salaries (338,338,526/773,546,456); however, salary-dependent benefits amount to approximately 25% of salary; therefore, the total saving would be $40.0M ($32.0M*1.25). Note that giving no raises in FY2017 would reduce the average raise since 2006 to 3.1%, as compared to the 1.2% increase in household income. Householders would still not have caught up to the County employees.
Since FY2000, the FCPS budget per student, in inflation-corrected dollars, has varied from the low of $11,730 in FY2000 to the high of $14,698 in 2008. In inflation-corrected values, the increase per student since FY2000 is 19.3% (Exhibit 4), approximately 1% per year; however, the increase per equivalent student has increased only 0.5% per year—a total of 9.2%. Using “equivalent student” adjusts for the increase in the number of ESOL and FRM students. Since FY2000, the rate of salary increases for individual FCPS teachers would have been almost 4.7% per year if they moved up in one step per year. Because in two recent years step increases were skipped, the average is 4.16%—well above the 1.2% increase in household income. (Retirements and turnover reduce the aggregate increases.)
Raises for teachers may be worthwhile; however, the school system has a history of raising all salaries by almost the same percent that the teachers get. The county would do well for taxpayers, especially the moderately poor, if the salary increases were limited for now to classroom teachers—those who have direct contact with the students. Other teachers and employees, on aggregate, could, after the householders have caught up, get raises that match the increase in median household income. Retirements and departures would permit larger raises if they are replaced by entry-level employees. Individuals would get raises as they move up the salary scales; however, the sum of raises would be zero.
If the FCPS were to increase the salaries of the classroom teachers by the proposed amount but were to hold the sum of all other salary increases equal to the relapse saving, the proposed $68.1M salary increase would shrink to $38.1M—a $30M saving (Exhibit 5). In addition, salary-dependent fringe benefits amount to 29.24% of salary, so the total saving would be $38.8M. Although the County cannot dictate the salary changes within the FCPS system, it can reduce the transfer fund by this amount on the basis of this analysis.
Yet another saving is available. Only rarely has the Board of Supervisors (BOS) been given any money in its reserve fund. For FY2017, $22.5M, an extraordinarily large amount, has been put into this fund. The Managed Reserve of $92.5M should suffice as a reserve amount. The starting balance for most years, although budgeted to be zero, has been on the order of $80M each year, slightly more than the Managed Reserve. This additional $22.5M reserve is not needed.
The sum of the savings listed above for county, school, and reserve is $101.2M. The state will be increasing its contribution to the FCPS budget by nearly $21 million, bringing the decreased need from the County to $122.2M, or, at $23.3M per penny of tax increase, approximately 5.24 cents per $100 of assessed value. Not only is the advertised 4 cent increase unnecessary, but the rate should be decreased by 1.24 cents.
Appendix B of this report includes snapshots of various parts of the county budget documents to aid those who want to check the foregoing numbers.
 We infer the impact on the poor on the basis that the average income of those leaving is approximately $70,000 and those entering the county, $60,000. This data is available from the IRS. It is summarized at http://www.howmoneywalks.com/irs-tax-migration/. Two other indicators are the increases in FRM students in the County public schools and the increase in the number of County welfare employees. If any of these had shown a contrary trend, we would not have inferred the impact on the poor. In addition, logic would so indicate that the impact on the poor is greater. Housing costs are a greater part of the household expenses for the poor. In addition, since 2013, in constant-dollars, the real-estate tax has increased 14.4% (3.6% per year)—$722 for the median household. The increases were greater on housing that the moderately poor would probably occupy: on condominiums, real-estate taxes have increased 20%; on townhouses, 26%. Year-to-year increases seem small, but they accumulate.
 We use FY2000 as the baseline in many of our comparisons because FY2000 is the oldest data that is available on the Internet. Using FY2009 distorts all comparisons because all County and School budgets were greatly inflated during the housing bubble. They were not fully deflated after the housing bubble burst.
 Salaries were obtained by the author via a FOIA request and used to check against a compilation from the budget documents. The 2% and 3% increases in FY2013 and FY2014 were designed to offset the 5% increase in the employee contribution to the VRS; however, they were true raises because the 5% will be returned to him in his pension. Consider the following: a person is hired at $50,000, works 30 years, and ends with a salary of $100,000. On average he has paid 5% on $75,000. His pension amounts to 75% of his peak salary ($100,000), or $75,000. Thanks to the raises, this $75,000 is 5% greater than if the 2% and 3% raises had not been given. So the employee’s 5% contribution is eventually returned to him as a pension.
 The dashed lines are the averages from 2000 to 2016. The school and county averages are near 4%; the household income, near 2%.
 Relapse and departure savings make the sum of all increases in payroll expenses less.
 Reports 141 and 172
 See Page 220 of http://www.fairfaxcounty.gov/dmb/fy2017/advertised/overview.htm. The comparison is made with the Approved Budget, not the Actual Budget. The Approved Budget is that agreed upon by all parties. The Actual Budget is usually somewhat larger than the Approved Budget because unexpected revenue and some of the reserve funds are frequently spent at the end of the year. The difference between the Actual and Approved is akin to windfall profits.
 Health insurance does not depend on employee salary.
 Bulova Byline, March 18, 2016
 See Page 235 of the Overview of the County’s FY 2017 Advertised Budget
Appendix A: The Proposed Resolution
WHEREAS the salary of Fairfax County teachers is below the average salaries of teachers in the Washington, DC, area; and
WHEREAS the median and average household income of Fairfax County residents has increased only 1.2% in recent years, most of which is due to inflation; and
WHEREAS the increases in school and county employee compensation has considerably exceeded the increase in household income thereby making school and county employees become relatively wealthier than private-sector employees; and
WHEREAS increasing the real-estate tax significantly burdens the moderately poor such that, as IRS data show, many must move out of the county; and
WHEREAS holding the salaries of county employees to the FY2016 salaries will save $40.0M, when savings in benefits are included; and
WHEREAS limiting salary increases to the approximately 12,000 classroom teachers would increase expenditures by only $38.1M, as compared to the $68.1M proposed if all school employees receive the proposed increases—a saving of $38.8M when savings in benefits are included; and
WHEREAS eliminating the $22.5M reserve for the BOS is possible because there is an adequate managed reserve; and
WHEREAS the state is increasing its contribution to the Fairfax County school system by $21M; and
WHEREAS the foregoing savings total to $122.2M, the equivalent of 5.24 cents in real-estate taxes; and
WHEREAS the beginning balance each year is approximately $80M, despite the fact that the budget always calls for no ending balance, thereby showing that there is an adequate margin in the approved budgets; therefore,
BE IT RESOLVED that Fairfax County classroom teachers be given the planned salary increases.
BE IT FURTHER RESOLVED that:
- All other school and county employees receive no salary increase.
The real-estate tax rate be decreased 1.24 cents per $100 relative to the FY2016 rate.
Appendix B: Snapshots of the Budget Documents