Henrico expects rosier finish to Fiscal Year 2020 than originally anticipated

It could have been worse.

Though Henrico County finance officials haven’t yet closed the book on Fiscal Year 2019-20, which ended June 30, their preliminary analysis shows that the county’s financial downturn wasn’t as severe as they had feared it could have been.

This spring, officials estimated that in order to balance the FY19-20 budget and make up for revenue losses associated with the pandemic, they might have to dip into the county’s fund balance – its surplus money – for $40 million to $60 million.

But in part because sales and meals tax revenues didn’t drop as far as expected – and then began to rebound – that number is expected to be closer to $25 million once the final calculations are in, Henrico Finance Director Meghan Coates told the Citizen Tuesday.

Factor in federal CARES Act money – which the county is using to cover a number of one-time expenses – and the number could shrink as low as $8 million or so, Coates said.

“Revenues have done significantly better than we anticipated,” she said. “There will be a draw in fund balance, but this is probably as good as we could have hoped for,” she said.

Even without COVID, officials were planning to dip into the surplus fund for about $25 million anyway in order to finish the new editions of Tucker and Highland Springs high schools, she said.

“If there was no COVID, we probably could have found ourselves in a situation pretty close to where we did now,” she said.

Sales, meals taxes produce more than expected
Monthly sales tax revenues, which county officials projected could fall by 25% or so, ended up dropping only by about 8% to 15% each month when compared with last year’s totals from the same months, Coates said. (For example, in May 2019, the county collected $5.9 million in sales tax, and this May it collected $5.1 million – a drop of 13%.)

Coates theorized that once the pandemic hit, people began spending money at businesses close to their homes.

“I believe a lot of our dual-income households who were still making steady money and have held down their jobs through this period have bolstered our local economy by buying local, which is another unintended consequence but great outcome for us,” she said. “It really did protect our bottom line over the last quarter.”

Meals tax revenues, which typically amount to about $2.8 million a month, fell initially to about $900,000 but by May had rebounded to more than $2 million, Coates said. She attributed that to the quick response of many restaurants, which developed new ways to serve their food.

“The innovation from our restaurant industry has really allowed us to recover faster than we thought we would,” she said.

The meals tax revenue is likely to grow slightly, too, because some businesses took advantage of the county’s offer to allow the deferral of spring meals tax payments until Aug. 5.

The county’s monthly hotel occupancy tax revenue has experienced a significant decline, however – it was nearly 80% lower this April than last April, for example. It’s rebounded slightly but is still less than half what it likely would have been, Coates said.

Agencies trim, too
Another crucial factor in the county’s ability to avoid significant financial strain: the efforts of its agencies to cut spending.

“We were able to ratchet down expenses much more effectively” than anticipated, Henrico County Manager John Vithoulkas told the Citizen.

County agencies spent about $17 million less than what Coates initially had projected they would need to spend even after the pandemic hit.

“People really tightened their belts, not buying anything that wasn’t absolutely essential,” she said.

The combined result of those efforts and the better-than-expected revenues is that Henrico’s fund balance will experience a minor blip, but the county’s bond-rating – essentially its credit worthiness – will not be affected.

The county is one of a small number of localities nationwide to earn the highest available ratings – AAA – from each of the three major rating agencies (S&P Global Ratings, Moody’s Investors Service and Fitch Ratings).

The fund balance is the most significant component of how bond-rating agencies assess the fiscal health of a locality, Coates said. And even though in a typical year, Henrico would be adding to that balance (typically between $2 million and $20 million annually) instead of pulling from it, the rating agencies haven’t wavered in their analysis of Henrico’s fiscal strength, she said.

“They really like the approach that the county took, being uber-aggressive on the budget side and cutting back as far as we did for Fiscal ’21, and they felt like we protected ourselves as best we could for something of this nature,” Coates said.

In late June, Henrico sold its last general obligation bonds associated with its 2016 bond referendum – $121.4 million in total, which will be used to fund the remaining projects from that referendum – and earned the lowest interest rate in its recorded history: 1.49%.

Some add-backs possible in current budget
When the pandemic began, Henrico officials slashed $99 million from their planned $1.4-billion budget for the current fiscal year – which began July 1 – and eliminated funding for most capital improvement projects (new construction or renovation), with the caveat that some of that money could be returned if conditions improved.

For the first time in its history, the county is now appropriating funds to its agencies on a quarterly instead of annual basis – and Coates and her staff are evaluating Henrico’s financial health monthly and adapting on the fly as needed.

Though she said it’s too early to know for sure, since financial reports lag one to two months, she expects that some money will be restored to the budget.

“It’s very likely that we’ll find ourselves in position to add back,” she said, but it likely will take until January to know for sure.