With the county manager expected to present a proposed budget in February, the County Board last weekend adopted a budget guidance that requests a budget for fiscal year 2011 budget no greater than the adopted budget for fiscal year 2010. That’s $947 million. Board members directed the county manager to close the anticipated budget gap by equally dividing between service reductions and revenue increases.

"Closing a gap of this magnitude will require a strategic balancing of tax and fee increases and noticeable service reductions," said County Board Chairwoman Barbara Favola in a written statement. "In the end, I am confident the final fiscal year 2011 budget will reflect our community’s values."

County budget officials are expecting to receive about $40 to $50 million less in revenues this year, the product of a flagging real-estate market and dwindling allocations from state and federal coffers. In addition to those losses, the county is expecting to have about $40 to $50 million in additional costs with uncontrolled expenses. That includes an additional $4.6-million increase in debt service and $2-million increase in Metro payments. Adding the lost revenues to the increased expenses creates a budget shortfall of somewhere between $80 to $100 million.

"This is a budget gap that’s unprecedented in recent years," said Mark Schwartz, director of Management and Finance for the county. "Given the scope of cuts that must be made, layoffs will be very probable although nothing is certain yet."

DECLINING REAL-ESTATE assessments are the main reason for the county’s falling revenue projections. Although residential assessments are only expected to fall 5 percent, commercial real-estate assessments are anticipated to drop by 14 percent. The precipitous drop in commercial real-estate assessments reflects the tightest credit environment for commercial developers in a generation or more — a phenomenon that will influence how this year’s budget cycle will be shaped in the coming months.

"Commercial real estate saved Arlington’s tax base the last couple of years as residential declined," said Stephen Fuller, director of the Center for Regional Analysis at George Mason University. "Now that residential has stabilized and is expected to grow in value next year and commercial real-estate cycle is headed downward, it looks like a liability."

Fuller said that Arlington’s deficit is small in comparison to other jurisdictions in Northern Virginia, and that he expects the commercial real-estate cycle to lag the residential recovery by only one year. Meanwhile, Arlington’s budget officials are bracing themselves for a difficult budget year that is expected to include service cutbacks and tax increases. County officials said that everything is on the table, including the possibility of furloughs.

"Our budget situation is serious but manageable," said Mary Curtius, media-relations manager for the county government. "We won’t have to raise taxes enormously."

THE GUIDANCE emphasized the fiscal year 2011 budget must fund services that protect health and safety, invest in affordable housing and environmental sustainability, fund schools and ensure a safety net. The board also directed the county manager to provide a budget that abides by the county’s revenue sharing agreement with the schools, explore other cost cutting and efficiency steps and provide options for employee compensation that address competitiveness and health care pressures.

"The County Board’s decision to squirrel away $6 million for employee compensation seems to be a wise move," said Tim Wise, president of the Arlington County Taxpayers Alliance. "But if there was ever any year to scrap the revenue-sharing agreement with the schools and tell the School Board to present a budget based on needs rather than wishes, this would have been it."