Federal cuts, possible recession raise tough questions for county reserve funds

Substantial economic uncertainty has left Arlington officials facing tough questions as they consider beefing up the county’s reserve fund this year.

The current Fiscal Year 2026 budget draft includes a proposed $11.5 million increase to the county’s Economic Stability Reserve — increasing it from $21.5 million to $33 million.

At a Tuesday meeting of the county’s Fiscal Affairs Advisory Commission, officials debated whether this buffer, representing about 2% of the county’s budget, is too much or too little.

“This is a super-hard exercise … given the almost unprecedented nature of the situation,” commission member Melissa Adelman said.

Richard Stephenson, the county government’s budget director, noted that “ideally, it should be more.”

But, he said, the additional funding was “significant” given the government’s budget challenges that loomed even before Trump administration actions put the region’s economy in peril.

“We’ve got a lot of unknowns,” Stephenson said. “You don’t know what’s around the corner.”

At the moment, the federal government is expected to provide about $88 million to the county and Arlington Public Schools. Another source of uncertainty for current budget projections is the potential for a major economic downturn impacting housing prices and discretionary spending.

While the full impacts of federal downsizing have not yet been felt, “it seems very, very likely” they will have a major effect on the local region’s economic picture, Adelman said.

“Things could be horrible,” she said.

County Board members have until April 9 to set the budget. On March 25 and 27, the public will have its say during two evenings of budget and tax-rate hearings.

The Fiscal Year 2026 budget goes into effect July 1.

Reserve funds are just one tool to address the possibility of budget calamity over the coming year.

“We do have some flexibility,” said commission member Thelma Askey. Options range from imposing a government hiring freeze to stopping capital spending.

But the county government does have a few costs for which there is no alternative but to pay. Among them: An anticipated $88.2 million in the coming year to cover interest payments on $1.43 billion in county and school-system bond debt.

FAAC Chair Gillian Burgess said the Tuesday meeting was the start of a discussion to “ask questions, challenge our assumptions” before moving forward with recommendations on budget issues in coming weeks. Subcommittees have been working on a variety of budget topics, she said.

The Economic Stability Reserve is one of three key reserve funds maintained by the county government. Others include a self-insurance reserve of $7.1 million and a General Fund operating reserve of $90.7 million.

That latter reserve is one “we hope to never touch,” Stephenson said, as it helps the county government maintain its AAA bond ratings.

The same day as the FAAC discussion took place, officials in Fairfax County also were discussing the implications of the evolving relationship between the D.C. area and the federal government.

“We will need to think and act differently. Our regional economy is entirely too dependent on the federal government,” said Julie Coons, president/CEO of the Northern Virginia Chamber of Commerce.

“We cannot afford to take a wait-and-see approach,” Coons said at a discussion led by the Economic Initiatives Committee of the Fairfax County Board of Supervisors.

“We have undeniable strengths,” Coons added. By thinking “creatively and collaboratively,” the region can ensure its long-term prosperity, she said.

Unemployment data typically lags by weeks or months. For the time being, this leaves local officials relying on anecdotal evidence to determine how many Northern Virginia federal workers and contractors have already have been impacted.

“The data has just not shown up yet,” said Jill Kaneff, a senior demographer at the Northern Virginia Regional Commission. It may be “a month or two before we actually see what’s happening,” she said.

Leaders from Northern Virginia have pressed Gov. Glenn Youngkin to use his relationship with the Trump administration to move away from a chainsaw approach to downsizing.

Bob Lazaro, executive director of the Northern Virginia Regional Commission, said impacts on Northern Virginia would have a trickle-down impact on every corner of the commonwealth.

“This is a statewide issue,” he said.