Alexandria leaders brace for ‘pasta bowl recession’

At a City Council retreat, Alexandria leaders met with some of the city’s leading budgetary advisors to discuss some dire signs of what one staff member called a “pasta bowl recession.”

The city’s top finance experts said the city should be cautious as it potentially heads into a period of stagnant economic growth — if not outright decline.

“We don’t want to take a doom and gloom approach,” said Director of Finance Kendel Taylor. “We’re not saying the sky is going to fall, but we actually don’t know. The uncertainty where everyone is sitting right now is fairly significant.”

Taylor said that, as the city begins to plan for Fiscal Year (FY) 2024, the Department of Finance is being cautious.

“When we look at FY 2024: it’s very early,” Taylor said. “We only have a couple months of sales tax… interest rates keep going up, fuel prices, there’s a lot of uncertainty. We’re in a very cautionary stage.”

While the city’s economy is continuing to grow, Taylor said that’s going more slowly than she’d like. While the city averages 4% economic growth, Taylor said her office is estimating only a 2% change.

“We’re still an attractive place to live, we’re still economically sound, but it’s not what it’s been for the last few years,” Taylor said. “We’ve seen a lot of growth in the past year… but really we’ve just gotten back to pre-pandemic levels. That means we missed two years of anticipated growth. It’s a weird environment… It’s something where we have to just be cautious.”

Along with that slow growth, Taylor said interest rates have gone from 3% to 7%, meaning it’s more expensive to buy a house in Alexandria today than it was a year ago.

Vehicle assessments, meanwhile, remain high. The city approved a one-time tax relief for car owners to keep their tax from skyrocketing after vehicle values shot up during the pandemic. Taylor said the city is still monitoring those values this year to see if a repeat of that one-time relief might be needed.

“It’s too early to really know what’s going to happen with vehicles, but values remain high,” Taylor said. “We made an assessment adjustment in 2022 to mitigate those increases. We’re going to keep watching that over the next few months to see what’s the right approach to vehicle values in 2023.”

In brighter news, Taylor said sales tax and meals tax figures have remained strong, exhibiting a commitment from the community to supporting local restaurants and businesses. Those tax levels were restored to pre-pandemic levels in the summer of 2021.

The hotel tax has slowly been crawling back. Taylor said in July the city was within 10% of where the hotel tax was pre-pandemic. In August, it was within less than 1% of pre-pandemic levels.

At the same time, Taylor warned that optimism over tax levels returning to pre-pandemic levels ignores the bigger concern that the city has still lost two years of economic growth.

“It’s great to see that hotels are getting back to pre-pandemic levels,” Taylor said, “but we would have typically seen a few percentage points of growth.”

Kevin Greenlief, assistant director of finance, said the revenue from FY22 was good and FY23 has revenue increases baked into it, but the keyword for FY24 is caution.

“In the second quarter of 2022, [chief financial officers] are beginning to be pessimistic about GDP growth and potential impacts of a recession,” Greenlief said. “The popular term right now is a pasta bowl recession’: a long recession but not a deep one. I’ve seen ranges from a -.4% GDP growth to a .1% positive growth. There’s a lot of debate right now about whether there will be a recession. The smart money seems to think so, but they’re not looking like the sky is falling, it’s that [growth] is going to be flat.”

As the city plans for the future, City Manager Jim Parajon said some of that will involve looking at how much office conversion the city allows. While the city has had numerous positive office conversions — from restaurants to schools — Parajon also warned against throwing the baby out with the bath water. Maintaining some level of office space could be the better long-term play, even if it means losing some revenue short-term.

“The conversion approach for outdated office makes a lot of sense, but I want to be careful that we don’t lose good office space to conversion,” Parajon said. “That’s really important, and that may mean we play out a cycle or two in the economy so we’re looking at a balance of commercial to residential.”

Even when offices do come back, Parajon said they may not resemble the sea of cubicles from the pre-pandemic days.

“We’re likely to see smaller footprint office components with lifestyle office elements,” Parajon said. “They all feed really well into Alexandria because we have an amazing lifestyle here and that’s enticing to a company that needs to recruit and retain talent.”