RICHMOND -- What a difference 126 years makes.

Richmond, where people in Civil War days bartered their clothes for food and supplemented their diets with fried rats, is today the hub of a growing metropolis.

The city's double-A general obligation bond rating from Moody's Investors Service and Standard & Poor's Corp. stands as testimony to the city's relative stability, a stark contrast to the turbulence of the Civil War and to the fiscal angst being experienced today by localities nationwide.

Bedeviled by the sorts of financial stresses that hit nearly all municipalities this year, Richmond still finished its 1991 fiscal year with a balanced budget and a 3% general fund balance.

"It's to their credit that they did this in times of stress," said Parry Young, a senior vice president with Standard & Poor's. "A lot of jurisdictions were tested this year, but not many have come out smelling like roses. [Richmond] showed its mettle."

Max Bohnstedt, Richmond's finance director, attributes the feat to common sense, through he is quick to disavow credit. He came on board in September after leaving a similar post in Montgomery County, Md. "There's nothing magic about it," he said. "You do it by making the hard decisions. You don't spend money on things you don't need."

The tough decisions included whether to retain the hard-won 3% general fund balance of about $13 million.

In 1987, the city's reserve stood at just $1.3 million, prompting officials in 1988 to adopt a policy goal of running annual operating surpluses of at least 0.5% until the balance reached 3% of expenditures. The city hit the 3% mark in the 1990 fiscal year -- four years ahead of schedule.

Officials decided not to spend the balance in the 1991 fiscal year, forcing some spending cuts and other savings.

When the economy improves, analysts hope Richmond officials increase the fund balance. "We view 3% as kind of a floor," said Eric Goldstein, an assistant vice president with Moody's. "We're looking for the city to stabilize and improve and have a larger reserve."

Improvement Forecast

Mr. Goldstein acknowledged the past few years have been difficult for Virginia localities, and said Richmond has shown "impressive financial improvement in the last few years."

Further improvement may be difficult in the near term. Despite a fiscal 1992 budget that includes spending increases of just 2%, early indications are that the city will face a revenue shortfall. Mr. Bohnstedt said officials are still figuring out now big the hole will be, but vow to finish the year with another balanced budget -- likely without tapping the reserve.

"It's political will," Mr. Bohnstedt said of the resolve necessary to balance the budget.

Political will has long been a Richmond hallmark. Shortly after being forced to flee the city near the war's end, President Jefferson Davis said "nothing is now needed to render our triumph certain but . . . our own unquenchable resolve."

But some of the problems now facing Richmond may prove even more intractable than hordes of Yankee soldiers. Between 1980 and 1990, the city's population dropped 7.4% to 203,056, according to Moody's, while surrounding counties experienced a population surge.

Chesterfield County's population increased 48% over the same period, rising to 209,000, while Henrico County's population rose 21% to almost 218.000.

The counties' growth highlights the health of the Richmond region, but does nothing, directly at least, to boost Richmond's coffers.

"I think it's obvious that when you have jobs and firms moving from the city to the counties, it's going to change demographics, infrastructure, and revenues in ways we'd prefer not to be experiecing," Mr. Bohnstedt said.

But he said the phenomenon, at least in Richmond's case, should be examined as part of a greater whole. "This is an urban area," he said. "The city of Richmond has been developing since the 1700s. [Growth of surrounding counties] is an expansion of the urban area."

Mr. Bohnstedt added that since he has been in Richmond, he has not seen "the hole in the doughnut as you see in many cities," a blighted urban center ringed with rich suburbs.

Several factors explain the sprawl. For one thing, Richmond's property taxes are higher than those in surrounding counties, making it more attractive for developers to take raw agricultural land and convert it to commercial use than to build similar structures in the city. The new developments, in turn, entice businesses, part of what Mr. Bonhstedt termed the "human factors. People like to work in nice,, new surroundings."

The city's taxes also discourage the sort of retail developments that might draw more people to the urban core. Retail stores, which operate on thin profit margins, tend to take up lots of floor space -- making them an expensive proposition when taxes are high.

The Budget Challenge

Mr. Bohnstedt said a large area department store recently announced it was pulling up its stakes. The store's departure will mean lower sales and property tax collections, at least at first.

"It's another challenge for economic development," Mr. Bohnstedt said. "If I sound positive, it's because I intend to sound positive. These are challenges, not defeats."

An additional challenge will be for city officials to maintain balanced budgets. Mr. Goldstein of Moody's noted that most of the budget balancing in recent years has been done by cutting spending. He said "we'll certainly want to talk to them" about possible revenue enhancements in the future.

"You have to balance the programs that are needed and desirable against the price elasticity of the tax burden," Mr. Bohnstedt said. "We're not going to raise taxes."

Despite the challenges, analysts view Richmond favorably.

Key strengths include a diverse employment base, anchored by the state government presence. "It's a very stabilizing factor," Mr. Young said of the state's link to the city's economy. The city also has a strong institutional base and is home to several large regional banks.

Richmond typically comes to market twice annually with tax anticipation notes and usually issues about $30 million of general obligation bonds. Despite a somewhat high dept per capita, analysts credit the city with strong financial management and expect the city to weather the recession well.

City officials agree and expect Richmond to come back stronger than ever. After the city's fall 126 years ago, diarist Mary Chestnut reported that "all below Ninth Street to Rockett's [Wharf on the James River] has been burned by the beggars who mobbed the town." Several years ago, city planners reawakened to the James River's potential, and new developments have sprung up like mushrooms.

"The city is working very hard at restoring downtown," Mr. Bohnstedt said. "It's happening in the city of Richmond."

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