November 6th, 2008
Initial questions regarding the budget
I have included responses in the comments section.
Regarding the second 8 cent tax increase to restore our cash reserves, at what point with this increase will our cash reserves be restored to an appropriate level? Would it not be appropriate to sunset this tax increase to that projected year or the year after, or to at minimum require occasional re-authorization of this 8 cent increase?
Also regarding the 8 cent increase, what are the financial and/or other repercussions if we were to wait a few years until the economy picks up to retain our credit rating and enhance our ability to borrow to fund future growth opportunities?
Please comment on how this tax increase and our financial situation overall relates to our ability to have a $10/$15 million referendum this April regarding open space, which I view as especially important in case any movement is available on the country club to purchase at least a portion of it. If our situation in this regard is unfavorable, what would make it more favorable (or less unfavorable)?
These are obviously tough economic times and many seniors have seen increases in their rents and their energy costs but not in their social security check. Do we have any current programs aimed at tax relief for seniors? If so, what are they? If not, are these allowed under state law? What can be incorporated into this tax increase that is mindful of seniors in our community in relation to their property taxes?
What services are non-essential that could be suspended for a few years? i.e. if council did not vote for any tax raise, what are options for what would be postponed or changed to make up the difference?
Can we adopt some ordinance with the budget that would match/link tax rate changes to an inflation index automatically?
Are there other fees that we can raise that will also include the university in revenue-generation instead of just looking at a property tax increase?
I would like to see an additional $30,000 in the budget regarding recycling so that the Main Street recycling program can potentially be instituted in the upcoming year.
Are water rates being changed with the budget or in a different ordinance? The budget notes we will likely have to increase water rates approximately 15%. What is the average $/customer/year on this? In the WRA report we received, it was suggested to raise water rates $50/year inside the city and outside the city by $100-$200/year. The budget does not differentiate between customers inside and outside the city.
Regarding the pension contribution, the budget states that council can choose whether to use the portion of the pension contribution for improving the funded status of the pension plan or to increase benefits to existing retirees (or I imagine some combination). Are we selecting which option to proceed with during the adoption of the budget or at another time? What are the benefits/fallbacks of each option?
This budget includes a continuation of the $7,000 subsidy for the trolley. Has DelDOT worked to address any of our concerns that we stated our funding was contingent on that we laid out in May?
2 comments ↓
TO: Mayor and City Council
FROM: Dennis McFarland, Finance Director
SUBJ: Proposed 2009 Operating Budget
Councilman Temko raised a number of questions regarding the proposed 2008 operating budget in his email dated October 27, 2008. The answers to these questions involve numerous policy judgments as well as financial judgments. This is to say there are no simple answers to many of the questions. However, I will attempt to provide the best responses I can from the financial perspective.
The two-year property tax increase proposal is clearly the most problematic issue in the budget. The first year increase of 12 cents is, essential to maintain a minimal operating surplus in 2009. This assumes no change to expenditures, an issue which I will address below. In a better overall environment, I would have recommended the full 20 cent increase in 2009 in order to have an acceptable surplus. As I have previously stated to Council, I believe the annual operating surplus should be about $2 million to restore and then maintain the City’s financial strength.
Responding more specifically to the question of how long it will take to restore the City’s cash reserves to an acceptable, I offer the following. Five years ago the City’s cash reserves amounted to roughly $25 million which is acceptable (in 2002 the cash reserves peaked at $40 million.) The City’s current cash reserves are about $12 million. Thus, we would need to achieve an operating surplus of roughly $2 million for each of the next six years to reach an acceptable level. That is unlikely even if we adopt the 20 cent increase immediately. Operating expenses are certain to rise at something approximating an inflationary rate over that time period and thereby offset a portion of the increased tax revenues, everything else being equal. In this scenario it makes little sense to “sunset” the tax increase. In fact, I would anticipate some future tax increases in the coming years.
The second question asks what are the consequences of delaying the restoration of our cash position. Simply put, it would be very expensive and difficult to borrow any monies until a restoration plan is adopted. We would likely, absent a substantial tax increase, continue to have a deteriorating financial position. This would require a consideration of service impairments and reduced maintenance of the physical infrastructure. In certain respects, this is what we have experienced over the past few years as we have deferred maintenance in the sewer and water utilities and investment in the IT infrastructure. It is somewhat of a “pay me now or pay me later” situation. Finally, and most certainly, we would not be able to adequately respond to future opportunities or challenges for the foreseeable future.
The third question asks about our ability to borrow $10 to $15 million this April to fund the acquisition of open space. Given what has been stated above, I hope it’s obvious that borrowing money for any purpose will be very problematic. The proposed 2009 budget, which already includes the financial benefit of a 12 cent tax increase, still yields only a $50,000 operating surplus. The debt service on $15 million of bonds is roughly $950,000. Thus, the additional debt service costs would require another 12 cent tax increase just to fund it.
I will submit information on tax relief to senior citizens under separate cover.
The fifth question asks what non-essential services could be suspended for a few years. From a financial perspective, I cannot identify what constitutes a non-essential service. That involves a policy determination rightly with the purview of City Council. What I can say is that, given the current services being provided, they are being provided in as cost efficient manner as possible. Please bear in mind that City departments have endured numerous years of tight budgets as the pendency of the reservoir litigation has limited expenditures. Moreover, personnel costs including benefit costs have risen during this same time period at a rate greater than inflation. And personnel costs account for 75% of the City’s operating costs. In short, there is little, if any, fat in the proposed budget.
The sixth question asks about indexing/linking the tax increase to inflation. This is more purely a legal question to be asked of the solicitor. However, it is my understanding from a simple reading of the City Charter that it is not permissible.
The seventh question asks about other revenue generation opportunities. I will defer to the City Manager on this issue. While we have discussed various possibilities, they all entail some complexity and downside. Nevertheless, they should be addressed in the appropriate forum.
The eighth question asks how the proposed water rate increase will be enacted. Adoption of the budget does not constitute changing the water rates. That can only be implemented via an ordinance. A 15% water rate increase would result in the average residential customer’s annual bill going up $31. As proposed, the increase would apply equally to customers inside and outside the City.
The last question asks about the use of the increased pension contribution. The Council retains discretion on how those dollars would be utilized after budget adoption. In other words, additional action by Council is required at a later date to change the pension benefits. From a financial perspective, I would recommend that the entire amount be devoted to increased funding of the plan. As communicated to Council in the quarterly pension performance reports, the pension plan has been seriously underfunded and recent market downturns have only exacerbated the situation. To increase current benefits at the same time that promised future benefits are uncertain does not seem prudent. Having said that, the cost of living pension increases for retirees have been minimal the past few years. Perhaps equity requires affording them something.
The complexity of the questions raised and the attempted answers is indicative of the need to consider financial issues over a longer time frame than one year. It is why the 2009 budget message recommends that the City adopt explicit financial policies and goals as well as a longer planning horizon. I hope these responses are helpful. Should you have other questions in advance of the budget hearing, please let me know.
From Roy Lopata:
Hi Ezra – Dennis will be responding in more detail to your questions. But one quick thing regarding the Trolley Service and the budget, we will evaluate the service in terms of the issues raised in our approach to the City’s funding assistance as we go through the 2010 budget process. In any case, the cost savings (if any) to the City will be minimal.
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