City
budget: delusion vs. reality
by
Mike Kroll
The city of Galesburg is currently facing significant
budgetary challenges because the Galesburg city council and former city manager
Gary Goddard refused to recognize the full impact of a descending economy on
city revenues. Over the past few years the city has passed budgets that mostly
held taxes and fees in check through the postponement of longterm obligations
and deferred maintenance. City staff levels and payrolls have been reduced
through accelerated retirement programs, particularly in the public works
division; at the same time that pension payments were short funded. And not
only has much of the discretionary spending been eliminated from the general
fund budget but corners have been cut on necessary but less obvious operational
and maintenance expenses. The end result is that new city manager Dane Bragg
was left with the unenviable task of alerting the city council to a pending
crisis of their own making.
Before the departure of Goddard he presented a 2007
budget to the city council for approval that was balanced only by failing to
recognize inevitable utility rate increases, underfunding pension obligations,
failing to properly recognize underfunding of the risk management fund and with
the passage of increased sales and telecommunications taxes. Over recent budget
years Goddard had practiced smoke-and-mirror budgeting with little critical
oversight by the city council and this tactic continued right up to the end of
his tenure. Rather than explicitly explain the history of underfunded pensions
and maintenance as key reasons creating the need for additional tax revenue
Goddard counted on the council passing the new taxes merely because he told
them they were necessary. When public pressure in opposition to the tax
increases led the city council to not approve them at the eleventh hour a
crisis was created even as Goddard celebrated his retirement.
Galesburg's revenues come from numerous sources
including sales taxes, property taxes, state income taxes, fees for services
and earned interest on investments. According to the city's figures nearly 78
percent of the revenues supporting the general fund come from taxes estimated
to total almost $16 million in 2007 (including the two tax increases that were not
approved). At 36.7 percent sales
taxes account for the single largest source of this revenue followed by
property taxes at 21.1 percent and state income taxes at 12.7 percent. In
recent years the city council has become convinced that property taxes are
unfair and must be minimized while sales taxes are somehow a ÒfairerÓ source of
revenue because ÒeveryoneÓ pays sales taxes including non-residents and those
who do not own property.
As a consequence the city council instructed Goddard
to not increase the 2007 property tax rate over that collected in 2006 meaning that with a declining equalized
assessed value of taxable properties the dollar amount of property tax revenue
raised in 2007 will be approximately $6.56 million (or about $333,000 less than
the amount collected in 2006). Unfortunately this is nearly $1.5 million less
than necessary to fully fund the police and fire pension funds and excludes
$700,000 needed to make a city bond payment. Over the past few years the city
has underfunded the fire pension fund by a total of almost $300,000 and the
police pension by $246,654. Goddard's 2007 budget (already approved) continued
this trend by funding only $659,600 of the necessary $776,000 contribution to
the fire pension fund and only $590,750 of the necessary $695,000 to the police
pension fund.
According to fire chief John Cratty nearly a quarter
of the city's firefighters will become eligible to retire during the next five
years yet the city has systematically underfunded their pension program.
Information on the proportion of city police officers who will become eligible
for retirement in the next few years was not discussed by the city council. It
should be noted that covering the costs of these pension obligations is not
optional for the city. If the amount of money in the fund becomes insufficient
to cover pension obligations the city would be forced to make up the difference
out of increased tax revenues.
Expenses such as pension funds, bond repayment and
equipment replacement funds are inherently different from most other expenses
in that they reflect costs that are already incurred. Failure to fully fund
such expenses is not the same as choosing not to construct a new building or
spend less on office supplies. One can think of these funds as analogous to
credit card balances, you have already made the purchases and now must pay down
the balance. On a credit card there is no option not to make a monthly payment
and the smaller that payment the faster the unpaid balance grows with accrued
interest charges. In the case of a pension fund the financial planning for that
fund is based upon regular contributions and earned interest being sufficient
to cover pension obligations and maintain the fund. If you delay or skip
payments to such a fund the available balance is decreased along with loss of
earned interest and the effect is escalating longterm costs.
It isn't hard to see why Goddard led the city council
down this financially precarious road. City council member had made their
feelings clear that not only were tax increases in general to be avoided but
this was especially true of property taxes. Had Goddard gone to the city
council over the past few years with a property tax levy sufficient to fully
cover pension and bond repayment they would surly have balked. With his
retirement on the foreseeable horizon Goddard could certainly see that with a
few revenue enhancements and a non-curious city council the accumulating debt
could be pushed into the future. Well the future arrived quicker than expected.
With the council's failure to approve either the sales
tax or telecommunications tax increases sought by Goddard and included in the
revenue projections for the 2007 city budget a budget shortfall was expected
however the magnitude of that shortfall was not. Within a week of arriving in
Galesburg incoming city manager Bragg was forced to dive in quickly to offer
his analysis to the city council. Since Goddard had projected 2007 revenue of
about $700,000 from the two failed tax increases most assumed that this would
approximate the shortfall. When Bragg told the city council that the actual
amount was about $1 million more most were taken by surprise. Bragg told the
city council of the unfunded liabilities and added $200,000 to cover
anticipated higher 2007 utility costs that neither Goddard nor finance director
Gloria Osborne thought to include in the budget presented to the city council.
During the first of two work sessions Bragg presented
an analysis of the 2007 budget problem with lots of specific numbers city
council members claimed were new to them and offered some possible approaches
to fixing the budget. These included drastic reductions in staff and services
that were quickly dismissed by the city council and Bragg's recommendation that
a combination of spending reductions and new revenues be used to bring the
budget into balance. This was option two and frankly the only one that made any
sense. However, there really aren't many expenses left to cut. The only true
expense cut that met with unanimous agreement was doing away with a $350,000
project to connect all city facilities with a fiber-optic network.
The other spending reductions apparently favored by
the city council include continuing the practice of underfunding existing
commitments. While no official action has yet been taken by the city council
ÒcutsÓ now on the table include reducing payments to the equipment replacement
funds by a total of $217,000, reducing the required GASB 45 contribution by
$142,000 and some form of hiring freeze. The GASB 45 issue is a new government
accounting requirement that the city fully fund its self-insured health
insurance fund (a sensible mandate given circumstances). As far as the hiring
freeze goes it is unclear whether this will really save the city much money given
existing short-staffing and the almost certain increases in overtime costs.
While the anti-tax gang continue to object to any and
all proposed revenue increases it does appear that the city council may
implement a new alcohol and prepared food sales tax of two percent that would
generate an estimated $660,000 in 2007 if enacted by April 1st. A similar
effort was attempted last summer by Goddard when he proposes the same tax at a
one percent rate and was defeated after the city council heard complaints from
affected business owners. While this is far short of the revenue necessary to
truly balance the city budget in 2007 it is a step in the right direction and a
tax increase that is both fair and well justified. The question remains whether
the city council will be able to keep to their consensus reached during the
work sessions in the face of public opposition and actually pass the new tax.
Another opportunity to increase revenues came up at
Tuesday night's city council meeting. Part of the hole the city currently finds
itself in is due to not levying property taxes to cover necessary bond
payments. When financial times were good the city council choose to pay these
bond payments from general fund revenues, specifically the city's share of
Illinois income taxes. Each year the city council would vote to abate (not
levy) property taxes that would normally cover the necessary bond payment. As
city expenses have risen without matching revenue increases it has become
impossible to use the city's share of state income taxes to replenish the ÒDebt
Service FundÓ that was created to cover these payments. Bragg presented figures
to the city council during the work sessions to demonstrate that this fund will
essentially cease to exist in 2008 as it has been spent down without
replenishment.
The city currently has three sets of bond payments
totaling $1.088 million annually. About one-third of that amount ($388,271) has
specified revenue streams available to cover the required payment. Downtown TIF
funds are being used to pay back bonds on the Kensington and roughly half of
the quarter-cent economic development sales tax is used to pay for the
Logistics Park bonds. The remaining $700,000 has no specified method of
repayment other than property taxes but has been paid from the rapidly
declining Debt Service Fund.
If the city council chooses to only abate a portion of
this amount property taxes would be increased by the difference. If only half
the amount were abated the increased property taxes would bring the total
property tax levy up to slightly more than the 2006 levy and some money from
the Debt Service Fund could be used to increase the level of pension funding.
This could be seen as gradually returning to use of the property tax levy to
fund this bond payment while simultaneously mitigating part of the pension
shortfall. Whether or not the city council understands and appreciates the
possibilities of this approach remains to be seen.
1/18/07