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 “fairer” source of revenue because “everyone” 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 “cuts” 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 “Debt Service Fund” 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