Sunday, February 17, 2008

THE BUDGET

We have accomplished a lot over the past six years and still have the lowest tax rate of any city in Virginia at 53 cents. While the tax rate has fallen revenue to the city have increased in part to cover the cost of construction of schools, recreational facilities and the new police station. However, in comparison to our neighbors the City comes in last in the percentage of that increase over the past six years.

With the falling real estate market and retail sales the City is now faced, as are most localities, with a revenue shortfall. In addition, there is no indication of new revenue coming on line over the next two years to cover increased cost for the regional jail, coverage of a larger percentage of the school budget, and new costs such as a court facility and water/sewer upgrades. In light of these realities how will we face the coming budget year?

A few observations on the city budget are in order before getting into this discussion. Unlike state and federal budgets local budgets do not have a lot of programmed spending. Most of the budget is for salaries—firemen, policemen, trash men, etc., and benefits. This accounts for about 35% of our budget. The next big expenditure is the transfer to schools that accounts for another 30% of the budget. Debt service is currently about 8.5%. These three areas account for almost 75% of the budget.

If there is an area that could be considered funds for programs it is our Outside Agency budget that accounts for about 7% of our budget. The larger parts of this budget are based on formulas as is the case with the regional jail, and library. The remainder of the budget is for capital transfers, paper clips, pens, supplies, travel, education etc.

A comment on the City’s reserves—City policy is to maintain a reserve of 12% and no less than 7%. This translates to roughly 10M. We have held reserves higher than this over the past years to allow us to pay cash down for projects such as the schools, pool, Rec. facilities and the police station. This fund is maintained for emergency/ unexpected expenditures. If we reduce them below 12% we are expected to bring the reserve back up within five years. If we draw down below 7% we must bring it up in two years. For reserves above the 12% figure it is expected that these funds to be used on one time capital expenses and not operating costs as has been suggested.

To use reserve funds for operating is a last resort to cover critical services. To do otherwise is to increase expenses without having the revenue to cover them the following year. It would be comparable to you using you savings account to cover your monthly bills. Before we consider using reserves for operating expenses we should first consider reducing non-essential expenditures.

Factors facing the current budget:

--Increase of about 1.3M for additional employees and debt service on the Regional Jail expansion.


--Reductions in State and Federal funding. At least 5% from the state.


--Another increase in the percentage of the School Budget the City must absorb.


--2nd phase of salary increases to teachers to make them competitive, not in line with, area localities.


--The planning and construction of a new court facility.

Another issue to be considered is the fact that we have held our own employees to cost of living raises and the possibility of a 2% merit pay while we have provided funds and benefits to other agencies which included higher salary increases and benefits. This was a major consideration in Councilman Dixon’s and my effort to reduce payments to Outside Agencies last year. While we had the Mayor’s support the majority of Council would not support the level of cuts suggested.

At our November Budget Retreat Council was apprised of some of the issues we would face in the coming budget year and it was agreed that we would consider no new expenditures beyond the land acquisition on the river. This investment would increase property values in the downtown and spur further investment.

There was not total agreement on the court facility beyond the location. I continue to maintain that this is a cost we cannot take on under the current fiscal situation. To maintain the 2010 timeline for the facility would mean placing the initial costs squarely on the shoulders of city taxpayers.

In reviewing the coming budget my philosophy will be:

1. To protect city core services first. This includes education. The School Board has worked well with the Council and has recognized the budget issues we face. They have not increased programs and have kept a handle on expenses. We did cover an increase in salaries last year and I would hope that under the current situation we at least do not loose any ground to our neighbors. We also need to look after our own employees.


2. I cannot support any expenditures related to the new court facility on the current timeline of 2010. We need time to get projects such as Wegmans, and possibly Kalahari, on line before taking on the courts. This project can be dropped back two years without incurring major increases in cost.


3. Outside Agencies should be judged on outcomes and need. I wouldn’t support an across the board cut because some agencies do provided needed services. Others such as GWRC/FAMPO generate funds. We use our contributions for matching state and federal dollars from $7 to $9 for every dollar we put in. However, we cannot support new program, positions, or raises if it means adversely affecting core services. And we cannot be expected to make up for state and federal cuts.


4. While we do not want to reduce services to city residents we must ensure we have made every reduction in the budget possible before we consider any tax increase.

What philosophy would you bring to the budget? No new taxes? Are services or programs more important that holding the line on taxes? The following year will not be much different than this year suggestions to you have on dealing with that situation?

3 comments:

Bryan said...

Matt, once again, thank you for being upfront about the challenges facing the city, and soliciting an oppinion prior to going behind closed doors to make some difficult decisions.

Lets talk about the reserve fund. If you look at the general fund balance at the end of the last 3 years, it appears that we have been spending down the amount of reserve.
http://www.fredericksburgva.gov/citypubs/FY08_budget/Section6_Fund_Balance_Analysis.pdf
Considering that just two years ago we lowered the tax rate to the lowest I've ever seen for an area of this size and density, yet we continued to spend on an ever increasing rate, we have been overexpending our savings account. It's been a tight year for a number of people, and I suggest that it's time the city go on a belt tightening audit. I applaud Phil Rodenburg on instituting a hiring freeze.

Here is one thing that I don't understand. If we have seen a dramatic downturn in the building/construction sector, I would expect to see an associated re-allocation of manpower from the building/planning offices to other areas where we have needed additional headcount. This isn't apparent in the 2008 approved budget documents. I also heard Ms. Greenlaw state at the last planning commission meeting that there are complaints about the length of time to get site plans approved, yet she was unaware of any personnel cutbacks in the review process. Something here just doesn't add up, which is where I think we could save some money.

Saving money #2. Not 3 days after hearing of the hiring freeze at the city council meeting, I received two letters from the commissioner of revenue with several sheets of paper documenting the personal property I would be required to pay taxes on this year. Not the bill, simply a statement. Spotsylvania stopped sending out this document this year to cut cost. Why aren't our divisions thinking of every possible ways to cut costs. Here was several thousand dollars of paper/printing/postage that were filed in my recycle bin. How many other opportunties are there to save money.

Rainy day fund - we are definately on our rainy day with this year being all but defined as a recession. Everything I read says that we should start coming out of it by the summer and into next FY. I would support council if they wanted to use up a bit of the reserve for 1 year. Builders seem to be looking ahead to next year. I drove through the new estates behind the preserve at smith run. There are lot of new lots being prep'd both there and at idlewild.

Speaking of construction, is the city receiving an adequate benefit from these large planned developments? Fredericksburg has not been mentioned in any of the discussion of proffers. As the state moves to impact fees, what can the city expect to be able to recoup to fund schools and services?

I also think phasing the courts project is a good idea. Whether that is delaying construction, or starting construction on the most critical needs first. For example, there is no immediate need for a 2nd parking deck, as the one we have on that end of town is rarely full. Plus there is property on the northern most area of the new courts proposal that is paved or unused ground, maybe start there before having the expense of rebuilding the post office. Generally I would think the courts project would be bond financed, so how much does this really help the city budget.

Finally, the fact that jobs here are based on cost of living plus an incentive bonus is a great management decision. That's what most of us make, especially in tough times. Perhaps the end of FY08 the incentives could go to those employees who saved the city the most, or came up with the most creative cost saving measure. Can I start with a suggestion that autochalk should have been a Prius (or similar hybrid) and not a gas guzzling SUV?

FYI - I like your 4 pillars on which to base your budget decisions, good sound priorities.

Bryan said...

Ok, one more nit. Let's put the zonine changes the city is considering into the context of the budget. Large homes help feed the revenue of the city - as property values go up, the tax collected on that property goes up. If residents are more restricted in redeveloping older properties, or even restricted in additions, that has a direct impact on the earning potential of the city.

Not only that, a more restrictive zoning is going to adversely impact property appraisals during the next cycle. Currently a family can look at a home and a lot, and might love the lot and hate the home, but will offer a good value to the seller so that they can build their dream home. That dream home is already restricted to 35' tall, and certain frontyard, sideyard, and generally a 25-30' backyard. With the new zoning changes, that person has a burden of proof to make sure that any new design won't exceed some %, and may or may not have to calculate a flood zone area.

Now when those plans go to the building inspector for approval, they are also going to have to expend an additional amount of time to verify all of the property owner's calculations. Any discrepency will create a new round of responses/rejections, and continue to expend our city salary money.

KISS - Keep It Simple... The zoning ordinance as written is very simple to follow, and we have become very efficiant at it. Rather than creating additional cost to the city and the city residents, lets table this until the budget is in better shape. Then we can also take the time to create an ordinance with fewer loopholes and gray areas than what is being proposed.

Sorry to bring it up, but it just gets back to my argument for why are we spending more when we need to be cutting costs.

Matt Kelly said...

BRYAN—Some musings on your musings:

--There are budget items that continue to go up for which we have little control--The biggest being the school budget. Each year state support goes down and local support goes up. Then there has been the cost necessitate from going from (3) to (4) schools. Our bills for health insurance and retirement, like everyone else goes up. And there are items such as the regional jail that keeps going up every year. This year the increase will be around 1.3M. On top of all this, state and federal unfounded mandates roll in while financial support continues to drop. As I noted this is one area where we have to draw the line.
--We have always had a small Building & Services Dept. Housing has slowed but there is still enough commercial development to keep everyone busy.
--The Commissioner of the Revenue is a Constitutional Officer. While she does get city funding Ms. Jacobs is not city staff. Your point, however, is well taken. I know there have been discussions to streamline the process and I’ll follow-up with Lois to get an update.
--As noted using reserves for Operating Expenses is a slippery slope. May need to use it to cover existing essential services but not new operating costs.
--Proffers never cover the actual cost of development. Impact fees will be no different. This is a subject that should deserves more in-depth discussion. But that will be for another day.
--With the construction of the hotel the deck we have will fill up in the foreseeable future. A deck to handle court operations will free up space on the streets for tourists. Projected debt service for the build-out of the court facility equals 12 cents on the tax rate. That’s what would be needed to cover debt service for 30 years. We are also looking at a lease to buy option.
--The hybrid option was discussed. Auto-chalk, even with the SUV, is paying for itself.
--I expect to see you at tomorrow's meeting with the Planning Commission on the zoning changes. You make some valid points. Now let me play devil’s advocate. A diverse housing stock also has its advantages. Being able to live and work in a community keeps costs down and people living in higher end homes still want services. Currently I have few firemen, police and teachers living in the city because of housing and rental prices. When setting their salaries I have to consider cost of living. Again, a big topic, but just something to think about.