City budget: simple answers aren’t always easy.

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A funny thing happened on the way to putting together the City of Wausau’s 2010 budget. Actually, it’s not funny at all – but it’s fairly typical of what many businesses and families have been dealing with since late 2007. It’s called lower income.

Cities rely heavily on property taxes and while they’re not really popular, it’s the system we have and they tend to be a fairly stable revenue source. But property taxes are not a bottomless pit and it’s not just about politics. The overall increase in the city’s levy increase is capped for 2010 at three percent. In past years, the rapid growth of new construction has rendered the statutory cap moot because the growth brought on by new buildings has been greater than the cap and the city has thereby benefited from its success in economic development. But with the recession, new construction was down.

Unlike the federal government, the city doesn’t have the option of running a deficit (and it’s just as well.) The state is also required to have a balanced budget, but after years of accounting games and installing an incorrect revenue or cost assumption here or there, Wisconsin runs a structural deficit of several billion dollars annually.

The problem is that when you factor in things like reductions in state revenue sharing, lower income from permits, and other items, the impact is that a three percent increase in the tax levy will be outstripped by the other factors in play that increase costs. There is a year-over-year net decrease in revenue to the City of Wausau of nearly $700,000 – but even that number understates the problem. Health insurance premiums are currently set to rise more than 21 percent. There are union contracts calling for cost-of-living raises.

To make a long story short, the city’s obligations are greater next year and the amount of money to cover them is smaller. Something’s got to give.

The city’s situation stands in sharp contrast to that of the Wausau School District, which will be increasing its tax levy by $4 million, or more than 10 percent. I’m not offering a judgement on that course of action, but the truth is that when many people get their property tax bills, they look at the return address and blame everything on the city. But both the city and the county will be capped at three percent. Period.

Since payroll costs including benefits are the largest component of the city’s budget by far, some people legitimately ask how employees could be receiving raises and the city can eat all of the increases in health care premiums or retirement funding in such an environment. Unemployment in the community has essentially doubled in the past year or so. For those who remain employed, many are looking at no raises, shouldering a higher share of their benefit costs, paying for much or all of their own retirement, dealing with furlough days and weathering other things that have diminished their net incomes. Remember the old laments about living on a fixed income? Well, a fixed income is better than one that is falling and the city would be better off in 2010 with a fixed income, just like a lot of other people and businesses.

As for contract negotiations, the city doesn’t have the luxury of simply taking a hard line on pay and benefits with union employees and unilaterally saying that there will be no pay increases or that any rise in the increase of benefit costs will be taken on by the employees. Such a posture might seem politically popular at first, but it would surely send the union contracts to arbitration where the city would almost certainly lose.

Arbitration doesn’t allow for meeting somewhere in the middle. The arbitrator decides whether the union or the city’s final position is implemented, so it’s essentially an all-or-nothing game. I don’t believe the city could have negotiated a no-increase contract and higher cost sharing with the facts that were available at the time the talks were taking place. There may be opportunity to negotiate something different now, with the array of unpleasant choices that are now crystal clear.

To be most effective and cause the least amount of damage, the city needs union cooperation to navigate the difficult financial situation it is faced with. Pay freezes can be implemented with non-represented employees, but a large share of the municipal workforce is unionized and their participation in the solution is critical.

The situation is that if unions don’t forgo or severely temper receiving cost-of-living increases as provided for in their contracts, then there are going to be significantly less employees on the payroll next year to receive that extra money. It’s a question of either protecting some relatively modest pay increases or protecting a number of jobs because there would have to be significant job cuts to accommodate the increased payroll expenses in 2010.

There may still be some cuts or furloughing necessary even with a pay freeze or rollback in the increases, but the goal is to avoid or minimize this to the greatest possible extent. While it might seem like a no-brainer, that’s not necessarily the case. Union leaders have their own constituencies with their own interests and people need to appreciate the difficult situation it can place people in to turn down what they legitimately bargained for in good faith just a few months earlier (practical or not.)

And what of other cost items in the city budget, such as capital projects? In family budgets, paying for housing, making sure there are groceries and keeping the heat on are things that come before vacations, video games and movie tickets. Likewise, governments have to set budgets that reflect the highest priorities and address true needs as opposed to wants. We’re necessarily going to address safety before we buy new playground equipment.

It is almost certain that there will be some cuts and deferrals when it comes to city improvements in 2010. Still, it is important to understand that dumping a million dollars worth of capital projects does not translate into a million dollars worth of annual budget savings. In general, the cost reductions from such a move will be far less than $100,000 in a given budget year after the timing and funding factors associated with many capital projects are taken into account. Moreover, it is a bad long-term policy to defer maintenance and improvements because many of these projects tend to simply reappear later with greater urgency and higher price tags. Feeding ramping payroll increases with one-time savings on capital project cancellations or depleting the general fund for operating expenses promises only bigger and more costly problems later. It’s like running red lights. I can’t tell you that if you do it once, you’ll get into a crash — but it can just about be guaranteed to happen at some point if you make it a practice.

This isn’t about union busting. I’m not interested in bashing public employees or joining the chorus of people who say that they have it too good. From time to time, we find ourselves in economic conditions in which people understandably prize the security and stability that have traditionally accompanied public employment over the uncertainty and dynamic nature of the private sector. When people are getting five or 10 percent raises in the private sector, they don’t worry too much about someone else getting three percent. But when they face pay cuts, freezes, furloughs, benefit cost increases or layoffs, it’s only human nature to wonder how they can also be funding what looks like a parallel universe where few or none of these things seem to be happening.

Part of the American Reinvestment and Recovery Act was specifically designed to help prevent state and local governments from adding to the unemployment problem by slashing and burning their payrolls as income and sales tax revenue headed south. Placing additional stress on the economy that way carries the risk of turning a bad situation into something worse. Public employees provide critical services in our communities in terms of quality of life and sometimes, literally life and death. If positions are cut wholesale, it will be very difficult to restore them in the future and the quality of services will be negatively impacted. I’ve yet to have anyone tell me that we have too many police, their street is plowed too quickly, their parks are too clean or we should add 10 minutes to the response time on our firetrucks and ambulances.

There will be a lot of thorny choices over the next few months and probably a healthy dose of political posturing to go along with them. The truth is that our challenges, while significant, are far smaller than many of those faced by other governments, businesses and individuals in the difficult period from which we are hopefully already emerging. Glib slogans and finger pointing aren’t going to get the job done. Knocking insignificant amounts off of property tax bills while allowing infrastructure and services to decline in far more noticeable ways isn’t going to make this a better or more prosperous commuity. But with everyone working together, we should expect to emerge stronger, leaner and more responsive to people we are here to serve.

The answer for the 2010 budget seems pretty simple. It’s just not easy. There will be plenty of discussion between now and when the property tax bills go out in December. Pay attention, learn all you can and then talk to your representatives to let them know how you feel about the issues in play. It has never been more important than now.

JR

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2 Responses to “City budget: simple answers aren’t always easy.”

  1. joseph Browne Says:

    Is there a simple reference which would guide one in understanding / analyzing Town/City Budgets & Reporting methods. Presently on the November ballet for a town trustee position and have reviewed 8 years of Town Budgets and are somewhat lost.

    With years of Business Accounting methods, Profit and Loss, Balance Sheets, as well CPA reporting analysis, Can truly say Budget Accounting escapes me and need some help in understanding. I can see the numbers and pull them from the sub sections. Need some understanding were one stands in explaining the numbers.
    Not use to running something which feeds off the trough sort of speak.

    Thanks if you can help.. I enjoy your blog.

    Joseph Browne
    Palisade, Colorado

  2. The answer to this question will vary by state and it’s important to understand impact when you’re dealing with trying to control costs. For example, if you cut a position and it is largely funded by a state or federal grant or a revenue sharing formula, you can be making a bad choice for your taxpayers. They end up still having to pay taxes to another entity for the larger program and at the same time, they are deprived of the service or asset that is being supported. What I’m saying is that principle has to meet pragmatism.

    I’ve also seen people mix capital and operating expenditures or Tax Increment Financing numbers together to say “They’re all spending.” That’s true, but these things need to be considered independently to have a coherent and thoughtful approach toward overall spending.

    Using governments that I’ve been involved with as examples, Marathon County may have around $150 million in annual expenditures and a $50 million annual property tax levy. The City of Wausau may have around $50 million, but a $22 million levy. I want to know what will impact that levy and I want to differentiate between things that will produce a return vs. simply operating expenditures. Deferring maintenance tends to produce initial savings, but then things deteriate and end up costing more in the long run, while producing issues in the meantime.

    Here’s a resource I found online that might be useful in a generic sense:

    http://www.mrsc.org/subjects/finance/budgets/budget.aspx

    It’s specific to Washington State and your inquiry will need to be specific to Colorado to be useful, but going through the information may give you an idea about what kinds of questions to ask and who you should be asking.

    Good luck!

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