To City of Lawrence

City Commission

 

MEMORANDUM

 

DATE:               May 2, 2008

 

TO:                   Dave Corliss – City Manager

                        City Commissioners

 

FROM:               Rob Chestnut

                       

 

SALES TAX PROPOSAL

 

The commission is now considering options regarding a possible sales tax election later in 2008.  Based on the analysis attached, I am attempting to provide a scenario that is a jumping off point for discussion, and I am hopeful we can work toward a consensus on a structure that will provide significant benefit to the community in years to come.

 

Current Situation

 

The City experienced significant revenue growth in the general fund through 2005 as a result of increasing real estate valuations as well as robust sales tax growth.  The graph below shows revenue growth since 2004 in the general fund:

 

 

p. 2 Sales Tax Proposal

 

Spending between 2004 and 2006 accelerated significantly.  Spending grew approximately 15% in 2005 and 2006.  Despite robust revenue growth, fund balance was being spent down.  As revenues slowed to 4% growth in 2006, a $3.4 million deficit was realized in 2006.  Mid-year budget cuts and deferral of several transfers in 2007 allowed for a slight surplus that will not be repeated in 2008.  Without significant change in either revenues or expenditures for 2009, the general fund will have another significant deficit and the fund balance will drop below 15%.

 

Other funds with property tax revenue have also seen reserve balance decline in recent years including transit, library and the City’s bond and interest fund.  Based on preliminary estimates, the transit fund will require another $1m in new revenue to sustain current service after seeing deficit spending each year since 2005.  Much like the general fund, these funds will require new tax revenue in 2009 to be sustainable in future years. 

 

Adverse Impacts  

 

Adverse impacts are now becoming a reality regarding some important City services:

 

-         Street maintenance continues to be underfunded according to staff analysis.  Even with significant general fund increases in recent years, it appears we are not making headway on an overall improvement in street conditions.  This was one major issue recognized in last year’s citizen survey.

-         Increasing debt is putting pressure on the bond and interest fund.  This limits the ability to finance fire/medical equipment, larger street improvement and other capital needs for the City.  Spending will need to stay below $5m annually in order to maintain a reasonable fund balance by 2011.

-         Transit needs are not being met with the existing level of funding.  Even with the $1m increase required to maintain the current level of service, transit needs will continue to challenge the ability to fund without a new revenue source.

-         The library’s City funding comes from property tax revenue that will flatten out year-to-year over the next several years.  Increasing personnel and other costs will require a reduction in service levels due to flat funding.

 

 

 

p. 3 Sales Tax Proposal

 

.5% Sales Tax Election Proposal

 

I am recommending consideration of a .5% City sales tax that would be comprised of two separate elements that should be voted on separately as follows:

 

-         .35% Infrastructure Fund

-         .15% Transit

 

These two ballot issues could be placed on the November general election ballot with negligible cost to the public.  I would propose a 10-year sunset clause for both elements.  The total proceeds estimated for a .5% City sales tax would be $6.4m for 2009.

 

Infrastructure Fund

 

A .35% sales tax election would produce approximately $4.5m in annual revenue for this fund.  I would propose that this revenue would be used on the following types of projects:

 

-         A portion of the street maintenance now being paid for in the general fund. 

-         A portion of larger street construction projects now bonded with debt service paid out of the bond and interest fund.

-         Infrastructure for economic development projects such as requirements to prepare industrial sites for build out.

-         Sidewalk reconstruction in older neighborhoods that will require major reinvestment.

 

I would not propose a particular split between the types of projects.  During any given year the demands will fluctuate.  The primary focus is to provide for reinvestment in our community that has been somewhat lacking in prior years.  As we begin to catch up to the backlog of projects now within our current budget that have no realistic hope of being funded, I believe the public will need to decide if the additional funds are necessary for this fund in 10 years.

 

Transit

 

Transit currently has a separate fund for its operation.  Therefore, a new fund will not be required.  A .15% sales tax election would produce approximately $1.9m in annual revenue that would be put into the transit fund.  I would

 

p. 4 Sales Tax Proposal

 

recommend removing the approximately $1.0m of revenue being funded from property tax in 2008.  A discussion of the mill levy distribution between funds will be detailed later in this memo.

 

Transit funding must be increased by at least $1.0m in 2009 to sustain its current level of service.  An increase of at least 1.2 mills will be required without any other source of revenue.  I believe it is time to allow the voters to make their voice known regarding an issue that will now require funding in excess of $2m annually from local sources.

 

Transit funds have been depleted consistently since 2005.  The mill levy required to support ongoing costs has not been set at a level to sustain it over the last four years.  The City depleted a total of $1.7m in fiscal years 2005-2008 out of the transit fund, and it will have almost a zero balance at the end of 2008.  The mill levy was reduced in this fund for the 2006 budget year despite deficit spending in 2005 within the fund. Due to a smaller than required mill levy increase in 2007, funds from equipment reserve were transferred to transit of $232k in order to fund the last year of the current transit contract. 

 

A new contract will require doubling the annual local funding for transit.  I believe it is time to inquire of the citizens about their desires on this issue.  If we attempt to fund transit at its current level of service in 2009 from existing revenues, it will lead to a significant reallocation of priorities that will require reduction in our core services.

 

Mill Levy Proposal

 

I am proposing a slight reduction in the mill levy.  If we agree upon funding transit from sales tax, it will release 1.171 mills to be reallocated into other funds now being either partially or primarily financed by property taxes.  My reallocation and reduction is highlighted in the chart below:

 

 

 

p. 5 Sales Tax Proposal

 

The net mill levy reduction would be .240 mills.  The reallocation of some funding currently used for transit would go to the general fund, library fund and the bond and interest fund.

 

The general fund is now out of balance.  Significant reductions were made to the 2007 budget.  Sustaining those reductions and proposing a 2% overall increase in funding across all departments in 2009 will still generate a $1.7m deficit in 2009.  I think it is appropriate to move .5 mills to the general fund, but to continue our vigilance in controlling spending within these departments.  I have included some analysis of the impact to the general fund the result from this proposal in a separate spreadsheet. 

 

If we move .5 mills to the general fund, reduce street maintenance by $1.0m that would be funded from new sales tax revenue and increase expenditures from 2008 by 2%, the 2009 deficit will be reduced from $1.7m to $.3m.  This comes very close to giving the staff ability to balance the general fund budget.  I realize that we are in slow economic times, and we should see increasing revenues in the general fund sometime in the future.  However, I believe it is prudent to reallocate now to ensure a closer match between revenue and expenses due to the uncertain nature of our overall economy in the near term. 

 

The proposal would set up a transfer of $125k annually to the library fund from the general fund in addition to the current property tax funding of 3.259 mills.  This transfer would occur if both sales tax initiatives were passed in November.  It would not fund any new projects, but provide an opportunity for library operations to sustain its current level of service over the next few years.  Without some increase in funding, the library will have no increase in City funding for 2009 with no appreciation in assessed valuation. This will require the library to seek other funding sources to absorb increases in personnel and operating costs.

 

Finally, I would propose increasing the mill in the bond and interest fund by .3 mills.  We have significantly increased our total debt since 2003.  This increase reduces the City’s ability to fund necessary capital needs for core services.  The trajectory downward of this fund balance through 2011 is significant.  Based on outstanding debt and $5m in spending each year, the bond and interest fund balance will be depleted by almost 60%.  The City will soon need to reduce spending well below $5m annually to stem this tide.  This will be difficult given capital projects now detailed that total over $50m. 

 

 

 

 

p. 6 Sales Tax Proposal

 

The proposed infrastructure fund that would have new sales tax revenue is targeted at this issue.  The backlog of worthy projects will continue to climb, and the City will not have any ability to move forward unless it continues to deficit spend in the bond and interest fund.  This can only occur for a few years until the fund balance is completely depleted.  The infrastructure fund would relieve a backlog of street projects, and it would assist in refocusing the fund in financing equipment required for the City’s core services.

 

Summary

 

The dual challenge facing the City is difficult.  We must meet the ever-increasing costs of current services during slow economic conditions.  It will require continuing evaluation of our spending priorities to increase the efficiency upon which City services are delivered. 

 

The cost of transit services has now outstripped our ability to fund them within existing revenue sources.  The proposed sales tax election for transit will provide adequate funding for 2009, and it will provide a consistent revenue source to transit over a long period of time. 

 

Infrastructure needs special attention now.  The proposed sales tax election would allow the City to make significant progress toward providing a level of street performance (particularly in the core of Lawrence) that has seen slow deterioration over a number of years.  Funds for economic development infrastructure represent an investment in the financial well-being of Lawrence that should produce revenues well beyond their cost in the future.

 

I look forward to the discussion of this proposal.  I would suggest we provide staff with some definite mill levy guidelines for 2009 as soon as possible.  The deadline to submit ballot language for the general election is September 23rd, so we could agree in principal on the sales tax proposal and work through details over time while giving specific direction on the mill levy in the near term to complete the 2009 budget.