To City of
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:
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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.
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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
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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:
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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.
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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
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.