Balancing a governmental budget in the “New-Normal”
Across the country, city managers, mayors, school superintendents and other state and local governmental officials are coming to grips with the severe budget deficits they will be facing as a result of the continued decline in residential property values. Most municipal units derive the bulk of their revenue from taxes collected on the value of properties in their respective communities, and typically share a portion of revenue allocated by their state government.
In all 50 states, revenue is down this fiscal year, but will likely remain down for many years for the ten states hit the hardest (Pew Research Report on California and others, November, 2009).
The severity of the problem, which is only exacerbated by the traditional high-cost benefits package featured in most municipal governments, is causing officials to re-examine how they not only deliver services to their constituents, but how to pay for them.
Most governmental units provide public safety, parks and recreational services, public infrastructure (roads, streets, lighting, water, sewer, recycling, etc.), library, business development efforts, as well as traditional services required by statute (tax collection, treasury management, purchasing, etc.)
On the revenue side, the tax base is typically the largest driver of revenue. If you dig out your property tax bill, you will likely see anywhere from 5 to 15 different taxing authorities, all of which principally derive their revenue from property tax (imagine all of them going through this process).
The takeaway on the revenue side is to try to create as many self-sustaining enterprise funds, each with its own taxing authority, so that, say, a park and recreation system is operating on the revenue it generates as a stand-alone unit. Most municipalities allow for special millage votes for sanitation and refuse, library districts, police and fire, 911 service, and separate economic development zones (TIFA, DDA). The point is that operating millage capacity should be used to fund the operations of the municipality, i.e., those services that go directly to the mission of the municipality, and not divert these monies to subsidize offerings that are either a) undesirable left-overs from years past, or b) can be supported by separate revenue streams.
Most residents of any city, county, township anywhere will likely value their police and fire efforts, want to keep their communities clean, but will be reading about their local school district struggling to make its budget, and their county and state in similar dire postions with respect to their budgets. This will be a difficult process in the beginning, where raising taxes is not likely to be a realistic option, given the depth and breadth of this problem.
In addition, any local units that are in the unusual position of having a positive fund balance will want to retain that balance as the length of this recession is unknown, but more important, the amount of time for property values to recover could be decades. Municipal credit ratings will be impacted by the decisions made in the next 3 to 9 months, so it important to understand there is help available to deal with this unprecedented crisis.
Glenn Watson is a member of Free Vector Advisors who specializes in public finance and is actively involved in assisting state and local governments deal with their budget issues. You can contact Glenn at glenn@freevectoradvisors.com.
Here is an interesting piece submitted six months after we commented on this topic, which continues to plague governmental units.
http://www.governing.com/blogs/bfc/debt-deficits-fiscal-sustainability.html