Wednesday, September 24, 2003

City budget crunch can be traced to four causes

Peachtree City has a new budget for the fiscal year starting Oct. 1, and the city's running a deficit.

Of course, deficits occur when city government spending exceeds tax collections. Government officials have only a small selection of tools for closing the gap between income and outgo: Restrain spending, raise taxes, issue debt (borrow).

In the city's budget report (published on www.peachtree-city.org), our city officials list the reasons for current budgetary woes:

1. Decrease in L.O.S.T. and hotel/motel tax collections.

2. Significant events from fiscal year 2001.

3. Increase in health insurance premiums for city employees.

4. Increase in retirement contributions for city employees.

Let's see if we can dissect these reasons. We'll start with simple explanations of items 1 through 4 before proceeding to analysis of each. Since this is the point where policy wonks start getting excited and we normal folks glaze over, I'll do my best to keep this brief and to the point. If you find the following absolutely unbearable, you can skip to the final three paragraphs to see how the story ends.

1. L.O.S.T., or local option sales tax, is all sales tax collected throughout Fayette County and shared by all the city, town, and county governments within the county. Three factors determine who gets what: (1) total sales of taxable goods, (2) relative population of each jurisdiction, (3) distribution percentage negotiated and legally agreed to by government officials.

Hotel/motel tax is simply taxes collected from people staying at local lodging establishments.

2. "Significant events from 2001" is code for the property tax rate cut during the Lenox administration.

3. Health insurance premium increase means that the cost of providing medical insurance to city employees is climbing.

4. Peachtree City employees have a defined-benefit pension plan. In a defined-benefit plan, the employer (in this case, Peachtree City) guarantees pension payments based upon an employee's final salary and years of service. To support this plan, the city sets aside money that's invested in assets (stocks, bonds, money market funds) whose value is expected to appreciate.

Now that we're acquainted with the Big Four, let's try to understand what's happening with the city's finances.

1. The nation's economy has been anemic this entire millennium. Fayette County arguably has fared better than many areas in our country. Nevertheless, it's safe to assume taxable purchases would have been greater had the economic boom continued unabated. Therefore, tax revenue is lower than it could have been in a vibrant economy.

Hit number one: Less total money is available to share among the governments within Fayette County. At the same time, as PTC approaches build-out, growth of the city's population slows relative to, say, Fayetteville's.

Hit number two to PTC because, remember, taxes are shared based on relative populations.

Hit number three is the share negotiated by PTC and Fayette County officials. The cities' share has dropped from 52.5 percent to 50 percent.

It's safe to say the first and second factors are beyond the control of even our wisest officials. However, the third is absolutely under the control of those officials.

Negotiations have left PTC (and the other towns within the county) with a smaller share of total sales tax dollars collected by the county. Over the 10-year budget period reported, it looks like the share change will drain an estimated $2 to $3 million from PTC's coffers.

That seems like a lot of money until one realizes that this loss is used to justify this year's property tax rate increase that during the same period will yield an estimated $15 million for the city! Not to mention the property tax rate increases planned for the following two years.

Add it all up and the city's planning on collecting $40 to $45 million through property taxes to replace $2 million lost in sales taxes. If I'm in government and I can't resist spending other people's money, right now I'm in high cotton.

I note, too, an interesting approach to budgeting that our city officials take. They forecast sales tax revenues and then plan spending upon the forecasted revenue. Nothing wrong with that. But as time passes and actual revenue falls short of projected revenue, these same officials seem to ignore the amount they actually collect and project future increases with previous projections as their baseline.

If I ran my household budget this way, I'd have the fanciest car in the neighborhood till the repo man dragged it away in the middle of the night.

2. The prior administration did provide tax relief in the form of a cut in property tax rates. However, because of increases in value of taxed properties, total collections of property tax increased every fiscal year from 1999 to 2003. Enough said.

3. Increasing health insurance premiums challenge every public and private entity. The city reports an increase of just over 15 percent this year. Someone in our government deserves kudos for limiting the increase to only 15 percent in an environment where insurers commonly demand increases twice that rate.

4. Covering its pension commitments is becoming more expensive for PTC. Since benefits are guaranteed but returns on the city's investments are not, depreciating value of investments such as we've seen the past few years hurts the city's ability to pay its pension commitments. What was expected to grow has shrunk, so there's less available to pay expenses that don't decline. So the city must dip into other funds to make up the difference. In a worst-case scenario, the city will have to issue debt to pay its pension obligations, which in November of 2002 were underfunded by nearly $1.7 million. Not listed as one of the four major contributing factors to current woes, loss of impact fees receives honorable mention in the budget report.

Falling impact fees, fees that developers of property pay the city because their activities create increased demand for public safety and protection, roads, utilities, services, are described as a "problem." How times change? Not long ago building was a problem and now not building is a problem. We'll need awfully wise leaders to sort out that one.

What's all this mean? For much of its history, Peachtree City has lived on growth. The town nears the end of its growth and the steadily increasing tax revenues resulting from that growth.

Therefore, leaders of the city have to start making tough spending decisions or continue to increase tax rates. It's that simple.

Of course, the voters select the leaders. With the financial sea change before us today, it's important we select the best leaders available. The best leaders are identifiable by their experience, maturity, integrity, wisdom, accountability, and willingness to accept responsibility. They are going to understand that Peachtree City's gravy train has departed and isn't returning. They will make spending decisions that are not popular with everyone in the community. In short, they will lead.

With the upcoming elections, it's important for each of us to talk to the candidates, consider their positions, and decide who best can help steer the city through uncharted waters. Since all candidates for two contested council seats have filed, now is a good time to start.

Rex Green

DIRECT PAC

Peachtree City