Saturday, November 22, 2008

Taxes: A Parallel Universe?

A recent Herald carried a story that predicted Whatcom County would pass a property tax increase for next year.
After 14 years of bragging about NO property tax increases, that tends to get one's attention, doesn't it?
Why would the County want to break its string of no additional property taxes now?
Anything to do with a slow down in growth, which usually lines the County's pocket without any Council action?
Or not being able to count on the City increasing its property taxes again, which also increases the County's revenues.
How about some folks realizing that just bragging about no new taxes won't pay the bills?
Or, maybe the extra money was needed to pay Pete's wind-fall salary increase?

But, that news also comes on the heels of the Bellingham City Council's action to NOT increase its property taxes by 1%, but instead to 'bank' that amount for future use.
This action occurred despite a looming large deficit projection for the City, that only worsens every time new estimates are made.
Ever wonder what else the City might decide do to bring its expenditures closer to revenues?
Of course, by law, the City must balance its budget every year

Most City General Fund expenses go to pay the salaries & benefits of its employees, who are the ones citizens depend upon to provide both essential and desired services.
Without all those employees doing their jobs, life in Bellingham would be very different - and likely not to make any top ten lists.
And, be aware that it is the General Fund that is by far the most challenged, every year that revenues do not increase.
That City revenues are largely also pegged to growth is a perennial problem for the City just as it is for the County.
Fortunately, it isn't every year that the City has more employees than it has revenues to pay for them.

Here's a few comments and ideas about options the City has in balancing its budget:

Eliminating unnecessary authorized staff: Earlier, the Council approved the Mayor's recommendation of reducing staff by 13 Full Time Equivalents [FTE's].
Even if all those positions were unfilled, this was a good move, because 13 new hires are now not possible without Council approval.
At about $75k per FTE, this action has the effect of reducing potential expenditures by up to $1 million per year.
Even if these hires were not made, they have had to be accounted for in the budget. Now, they aren't.

Sales Taxes: Currently these revenues split 50/50 between General Fund and Street Fund. Total amount ~ $16 million/year [2 years ago].

If the Council decides to make the split 60/40 in favor of the GF, then about $1.6 million per year could be transferred to the GF at the expense of the Street Fund.
That amount would significantly reduce the projected shortfall for the GF.
But what would it mean to the Street Fund, which is already challenged to fund its 6-year Transportation Improvement Plan [TIP] projects, including pedestrian/bike improvements, annual street resurfacing, and sidewalks & curbs upgrades?
Other cities already do this split in a different proportion, but once that move is made, is a return to the old split likely?
Would that be sustainable, particularly if new arterial roads, bridges and other improvements are needed?

While on this subject of Sales Taxes, don't forget the major economic downturn that is upon us and likely to continue for the indefinite future.
That would mean normally anticipated annual increases simply won't be there, perhaps for years.
What else might happen to impact Sales Taxes?

Remember when the City Council voted to ban 'Big Box' Stores?
Actually, they were targeting a WAL-MART expansion to provide groceries, but in doing so, also managed to collaterally damage ALL the existing stores in Bellingham which happened to exceed 90,000 SF in floor area.
Think that ill-advised decision might come back to haunt us?
It seems to me that there were several Big Boxes already established in the City, which together were returning over $4 million per year in sales taxes, plus B&O taxes.
Some of those non-WAL-Mart stores complained that their future viability was impaired by this arbitrary move.
Like Costco for example, which the City Council grudgingly allowed an additional 2,000 SF for more refrigerated space.
Or, Mervyn's in the Bellis Fair Mall, which may wish to expand at that already developed area.

The point is, what if one, or more, Big Boxes decide to go elsewhere to build larger facilities than the City allows?
Or, maybe closer to an Interstate 5 interchange?
Like maybe to the Lummi Reservation?
What might that do to Bellingham's future tax collections?
What would it do for congestion?
For additional driving time for customers who will continue to shop where they wish?
OK, I'll stop there.

The point is made I think for anyone who is paying attention.
Hopefully, those with budget balancing responsibility will keep these things in mind.
But don't count on it!
At least until they have no other choice.

Utility Taxes: Another idea is tinkering with utility taxes, like water, sewer and stormwater all paid as rates, not taxes.
A few years ago, during another budget crunch, the City decided to raise the amount from these collections that goes directly to the General Fund.
The increase proposed and passed was from 9.5% to 11.5%, which brought about $220,000 per year in new revenue to the General Fund, always the one that is most stressed.
Of course, once these additional funds were removed from their respective Enterprise Funds, rates had to be raised to compensate.
Not taxes, mind you, but rates.
Thing is, rates are also paid by citizens, and usually are considered a more regressive method of raising funds than taxes.
So, I hope the City doesn't significantly fiddle with this idea again, unless the decision is made to raise more revenue for protecting the Lake Whatcom Reservoir.

B&O Taxes: Not likely to change for several reason, the first being what we have now is pretty fair and predictable, after some adjustments were made a few years ago to reduce the amounts charged, plus oversee collections better.
St Joseph's Hospital retained its exemption a few years ago, because of the free medical services it provides to our community.
Additional B&O taxes can be collected only if existing businesses expand, or new businesses are attracted into the City, or annexed.
Because neither the County or the Port levy B&O taxes, this acts as a disincentive for businesses to locate within the City, a situation that ought to change if we are serious about developing compact business centers that are close to services, hosing and public transit.
If County or Port agreed to B&O taxes, that would raise additional revenues for those entities as well.
If additional business incentives are desired, these can still be offered on a case-by-case basis, and possibly on a time-certain basis.

Real Estate Excise Taxes [REET]: With real estate sales down, these collections will also be reduced, which mainly reduces funds for capital projects, like streets. parks and other facilities.

Impact fees are another potential source of additional funds for the City, but during a building downturn aren't likely to produce very much predictable and ongoing revenue.
Also, because the City has already increased most of its allowed impact fees to levels that are reasonably high, there may not be much potential revenues likely from this source.
An exception might be the Parks Impact Fee, which could be raised from its current 35% level to 45 or 50%.

User fees are another source of revenue from which the City could expect additional revenues.
But generally, these do not amount to sufficient sums to do much balancing of the books, and sometimes raising a user fee actually reduces revenues because people stop doing those activities that cost more.

Travel, Grants & Discretionary Outlays: There always seems to be room for some reduced spending here, but not enough to count for much.

Wages, Salaries & Benefits: Since about 85% of City staff is represented by various collective bargaining units, the pressure on WSB is constant and upward. There is not much that can be done to reduce these pressures other than good bargaining oversight and keeping staff levels at lean and efficient levels. While it is important to honor the collective bargaining process, all City employees need to understand that there is a balance toward which all have a responsibility. The City needs to retain productive employees by paying competitive wages, and not wasting time and money by continuously hiring and firing.

Budget time is not a fun part of being on the City Council, regardless of what year it is.
But, those years when deficits are projected are far worse!
Also, government budgeting is complicated and significantly different from household or business budgets.
And these are public funds which are at stake, not private money.

As one aspirant candidate for Council said to me not long ago, 'being in office with no funds to spend doesn't sound like any fun at all'.
And it isn't fun!
That is why paying attention during the good times is so critical.
It's why making sure sufficient reserves must be set aside for hard times.
It's why 'feel good' expenditures aren't in anyone's best interest.
And, sometimes it's why established programs must sometimes be cut, in the interest of keeping services which are considered more critical.
Believe me, that's the hardest work!

So, good luck to the Mayor and City Council in their efforts to balance next year's budget.
It's not fun, but it is a very necessary exercise!
Thank goodness, you folks are there to do this for us.