Wednesday, August 13, 2008

Are tax increases in Spotsylvania inevitable? No.

by D.J. McGuire:

Last night, the Spotsylvania Board of Supervisors received a report from county staff that projected yawning budget deficits over the next five years (Dan Telvock, Free Lance-Star):

Spotsylvania County residents could see the real estate tax rate increase by as much as 15 cents in five years if the economy doesn't improve. That would boost the average real estate tax bill by more than 24 percent.

And that's just to balance the budget.

Budget officers said during last night's Board of Supervisors meeting that revenue projections continue to fall short in the sluggish economy.
The actual report (Exec Summary) spells out the gloom and doom, and hints that the pain will start really early (emphasis in original):

The Budget Plus Five Model sent to the Board in early July has been updated to reflect the approximately $7.6 million revenue decrease currently estimated for FY 2009 (the earlier version sent to the Board prior to the most recent revenue update assumed a $1.9 million revenue decrease in FY 2009). Given the assumptions and methodology outlined on page 2 of the attached Budget Plus Five narrative, tax rate increases are needed in each of the next five years to balance the General Fund and Transportation Fund budgets. The tax rate increases are shown by fund on the second page of the financial analysis spreadsheets and are summarized in total below:

FY 2010 - $0.067; FY 2011 - $0.034; FY 2012 - $0.024; FY 2013 - $0.025; FY 2014 - $0.002

That's an increase of 6.7 cents next year, or nearly 11% again.

Sure, that's a hefty tax hike, but if it's necessary, it's necessary. Only here's the thing: it isn't necessary.

To understand why, one has to dig into the report's attachments, particularly how the spending and revenues were projected. We'll start with the glaring problems on the spending side:

  • Average Municipal Cost Index (MCI) applied to Operational costs less one-time costs

  • Addition of Sheriff’s replacement vehicles, replacement PCs, and redevelopment of the athletic fields not included in the FY 2009 Budget

  • Estimated Personnel costs (assumes 2.5% merit and 2.0% cost-of-living adjustment each year)

  • Adjustment to Debt Service (in accordance with the Approved CIP revised to include updated schedules for Campus Master Plan and Transportation projects)

    For starters, the Municipal Cost Index may not be the best way to examine operational costs for next year. This isn't an issue with the MCI per se as much as it is a timing concern. The MCI over the last few years has factored in soaring construction and energy cost. Given the dramatic drop off in demand for oil and gas over the last few months, I sincerely doubt we'll see such a dramatic up move in energy prices as we've seen in recent years. As for construction, a combination of the now past housing boom and a massive building spree in Communist China led to those costs soaring in recent years. The housing market still has a long way to go until it will start to put pressure on construction cost, and the cadres in Beijing are putting the squeeze on new construction. For these reasons, the MCI is almost certain to be overinflating operational costs.

    The construction cost factor will also likely have a downward effect on the cost for the construction-fueled new debt service, easily the biggest cost driver in (in terms of percentage increase) for next year.

    Finally, there is the labor assumption of a 4.5% raise next year. This is hardly etched in stone. There is no reason the BOS must automatically approve such a salary. In fact, with one more vote for the equalized tax rate last year, this would have gone by the boards. Should one of the four Supes who voted for higher taxes have a change of heart, this could disappear next year.

    While it's difficult to get an exact grasp on what effect this will all have (the documents don't have the granularity required to see personnel and operational cost), I would say the projected cost increase could be cut at least in half (minus school funding, more on that later) - which would close the shortfall by roughly $4.7 million.

    Now, on the revenue side, the report basically follows the projections of the Virginia Employment Commission's economists, and come up with this:

    The underlying assumption on the revenue side is that economic recovery from what many currently believe is a recession in 2008 does not begin until FY 2011. This conservative approach, consistent with the Virginia Employment Commission’s conservative scenario, directly affects the estimates of meals, sales, and recordation tax revenue.

First of all, while "many currently believe" we're in a recession, that's still up in the air. At present, the economic figures actually show growth - slow growth, to be sure, but still growth nonetheless. The "conservative scenario," by contrast, already has us in recession (VEC):

In the pessimistic scenario, the U.S. economy initially responds to the stimulus package of tax rebates and low interest rates by the second half of 2008, but housing starts continue to fall, dropping below 800,000 per year; home prices drop another 10 percent; and oil goes to over $115 per barrel and stays there. Consumer confidence erodes still more, and the U.S. economy falls into a deeper recession in 2009. GDP growth averages neutral for all of 2008, but averages -0.2 percent for 2009. Recovery does not come until 2010.
The VEC report was printed four months ago, and does not take into account the fact that GDP growth in the second quarter of this year stood at 2%. The odds of GDP growth being "neutral" (I.e., zero) for the entire year is very slim indeed.

This is important because the county staff used the pessimistic scenario to assume revenue will remain flat on its back until FY2011. If revenue growth actually recovers in FY2010, it would mean an additional $8.7 million in revenue. Even a recovery halfway through FY10 would add more the $4.2 million to local coffers. Thus, the supposed $10.6 million deficit in FY10 could be as low as $1.9 million, or not even exist at all. I don't write this to beat up the county staff, but rather to make clear that the situation need not be as dire as they project.

Finally, the staff assumes no cuts in local spending - which is probably the most questionable assumption of the bunch (even Emmitt Marshall, one of the tax-hiking four, talked about the need for county staff reductions - although he may have been focused on, say, Animal Control).

Last spring, as the BOS was pondering the budget, School Superintendent Jerry Hill sent out a flyer detailing the impacts of certain budget cuts. It was easily the most detailed and traceable numbers I've seen out of Dr. Hill in the six years I've lived here (and I've heard from at least one resident that it's the most detailed stuff they;ve seen in twenty years). Sadly, the Supervisors did not take the opportunity to dig deeper into the school budget for more granularity. However, there is no reason they can't do that next spring.

Nor need it be limited to the school system either. I managed to find over $10.5 million in savings (just about the entire projected FY10 deficit) during the last budget cycle without touching the school system (note to Emmitt - FLS: I also spared the Planning Department, but there's no need to follow that precedent).

To conclude, while the county staff projections should give us cause for concern, I think the projected spending is too high, and projected revenues are too low. More importantly, what these numbers tell us is that we should look add reducing government spending to make up whatever shortfall may occur, not hitting property owners with tax increases or reducing already sinking property values.

Cross-posted to the right-wing liberal


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