Parameters for Budget Development Potential Fiscal Restraint Policies Report from City Council Finance Committee Budget Subcommittee December 14, 2005

Background Councilman Sapp introduced a proposal that city spending should be constrained by inflationary growth as defined by the CPI-U Under his proposal, the City Manager would develop a FY 2007 budget by going back to “base year” FY 2001 and only allowing each future year FY budget to grow by the CPI-U for that year The proposal was received by Council and forwarded to the Council Finance Committee for its review and comment

Background The Council Finance Committee discussed the matter at its November 21, 2005 meeting and decided to form a subcommittee to deal with the matter more fully The subcommittee was chaired by Dr. Jesse Hughes and also included Councilman Gilliland, Scott Seymour, Mary Bunting Asst. City Manager, Chris Snead Budget Director The subcommittee met on two occasions November 28, 2005 December 11, 2005

Subcommittee Work To expedite our work in order to return findings and recommendations to Council in time for use in the FY-07 budget process we assigned tasks Scott Seymour researched applicable indices Those considered included the Consumer Price Index (for urban dwellers, for wage earners and sub-regional indices); State Domestic Product and Resident Income Growth Jesse Hughes did a comparative analysis of past revenue growth for Hampton versus Portsmouth and Newport News Mary Bunting and Chris Snead analyzed past expenditure growth of various budget categories (mandated, critical services not mandated, and non-mandated service currently provided) versus various indices (CPI-U, SDP, RI) Mary and Chris also analyzed real property growth versus CPI-U, SDP and RI and provided a summary of annual revenue growth by budget category and line item

Subcommittee Findings We agree that a financial policy for governing spending and thus taxes is a good idea and workable in practice We believe that the most important element of that constraint relates to real estate tax growth as it has the largest impact on our residents and is the least controllable by residents Residents appear to be most concerned about real estate tax growth

Subcommittee Findings Some revenues grow faster than inflation – and it is desirous for them to do so as their growth reduces pressure on the real estate tax rate…for example Sales, meals, lodging, and amusement taxes are often paid by non-residents and are discretionary spending decisions by residents Revenues from federal/state government Fees and/or charges for services We should not artificially constrain these revenues from growing naturally

Subcommittee Findings Some spending, at times, may grow faster than inflation…for example Wages of city employees, teachers, public safety officers, etc. when the market dictates Mandated services from the General Assembly and U.S. Congress…many are unfunded or not adequately funded to actually the deliver the service mandated.

Subcommittee Findings We found no one ideal index to govern revenues or expenses The CPI-U represents a bundle of household purchasing decisions – the relative weight of these goods differs from what buying decisions a government makes Examples: the government buys more fuel as a percentage of the budget than do average households; the government also spends more on medical expenses than does an average household The index does not necessarily include such governmental functions as safety and education, water quality and crime There are not regional CPI-U indicators for Hampton city or the Hampton Roads region; the closest indicator would be CPI-U South

Subcommittee Recommendation There are two reasonable indicators to consider in regulating revenue/expenses: Consumer Price Index for Urban Dwellers (CPI-U) Resident Income Growth (RI) Neither should be considered in isolation but rather viewed in tandem as an acceptable range for real estate revenue growth Other revenues should be allowed to grow without constraint

Subcommittee Recommendation The next FY real estate tax rate should be set to reflect the prior year’s revenue plus the growth indicated by the range of CPI-U and RI growth Future year projections should be made using a four-year weighted average (the most recent year will be weighted at 40% with other years being weighted at 30%, 20% and 10% respectively) Any deviation from this policy should be explicitly explained to the public

Subcommittee Recommendation The basic premise of our proposal is that: All revenue from real estate taxes should be revenue neutral plus an inflation factor The inflation factor would be between the range of the projected CPI-U and RI This must be done on an aggregate citywide level since state law precludes more than one real estate tax rate

Subcommittee Recommendation Example: Using FY 2004 as the example, we would first project the CPI-U and the RI using the weighted 4 year historical average For FY 04, this would have been 2.3% for the CPI-U and 5.3% for RI Then we would take the prior year’s (in this case FY 03) collected real estate tax revenues and apply the two factors to develop a range of acceptable increases in revenue For FY 04, this would have been $1.63M to $3.85M Based on expenditure demands, such as market salary requirements, external mandates and local priorities, the real estate tax revenues would be restricted to growth in this range

Subcommittee Recommendation Example: We would next take projected real estate revenues based on actual assessments and subtract this growth to determine the “excess” revenue The “excess revenue” would be converted to an equivalent tax rate and the tax rate would be reduced by this amount For FY 04, this would have required a reduction of 5 cents using the lower end of the range, 1.6 cents for the average of the range, and 0 cents for the upper end of the range

Next Steps Assuming the Council concurs with this general direction, the Committee will: Run this past the City’s financial advisor to get feedback on how the bond rating agencies may view the policy It is possible that the rating agencies may see this policy as a restrictive policy that could hinder the City's ability to fund essential services and capital needs, especially in light of the investments we plan to make in schools Provide a review of the past years’ compliance or lack thereof with this new policy However, we recommend implementation moving forward with the FY 07 budget, not returning to a prior “base” year Reconciling to past years will be extremely difficult with close to 65% of the residential real estate taxes going to the school system

Council Action Questions? Are we on track? If Council concurs with the general direction we are heading, we will work on the remaining issues and bring a final recommendation to you in January