The Time to Make Tough Choices Dr. Kurt Thurmaier Chair, Division of Public Administration Northern Illinois University

Tough Choices  The aggregate operating balance of states and localities goes negative between 2015 and 2020 and stays this way at least through  Mainly due to health care and Medicare demands  Double Hit for Municipalities –GASB 45 Health Care Expenditures –Tighter state budgets = Tighter local budgets

Good Times Choices  Improve Fiscal Condition with Surplus Revenues  Must Compete with Political Pressure to: –Expand Current Programs –Initiate New Programs –Reduce Taxes and Fees  Especially property tax  State governments-bad examples  The alternative???

Tough Choices – The Bad Times Reform in the Current Fiscal Environment – Budget Deficits – 3% average deficit nationally for local govts in 2009; 4-5% deficit projected through 2012 (National League of Cities) – Iowa sales tax receipts projected to decrease by 5.3% in 2010; income tax receipts to decrease by 3.6% (State of Iowa Department of Management) – Layoffs – 90,000 local government layoffs since Nov (U.S. Bureau of Labor Statistics) – 5,400 actual or planned firefighter layoffs (International Association of Firefighters) – 40,000 police officers at risk without federal assistance (Fraternal Order of Police) – Iowa local government employment up by 500 since December 2008, delayed effect? (U.S. Bureau of Labor Statistics) – Capital – 62% of cities cancelled/delayed capital projects in 2009, more to come (National League of Cities)

Traditional Fiscal Stress Approach Year 1 – “Delay” Year 2 – “Ration” Year 3 – “Cut” Personnel Freeze HiringEliminate Vacancies Freeze Raises Make Layoffs Revenue Pursue Grants Increase Collection Efforts Increase Fees Create Alternative Sources Increase Borrowing Increase Taxes Services Improve Productivity Across the Board Cuts Outsource Pursue 28E Agreements Eliminate Programs Capital Delay New Projects Eliminate New ProjectsDefer Maintenance

Municipal Fiscal Bad Habits  In Good Times… –Expansion of or initiation of new programs –Reduction of revenue sources (i.e., tax cuts) before building fund balance or addressing deferred maintenance –Ignoring opportunities to collaborate or outsource  In Bad Times… –Across-the-Board Expenditure Cuts –Non-Targeted Vacancy Reductions –Deferring Capital Maintenance Needs –Borrowing through Shortfalls –Attempting to Collaborate or Outsource when Slack Resources for Transition are Least Available

Fiscal Sustainability  Elements of Sustainability (GFOA) –Diversity –Redundancy –Decentralization –Transparency –Collaboration –Fail Gracefully –Flexibility –Foresight  Align Taxes with Services Based on Traits

RevenuesExpenditures Property Tax Sales and Income Tax Fees Police Fire Core Admin Public Works Housing Parks Utilities Use-Based Development Ideal Revenue and Expenditure Distributions Match

RevenuesExpenditures Property Tax Sales and Income Tax Fees Police Fire Core Admin Public Works Housing Parks Utilities Use-Based Development National (2007 Census data)

RevenuesExpenditures Property Tax Sales Tax Fees Police Fire Core Admin Public Works Housing Parks Utilities Use-Based Development Iowa (2007 Census data)

Revenues and Uses Fees Sales Tax Property Tax TraitUtilities Use- Based Devt Pub. Works HousingParksPoliceFire Core Admin LowMediumHighReliabilityLowMediumHigh

Revenues and Uses Fees Sales Tax Property Tax TraitUtilities Use- Based Devt Pub. Works HousingParksPoliceFire Core Admin LowMediumHighReliabilityLowMediumHigh MediumLowElasticityHighMediumLow

Revenues and Uses Fees Sales Tax Property Tax TraitUtilities Use- Based Devt Pub. Works HousingParksPoliceFire Core Admin LowMediumHighReliabilityLowMediumHigh MediumLowElasticityHighMediumLow HighMediumLow Scalability HighMediumLow

Revenues and Uses Fees Sales Tax Property Tax TraitUtilities Use- Based Devt Pub. Works HousingParksPoliceFire Core Admin LowMediumHighReliabilityLowMediumHigh MediumLowElasticityHighMediumLow HighMediumLow Scalability HighMediumLow MediumHigh Core Nature LowMediumHigh

Tax Alignment with Services  Property Tax for Core Services –Reliable, Inelastic –Core Services Last Place to Cut  Sales Tax and Fees for Discretionary Services –Less Predictable, Inelastic, Volatile –Builds Fund Balance in Good Times to Protect in Worse Times, as Opposed to Program Expansion or Creation

Defending the Property Tax  Ideal source of independent revenue for local governments  Equitable and efficient administration  Fruits of good quality local government services show up as higher property values, thus establishing a link between services provided and payment of the tax  Services financed from property tax revenue provide direct protective services to the property  Few meaningful alternatives for providing local revenue autonomy

Revenue Diversification  Property Tax for Stable Services  Sales Tax for Discretionary Services and for Economic Recovery –Rebuild fund balance –Reduce deferred maintenance  Fees for User Services –Utilities –Use of Public Right of Ways reinvested in public purposes

Fund Balance and Financial Policies Reserved Designated Unreserved Flexibility More Less By Statute or Ordinance (Enterprise, State Controls) By Policy (Rainy Day Fund, Contingent Appropriation, Debt and Credit Considerations) Fiscal Emergency

Fund Balance & Financial Policies  Average municipal fund balance peaked in 2007 at 25% of annual operating expenditures, falling to 24% in 2008 and 21% in 2009  Governments with average available fund balance (25% of annual operating expenditures) have used reserve draw downs to fill 1% budget gaps without fiscal impact.  Governments with an extremely high available fund balance (100% of annual operating expenditures) have used reserve drawdowns to fill 3% budget gaps without fiscal impact  Designated and unreserved fund balances most controllable factor in determination of credit ratings.

Summary and Recommendations  Revenues –Diversify to meet expenditure needs  Sales Tax: elastic  Prop Tax: stable  Fees: mixed –Build fund balance –Draw reserves when needed  Expenditures –Avoid across the board cuts –Identify core and peripheral services –Spend one time revenues, elastic revenues, on discretionary programs and capital projects

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