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City finances: A look at the causes

Imagine you have a good job, a growing income and a positive outlook. You decide to make some long-term financial commitments by purchasing a home and a vehicle and hiring some help.

The checks are in the mail every month, and you are watching the revenues you have coming in to make sure those checks, when cashed, will have some money behind them.

Then one month you notice you are missing about $200,000.

That is the situation Elray Konkel found himself in December 2007 – when the city’s dire financial situation started to become apparent.

First, it was the decline of sales tax revenue, followed by an almost halving of real estate excise tax revenue. Soon the city was down an estimated $2.1 million in tax-supported revenues – a huge loss when the total general revenue fund of the city was about $19 million in 2007.

Then there is the matter of all those checks still in the mail.

“Several council members asked, ‘How much money do we have?’ I told them none,” Konkel said. “We do have money, but what I meant is that we have none that is not obligated.”

How the city got in this bind has been linked to a number of issues, including: the collapse of the housing market, leading to the loss of tax revenue (a majority of which comes from housing and development); increases in energy costs; overambitious capital spending; and an inadequate evaluation of the financial dangers due to that spending.

The city and the council’s response – including cuts in capital projects, operating cost reductions and issuing bonds – savings totaling some $5 million, was enough to ensure the city ends the year with a balanced budget, Konkel said. But this exercise in firefighter economics is causing serious pause within the council and the city, not only about the long-term sustainability of the city’s spending habits, but the impacts it will have on citizens who depend on the city to spend its tax dollars.

“I think (citizens) should be concerned,” Mayor Darlene Kordonowy said. “None of us can predict where the national economy is going to go. What that means for us is more difficult choices about what services we give the community and what level we want to give those services.”

Kordonowy, who said she became aware of the financial situation in January and February of this year, believes other factors that contributed to the city’s current financial troubles.

They include the lack of a working relationship between administration and the City Council and “the very healthy financial picture” of the community and country at the time, which was used to justify long-term financial decisions.

“It appeared, by the projects we had, that the revenue side was going to continue to be strong,” she said. “Although on the expenditure side we could see those costs escalating faster.”

However, council member Debbie Vancil pointed out there were some signs that the local economy was faltering before Konkel brought it to the council’s attention in February 2008.

Two years ago, permitting fees were increased by the city for building and development, a move that would generally raise the price of those fees by 20 percent, Konkel said.

But that revenue source has declined slowly since it reached a peak $1.84 million in 2005. It is an indicator, Konkel admits, that should have been noticed by the fourth quarter of 2007.

“When you raise a fee and the cost of a permit, you should be able to see greater revenue,” Vancil said. “That was a major red flag.”

Council chairman Bill Knobloch also noted that finance officials told the previous council in December 2007 that expenditures were starting to exceed revenues.

“We thought at that time, that the city administration had control and was in charge in the management of finances,” Knobloch said.

The lack of a major warning signal from the city to the council regarding revenue decline until February 2008 meant that spending continued at brisk pace up to the end of last year.

The passing of $4.1 million in councilmanic bonds to pay for open space purchases and the design of Winslow Way were approved at the end of 2007. In June 2007, public works brought forward proposed amendments to the city’s long-term capital project plan that would have considered spending $180 million in projects over the next six years.

“Talk about dead on arrival,” Council Member Chris Snow said. “We just laughed and went on summer recess.”

A portion of that $180 million capital plan was approved in January 2008, before the downturn was widely acknowledged.

“It is not sustainable,” Council Member Bill Knobloch said. “It’s all about money and the revenue that the city receives. That’s $16 million this year, that is not sustainable for multimillion dollar capitol projects.”

Konkel estimates that 90 percent of the annual general fund goes to provide basic service operations such as employee salaries, police and judicial services and street maintenance.

That, Konkel concurs, doesn’t give the city much leeway with how it spends its money.

But expenditures and how to generate more revenue are subjects that this city and council are hunkering down to debate in this year’s budget shuffle. It will undoubtedly change what citizens can expect from their government, Kordonowy said.

“I’m glad that we are in this situation, honestly. We are here for a good reason,” Kordonowy said, citing the need to reflect on the city’s financial capacity. “We are going to continue along this path until we get a new vision, or maybe a different way to get to the same vision.”

Different ways to that same vision could mean you sell, remortgage or rent out that house, decide not to buy another vehicle and perhaps put your employee on part-time shifts.

But deciding what to do with those cost savings, which projects to pursue and finding new sources of revenue will determine the direction of the city and the impacts on tax-paying citizens for years to come.

In Wednesday’s issue: How constrained revenues could result in more demands on taxpayers.

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