City’s financial situation worsens

$500K revenue shortfall may mean borrowing to pay bills.

The city started out the new year with sobering news. It is down more than $500,000 in expected opening revenues because of a November 2008 shortfall.

The decline could be the tip of the iceberg for the cash-strapped city as worrisome financial information for the end of 2008 is tallied by the administration.

The current losses throw into question the city’s ability to cover its budgeted reserves and adhere to the spending plan recently approved in its 2009 budget. It also raises the possibility that the city will have to resort to loans to fund operating expenses – something it has never had to do in it’s 18-year existence.

“There is just no way to predict (revenues) to keep going down, and down, and down,” Finance Director Elray Konkel said. “This is the deepest economic challenge this country has been through since the Depression and I don’t see a bottom yet.”

Konkel told members of the Finance Committee during a Tuesday meeting that he expects the $500,000 total to grow since the island’s economy shows no signs of turning around anytime soon.

“The $500,000 loss was through November,” Konkel said. “I am not going to comment on December yet because we are still going over details and things haven’t been posted, but I am expecting it to get larger.”

The revenue assumption downgrades were announced in a memo from Konkel a week after the council approved the 2009 budget on Dec. 17.

The timing of the memo caused concern among some council members, who felt they should have had the information, or at least indicators of the downturn, before they approved the budget.

“This has happened two years in a row now,” council member Debbie Vancil said. “We’re going to do just what we did last year. The council was given financial information in December to base its budget on and we come back in to find things had dramatically changed.”

Council member Barry Peters defended staff during Tuesday’s Finance Committee meeting by saying that financial information can take city staff up to six weeks to gather, summarize and publish.

Nevertheless, the figures are a troubling indication for the year. The $500,000 shortfall in opening revenue comes mainly from significant downturns in tax-generated income. Also included in the half-million-dollar amount is a $62,275 line item for an unforeseen, council-approved road upgrade on the Williams Property.

“We’re not expected to achieve the estimated $2.2 million (in reserves) based on what I have before me now,” Konkel said Tuesday. “Construction has almost come to a complete standstill; same thing on the REET (real estate excise tax) side, it’s just abysmal.”

There are also indicators that previously stable tax sources, such as monies accrued through property taxation, are beginning to take a hit. So far, property tax is down about $200,000 from an estimated $6.2 million for 2008.

Konkel attributed the downturn to delinquent payments by struggling island households.

“We’re starting to see the effects of foreclosures,” Konkel said. “Three to five homes a month are going to sale and there are several hundred homes in phases of foreclosure on the island.”

Statistics on the Bainbridge real estate market provided by Windermere show that November set a two-year low for median home sale prices. Those sales eventually drive the city’s REET revenues, which were expected to raise $1.5 million for the city in 2009.

Building and Development Services, the money raised from planning and permitting new developments, was also down sharply. The month of November saw only $30,000 come in for BD&S; the 2009 budget was based on an assumption of roughly $1.16 million of BD&S revenues. However, it’s not unusual for such revenues to be slow during winter months.

The $500,000 loss compounds a significant cash-crunch for the city, which receives a bulk of its property tax funds in two payments – between April and May, then October and November.

During Tuesday’s meeting, strategies to ensure the city can cover its costs until April were discussed. Those included the possibility of using tax anticipation notes – a form of short-term borrowing against future revenue – to accrue $862,000 to cover expenses, said Finance Committee Chair Chris Snow.

“That of course raised all kinds of alarms for people, it’s something we certainly hope we would not have to do,” he said. “(Tax anticipation notes) are quite undesirable, partly for political reasons. We definitely should not be going into debt for ongoing operations, and I subscribe to that.”

Another option would be to use council-approved, inter-fund loans to shift money between accounts, Peters said.

The move may be necessary to not only prop up the government, but to pay for pending dues, such as the city’s insurance premium payment to the Washington Cities Insurance Authority for $400,000. That amount is due by the end of January.

The downturn also brings into question the ability for the council and city to adhere to its approved 2009 budget and spending authority.

Snow said many things would have to be revisited, even hard-won concessions over community spending for human services and the arts.

“It’s pretty clear we won’t be able to follow the spending programs we had in the budget,” Snow said. “All of those things would have to be reviewed, (to) whether or not we can still hold good on (our spending promises), I really don’t know.”

Konkel believes the city has been proactive in handling the downturns, trimming more and working on a cost-cutting proposal that will come before the council sometime in February.

Mayor Darlene Kordonowy didn’t return calls this week regarding the city’s financial situation.

For now, the city administration has put a hold on spending. Money in the opening quarter is only being spent on salaries, benefits, and building and facility operations. The directive says that contracts and new spending will be stopped until May 1.

“We’re literally working on month-by-month, department-by-department cash flows to watch things,” Konkel said. “We’re at that point of needing to watch it that close.”

The administration is also working on a contingency plan to deal with an additional 15 percent drop in revenues if things get worse, he said.

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