Archive for December 30th, 2009

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Proposed Budget Balancing for FY 2010 & 2011 from:
City Manager Mike Letcher dated 12/28/2009
 

Here is my take on the plan.  I also offer my own observations and recommendations:
 
The plan is likely to avert insolvency
The plan is almost certain to lead to a significant drop in our credit rating
The plan reduces the level of core services
The plan does not produce a budget that is ‘structurally balanced’
Liquidity has been evaporating and necessitates quick action to avert insolvency
The plan ignores many potential areas of cost savings
 
 
We must make structural changes to our cost structure
Arizona State Treasurer, Dean Martin, has stated that revenue levels have dropped back to levels seen in 2004/2005.  2007 marked the high water mark of economic activity and we will not see these levels again for 6 to 7 years or longer.  This is a long-term, structural drop in revenue -and- expense levels must also adjust.  We do not have 7 years of one-time fixes.  We must begin immediately to make structural changes to our cost structure.  This can be augmented with revenue sources that have a more stable profile.  Taxpayers have a very limited stomach for new revenue sources or taxes.
 
Landlord/Renter Tax
One the positive side, this revenue source is more stable than sales tax revenue and this helps with sustainability.  The tax does hit a specific demographic segment that tends to be a lower socio-economic profile.
 
Utility Tax
The Utility Tax was increased for FY 2010.  This tax is broad-based as it impacts almost every demographic profile -and- is a more stable revenue source.  If new revenue sources are to be imposed, I recommend they meet these 2 criteria: broad-based & more stable.
 
Parks and Rec Fees
Councilman Glassman has frequently spoken of ‘Cost Recovery’.  Currently, many Park and Rec activities are offered at no cost to participants or very low cost (example 25¢/day to swim).  This is not consistent with ‘cost recovery’.  We must immediately begin to recover a larger portion of the actual cost of every program.  If our target is simply 50% cost recovery; this would produce additional revenue of over $7 million/year.  (source: FY 2010 Adopted Budget; pgs B-67to B-77)
 
Sun Tran – Van Tran
The general fund subsidizes bus service with $32 million/year; this is in addition to large subsidies from other governmental entities.  The actual cost to offer the service is almost 5 times the fare paid by riders.  We must reduce this subsidy through a combination of reduced routes and fare increase.  If our target is 50% cost recovery; this could have a positive impact on the budget of as much as $15 million/year.  (source: FY 2010 Adopted Budget; pgs B-91 to B-98)
 
Outside Agencies
This area is ripe for favoritism and facilitating ineffective agencies.  This needs to be a thorough and arms-length competitive process.  If you are effective you receive more, if you are ineffective you get nothing.  There is a perception that once your organization gets on the list you are on the list forever.  There needs to be political will to remove ineffective agencies.  I work with and financially support the Community Foundation for Southern Arizona (CFSA).  CFSA has in place a competitive process to evaluate grant applications from charitable organizations.  This includes site visits, program evaluations, financial review, effectiveness evaluation vs. similar organizations, fundraising…  Perhaps CFSA would be willing to directly assist the City with applications.  At the very least we need to adopt this model.
Credit Rating
The rating agencies are very clear about what we must do to maintain our credit rating.  We must:  1) Produce a budget that is ‘structurally balanced’, i.e. not reliant on one-time fixes;  2) Rebuild the rainy day fund to 10% of general fund ‘promptly’ to about $42 million.
 
The plan proposed by the City manager does NOT produce a ‘structurally balanced’ budget for several years.  The plan leaves the rainy day fund at the current level of about 2% to 3% of general fund.  In addition, the Self Insurance Fund remains with a large deficit which is sure to catch the attention of the rating agencies.  I expect our credit rating will drop several notches within the next few months.
 
(Source: Fitch, Standard & Poor’s, Moody’s reports from May 2009)