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by Joe Sullivan

By Mayor Bill Haslam’s reckoning, the city faces a $10 million shortfall that must be covered by spending cuts and/or a tax increase to balance the budget he will present on April 29.

The shortfall represents the amount by which what he considers obligatory expense increases for the fiscal year ahead exceed projected revenue growth from existing taxes. The list of obligatory increases starts with a mandatory 2.5 percent pay raise for the city’s 1,622 employees and also includes a required increase in contributions to their pension fund, as well as escalating costs of health insurance and workers compensation claims.

The sum of those costs is about $5 million, to which Haslam would add three other categories that are more nearly judgmental on his part, but about which he’s insistent.

For one, he’s resolved to stop the practice of drawing down the city’s reserve fund, to which former Mayor Victor Ashe resorted in each of the past two years, to cover operating expenses. A $2 million draw down in the current fiscal year has reduced the city’s fund balance to an undesirably low $16 million, and Haslam is determined to get the city back on a pay-as-you-go footing, which equates to a $2 million cost increase in the fiscal year ahead.

Secondly, the mayor is committed to increased funding for street-paving which Ashe slashed to $1 million in this year’s budget. It takes upwards of $3 million to cover the 54 miles a year needed to repave all of the city’s streets on a 20-year cycle, and Haslam says, “That’s the number we need to get to in order to keep up.” (But he may not get all the way there in his first budget.)

Another pressing need, in Haslam’s view, is procurement of a new financial information system at a cost of $2.5 million. “We’re driving a ’49 DeSoto that doesn’t break out the information that most people need to analyze what they do and that’s broken half the time,” he says. While some of the cost will be capitalized, a significant part will be incurred in the year it will take to make the new software operational.

If the city were experiencing robust revenue growth, it might offset a large part of these cost increases, but that growth has been anemic. Over the past five years, growth in the city’s two primary sources of revenue (property taxes and sales taxes) has averaged only about 1.5 percent, Haslam says. Applying that same rate to the city’s $130 million operating budget for the current fiscal year only yields about a $2 million revenue increase for the year ahead.

In pursuit of expense reductions, Haslam instructed each of his department heads to prepare budgets with 6 percent cuts. These cuts would come on the heels of the 5 percent across-the-board reductions that Ashe imposed a year ago when faced with a slash in revenue from the state. At hearings last week, the mayor and his department heads assessed the impact of these further cuts on city services, and in several cases the case was a stark one.

To begin to be sufficient to forestall a tax increase, the cuts would have to start with by far the largest city department; namely the KPD, which currently has a $36 million budget. At the hearings, Police Chief Phil Keith said a 6 percent cut would mean cutting his ranks by 27 positions to 394, down from 456 a year ago. “The citizens will clearly see the impact in terms of response times, and there will be other significant adverse effects,” Keith asserted. Haslam concurs but adds that, “if we cut a number somewhat lower than that, I believe we can still protect the safety of our citizens.”

Hardest of all to cut is the $15 million in the Public Service Department, which is responsible for everything from street cleaning and pothole and sidewalk repair to leaf and brush removal and codes enforcement. Its director, Bob Whetsel, lost 23 of his previous 338 positions in last year’s cuts and said a further reduction to 290 positions would mean “elimination of at least one of our seven crews. It’s service we would not like to lose.” Nor would Haslam. “We get 2,000 calls a month into our Public Service number, and their service expectations are high,” the mayor observes.

The Fire Department, Parks and Recreation, Engineering and sundry administrative units all got budget scrutiny as well. Following the hearings, Haslam said, “I came away thinking there’s room to do something in some areas and not a lot of room in others. We’ll take the next week working with all the information they gave us and figure out what kind of savings we can get, and that will leave us at some number.”

That number, implicitly, is how much of a tax increase the mayor will recommend on April 29 and which City Council must then act on in May. Haslam won’t be pinned down, other than to say that any tax increase will take the form of a property tax hike. But it’s a good bet that the city’s present $2.70 tax rate will be going up by on the order of 20 cents. Since each penny on the tax rate is worth $275,000, a 20-cent increase would yield the city $5.5 million.

It would be the first tax increase in four years, which is the longest the city has gone without one at least since Ashe took office in 1988. And City Council members who appear braced for it would much prefer it to come this year than next, when five of them are up for reelection. Indeed, Haslam can be expected to give assurances that he will not recommend a tax increase in 2005.

Looking farther ahead, there will continue to be upward pressure on taxes unless and until revenue growth keeps pace with rising personnel costs. Property tax collections, which account for the biggest part of the city’s revenues, have been lagging largely because there’s not much property within the city left to be developed. On the other hand, personnel costs, which account for more than half of the city’s operating expenses, are being pushed up more rapidly due to mandatory pay raises and the escalation of both health care costs and workers-compensation claims.

Then again, more time in office will give Haslam more time to streamline and perhaps restructure city government to curb costs without curtailing services. At the same time, downtown redevelopment can spur revenue growth. However there’s a paradox here because it will take a major investment on the city’s part to spur this long-term growth, for which the only apparent source of funding in the short run is a further tax increase. That paradox will have to be the subject of a separate column.

April 15, 2004 • Vol. 14, No. 16 © 2004 Metro Pulse