City starts on tight ‘status quo’ FY16 budget

City starts on tight ‘status quo’ FY16 budget

(April 10, 2015) The 2016 fiscal racehorse started down the track this week in tight first seed, as the Town of Ocean City reviewed a draft budget that holds the line on taxes and operating costs, but doesn’t leave much room for anything else.

Over the next several weeks, the mayor and City Council will review and tweak City Manager David Recor’s financial plan for the 2016 fiscal year, which runs from July of 2015 through June of 2016.

“The tax base appears to have stabilized,” Recor said in his summary remarks. “The economic indicators appear to be favorable. But there continue to be many demands for these limited financial resources.”

In essence, Recor assured the council that the budget plan will be able to accommodate the city’s operating expenses –  including employee pay raises, insurance hikes, and other bottom-line cost increases – without raising taxes beyond the constant yield rate, or cutting any services.

However, this puts a huge squeeze on the city’s backlog of capital improvements and other unfunded initiatives that have been put off for years – a list of projects that total $31 million, Recor estimated.

“I think it goes without saying that we can’t possibly complete these activities with ‘status quo’ financial resources,” Recor said. “Nor is it reasonable to think that you would be able to address all these things within a year.”

Under Recor’s plan, the city will maintain a tax rate consistent with the  constant yield,  a state government-calculated number that would produce for the city the same property tax revenue it received the year before based on the current assessment.

This year, 2015, is the first year of a three-year phase-in for new property assessments for Ocean City, with the exception of a select few commercial properties on the south end of town.

Most values, however, saw little change, with the resort’s total taxable property base slipping by 1.6 percent. Total city property values now stand at $8.39 billion.

Because of the decline in property values, Recor’s plan would raise the tax rate under the constant yield formula by an additional 0.76 cents per $100 of assessed value, putting the town’s next tax levy at 47.80 cents, as opposed to last year’s 47.04. This will generate $40.24 million in revenue.

On the plus side, Recor noted, the city has been successful in its effort to reduce its dependence on real estate taxes since the market collapsed in the fall of 2008.

In Fiscal Year 2009, during which the recession hit, property taxes accounted for 58.59 percent of General Fund revenue, which totaled $80.47 million. In the coming FY16, Recor’s proposal would finance 53.96 percent of the General Fund total of $78.28 million.

“I think it’s really worth pointing out where we stand today as an organization versus where we were seven years ago … and that [this budget] continues the downward trend since FY09,” Recor said.

The city organizes its finances around the General Fund, which consists of all city operations that do not have designated streams of revenue. Income flowing into General Fund is lumped into a single account and then disbursed to various city departments.

The largest single revenue stream for the General Fund, naturally, is property taxes. However, other revenues, such as parking fees, building permits, hotel taxes, and other miscellaneous charges make up a significant amount.

Much of this income is dependent on the economic environment. The city’s room tax, which collects a percentage off of every hotel or condo rental, is estimated to bring in $13.8 million in the coming year. While Room Tax revenue has seen less of an annual increase since the recession, it has yet to experience negative growth.

Likewise, while the city’s income from building permits and zoning fees took a hit in 2009, those revenues also show signs of cautious growth. The total value of new construction projects on the books is $116 million, Recor said, three times what it was last year. That means the city’s zoning and construction inspection operations could see significant growth.

“All of our General Fund revenues remain conservatively flat, but that was intentional,” Recor said. “Speaking with local businesses, I’m optimistic that we may see some gains over what we’ve projected here.”

General Fund expenditures are dominated by public safety operations, which total almost $34 million. The Ocean City Police Department is the greatest dollar-value dependent of the General Fund, with a total budget of $20.46 million.

The most decisive factor for the General Fund, across all city operations, is employee pay. Because of the two percent cost-of-living adjustment granted to the OCPD in the union contract signed this week, Recor’s budget includes a two percent pay increase for all city employees in order to maintain parity with the unionized police force.

The city also maintains other funds separate from the General Fund. These can be broken down into a few different types.

Enterprise Funds are those funds that, unlike the General Fund, collect revenues that are dedicated to their own operating expenses, and are thus run as a self-contained business. Some break even, such as the Water Department, which generates the $6.5 million dollars that it costs to run.

Others require lump sum subsidies from the General Fund. The Convention Center, for instance, operates at a loss and requires $1.46 million in General Fund revenues.

“We expect our enterprise funds to be run like businesses,” Recor said. “Expenses should not exceed revenues, although there are a number of funds that continue to receive subsidies from the General Fund to meet those gaps.”

Additionally, the city uses several Internal Service Funds. These funds are paid for by other city departments that use the citywide services which that fund provides.

For instance, other funds record their insurance costs as a payment to the Risk Management Fund, which in turn purchases citywide policies. The city’s Service Center Fund is supported by other funds that pay it for fueling and maintenance of city vehicles, with these revenues equaling the funds’ expenditures for purchases of fuel, tools, and mechanics’ salaries.

Payments to the city’s two pension trust funds, as well as to the trust fund for retiree medical benefits, are recorded as separate disbursements from each city department, with a collective total of $14.8 million.

Debt service, to repay the principal and interest on the city’s bonds, accounts for another $5 million deduction from the General Fund.

“I will tell you your debt is still well within your adopted policies … it is not disproportionate or unreasonable,” Recor said. “In fact, the payments declined by $205,000 due to the refinancing of the 2004 debt that you did in 2014.”

All together, this system remains pretty much flat, Recor said. However, he noted, this leaves little to no room for expansion.

Pay raises, as well as rising insurance costs, service prices with outside contractors, and other day-to-day expenses mean that many areas of the budget will have to do without needed growth.

In the Recreation and Parks Department, for instance, two vacant positions will not be filled with full-time employees. Rather, Recor said, the current budget proposal will fill the man-hours with part-time workers, as the city simply cannot afford taking on more insurance and benefit costs for full-time employees past those it already has.

The Emergency Communications Division is still short five full-time staff members for the city’s 911 center, something that Emergency Services Director Joe Theobald has been requesting for several years to address higher workloads, but has not yet been granted.

Additionally, there is precious little room left to address the city’s outlay for capital improvement and maintenance of its physical assets.

General Fund allocations for infrastructure replacement are only $1 million, designated for street repairs. This is in spite of a study by the city’s Public Works Department noting that at least $3 million needs to be dedicated each year to keep up with crumbling roadways.

The budget also has no allocation for canal dredging, which the city started doing in FY14 after years of delay. At least a half-million is needed to continue the program on schedule.

Many of the initiatives identified in the last draft of the city’s Capital Improvement Plan are funded via grants, bonds, or lease purchases. However, the current CIP still calls for $6.75 million in General Fund cash contributions for capital work in FY16, putting the city’s infrastructure allotment for next year six fold short of where it should’ve been, as of the last CIP revision.

This tally does not include a number of items that are new capital projects, or wholesale replacements, but are rather classified as maintenance items. However, the city has a number of maintenance projects that are of great demand.

For instance, Recor noted on his balance sheet that repairs to the city’s recreation complex at Northside Park –  particularly the failing roof – add up to about $1.26 million. These repairs had been described as urgent as far back as 2011.

All in all, the city has roughly $31 million in unfunded staffing and capital initiatives that, while beyond the status quo, would seem to be desperately needed considering they have been considered critical for years.

As a starting point to address this, Recor recommended conducting a study that would identify what needed to be done in a given period of years, and then calculating what would have to be incrementally added on to the city’s tax rate over those years in order to complete the projects.

“Similar to what we did with our water and wastewater study, where we calculated the rates to meet the needs, what if we did the same thing with our General Fund capital improvements?” Recor asked.

“If we have the financial resources to accommodate what the mayor and council prioritize, I assure you we can get the job done. That is just one way of looking at it, and it’s ultimately a policy decision for you,” Recor told the council.

While acknowledging that they had number of difficult decisions, the council seemed to agree that Recor’s proposal was a good jumping off point.

“We’re in an excellent position to move forward. We have goals,” said Council President Lloyd Martin. “That’s what I want this council to be focused on … what are our needs moving forward.”

 

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