City officials look at proposed budget, includes tax increases
City officials took their first look at the proposed budget for the upcoming fiscal year, which begins July 1.
The budget discussion started a bit later than normal since staff were watching the Legislature to see what impact new laws would have on the city budget and collective bargaining negotiations are underway.
Greg Doyon, city manager, said that about 75 percent of the city workforce is under collective bargaining.
Doyon said that commissioners will see the impact of not using the inflationary factor, which is the city’s allowable tax increase, during two years of COVID.
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He said it was the right thing to do, but there are budgetary consequences.
The city started with about a $1.7 million budget deficit, Doyon said, due to increasing costs and limited resources.
Melissa Kinzler, city finance director, said that the city’s health insurance costs increased about 8 percent and energy costs are increasing 200 percent.
Changes during the legislative session cause the loss of revenue in some city funds as well, and the COPS grant is in the second year, during which the city absorbs more of the cost of hiring those additional officers.
Kirsten Wavra, deputy finance director, said that since the city didn’t increase taxes in FY21, the city used $555,502 of fund balance and $1.3 million in FY22 to cover the deficit, lowering the overall fund balance.
City policy is to maintain a 22 percent fund balance, which equates to about two or three month’s worth of operating expenses to absorb any cash flow issues since tax revenue comes in December and June, or any unanticipated expenses.
Wavra said that in the current budget year, which ends June 30, that had a compounding effect since the city couldn’t recoup all of the tax increases it didn’t take over those two COVID years. For this budget year, the city used some of its CARES Act funds to offset the roughly $1.5 million shortfalls.
Wavra and Kinzler said that the city takes a conservative budget approach because revenue collection is uncertain and the possibility of tax appeals.
Wavra said that they’re projecting another $1.5 million deficit again this year and staff is recommending using some of the fund balance and CARES funds to offset the shortfall.
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Kinzler said that this year’s inflationary factor is a 2.6 percent increase, which equates to $451,129 in new tax revenue.
The city is restricted on how much it can increase taxes and that amount is half the rate of inflation for the average of the last three years.
Staff is also recommending using the permissive medical levy, which will add $353,042 in new revenue for the city. The permissive medical levy is only used to cover city employee health insurance premium costs.
Those two options would raise about $804,171 in additional revenue for the city.
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For comparison, a new firefighter costs the city about $100,000 and a new police officer costs about $110,000, according to the figures in the proposed public safety levy.
The proposed tax increases would equate to an additional $10.51 annually on a $100,000 home and $21.02 on a $200,000 home, according to the city finance department.
The increase in the city’s entitlement share from the state is about $311,446 and the city is estimating about $9.73 million and that captures revenues from gambling and alcohol.
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The city is losing about $79,000 in beer, wine and liquor license revenue through a state law change during the last session.
Kinzler said the city will see some revenue from the new marijuana taxes, but since that wasn’t effective until February 2023, it takes time to show up in city coffers. The funds are split between the county, state and incorporated municipalities in the county, and the city estimates it will received about $220,000 annually.
Kinzler said city staff is working with the county on those figures.
Wavra said that the staff strategy for the upcoming budget is to recommend using the full inflationary factor, permissive medical levy, the returned $350,000 library subsidy since the library levy passed, and cutting general fund subsidies for Civic Center events and the engineering funds. Those two subsidies equal about $329,056 to remain in the general fund.
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With all of those revenues, the city is still facing a $998,064 deficit, according to finance staff, so staff is recommending using some CARES funds to cover that shortfall.
Kinzler said that about 78 percent of the general fund is public safety, including police, fire, legal and Municipal Court.
The proposed public safety levy would add additional staff and resources, not subsidize the existing general fund budget, Kinzler said.
She said there will still be struggles in the general fund to keep up with expenses given revenue constraints.
The city police and fire department budgets are projected to be $28 million. The city’s total tax revenue for the year is an estimated $24 million, so the city would be facing a $3.9 million shortfall for public safety without the $9.73 million entitlement share from the state.
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Wavra and Kinzler said that they’re looking at a number of options to free up revenue for the general fund to include releasing some tax increment financing funds, or to cur remaining general fund subsidies for natural resources, swimming pools, recreation and planning.
That “would be pretty painful” for those departments, Kinzler said.
Doyon said “we can’t continue to depend on this one time revenue source,” in terms of federal COVID relief funds.
But that those budget changes will require broader discussion.
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Kinzler said they’re also going to be looking at increasing fees and assessments for a variety of city services.
Commissioner Rick Tryon what the argument was for not using more CARES funds in this budget to reduce the tax impact on property owners.
Kinzler said those tax mechanisms are ongoing tools for ongoing operational costs, rather than using one time funding.
“It’s not a best practice to use CARES money to balance your fund,” Kinzler said. “You really need to match your ongoing revenue with your ongoing operations.”
The city’s philosophy has been to use CARES funds for its actual purpose and support the general operations of the city in recovering from COVID.
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Staff is recommending to use some CARES funds for a growth policy update in the next year.
Doyon said that residents often ask why there isn’t more new tax revenue in the city based on construction.
Doyon said it takes time for that to filter into the city coffers and that apartments and single family housing don’t generate much tax revenue for the city.
City officials will continue their budget discussion at the July 5 work session.
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