Budget bombshell: City services unsustainable

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City services and infrastructure are unsustainable at current levels.
That’s the conclusion drawn in the city’s 2008 budget, which for the third time during the last 10 years shows a decrease in spending from the previous year.
“It has become increasingly clear that the City’s current revenue structure is not sufficient to maintain current service levels and standards,” according to the budget. “A comprehensive examination of the City’s revenue structure and delivery of services must be completed.”
Dave Nickerson, a former city finance director, said the problem is revenue generation.
“Years ago, cities got most of their revenue from property taxes, which are stable and predictable,” he said. “But now it’s reversed. Most of it comes from sales taxes, which fluctuate with swings in the economy. But no one wants to increase property taxes, so you’re left with sales taxes. It’s not a good structure. That’s been recognized for years-but that’s what we’ve got.”
Nickerson said he doubts that the city could sell a general fund tax increase.
“I think the whole concept of the general fund is outdated,” he said. “People just don’t want to give politicians money unless they know where it’s going. It’ll have to be targeted at specific areas, even though the need may be general. The voters just don’t support what we used to call representative government.”
The proposed 2008 general fund budget, at $235.8 million, shows a 2.7 percent decline from the 2007 budget of $242.3 million.
This $6.5 million reduction is the result of unavoidable increases in items such as fuel and utilities expenses and a state-mandated increase in the city’s contribution to PERA, the public employees retirement plan.

Spending constraints

Much of the city’s revenue is artificially constrained, either by state and local tax limitation laws, which limit year-to year increases, or by restrictive provisions applicable to particular revenue sources.
The Trails, Open Space and Parks fund, for example, is supported by a voter-approved 0.1 percent sales tax. Proceeds from the tax can only be used to support trails, parks and open space.
Another tax, the 0.4 percent Public Safety Sales Tax, approved by the voters during 2001, can only be used for public safety expenditures, i.e., police and fire. In addition, the portion of the general fund budget allocated for public safety must be the same percentage as that allocated in the 2002 city budget.
Because the public safety share of the 2002 budget amounted to 47.65 percent of the general fund, the city is obliged in perpetuity to devote nearly half of its yearly budget to police and fire.
Similarly, the city’s share of the Pikes Peak Rural Transportation Authority’s regional 1 percent sales tax, estimated at $51.8 million for 2008, requires that the city maintain transportation funding from other sources at or above the 2004 level, the year before the tax became effective.
These and other mandates, which affect almost all of the city’s revenue sources to some degree, have the effect of tying the hands of city decision makers, who have comparatively limited discretionary spending power.

Low tax rates

By most measures, the city’s sales and property tax rates are low. The sales tax rate of 3.5 percent is the state’s second lowest, behind only Fort Collins at 3 percent. And the city’s mill levy, to be set in 2008 at 4.707 mills, is by far the lowest of any of Colorado’s 10 largest cities.
Because of provisions in the statewide Taxpayers Bill of Rights tax limitation initiative of 1991, the city’s mill levy has been reduced eight times since 1991.
Slightly more than 60 percent of the city’s general fund budget comes from sales and property taxes. The remainder comes from a hodgepodge of sources: fines and fees, charges for services, intergovernmental transfers, miscellaneous other taxes such as a tax on movie tickets and, most importantly, a $26.8 million transfer from Colorado Springs Utilities.
This payment, which the city describes as a “payment in lieu of taxes” is meant to compensate the city for the franchise, sales, and property taxes tax that it would presumably collect from an investor-owned utility.

Not much we can do

Interim City Manager Mike Anderson, like Nickerson, sees the city’s financial dilemma as at least partially the result of over-reliance on the sales tax. But, he said, there’s not much we can do about it.
“That’s a problem that’s endemic up and down the Front Range,” he said. “Every city is struggling with relying on an elastic revenue source when your expenditures are relatively inelastic. A private company can cut expenses when sales decline, but we can’t close fire stations, or stop maintaining highways, or lay off public safety personnel. In fact, our expenses may actually increase in a down economy, with added needs for law enforcement and serving special communities.”
Anderson said there are two areas of the budget that illustrate the problem.
“We get about $127 million from the sales tax, and we pay out about $157 million in salaries and benefits,” he said. “Assume that both of those figures increase with inflation-and you see that it’s not sustainable. The gap just gets bigger. Also, look at our urban form. We have a very suburban profile, and it’s difficult to provide services efficiently in such a low-density environment.”
So, what’s the solution?
“If I knew, we’d be doing it,” Anderson said. “I’m not advocating for a property tax increase or any other increase. It’s not hopeless. There are solutions. But it’s going to take work, and it’s going to be glacial.”
The budget is available at springsgov.com or as a bound copy, which can be purchased from the city for $21.