A nanosecond overview of city budget constraints

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States and municipalities across the nation are having difficulties balancing budgets because sales tax is declining nationally — it’s a consumption-based tax, and consumers, of course, are “pulling back.”

Dr. Tom Zwirlein, professor of finance at the University of Colorado at Colorado Springs, was a keynote speaker, along with City Manager Penny Culbreth-Graft, at UCCS’ “Just the Facts, Folks: A Business Approach to City Finances” presentation.

Here are a few snippets of his presentation.

Zwirlein said the city’s tax collection is a “one-legged stool,” with heavy reliance on sales tax and little reliance on property tax. “Best practice” includes three major sources of revenue — not one.

Service expenditures are rising faster than goods expenditures, but services are generally not taxed.

For instance, during 1950, 65 percent of national sales tax was from goods — by 2009, that declined precipitously to 35 percent.

And with urban sprawl, large retailers are moving outside the city limits — to Falcon, Woodland Park and Fountain.

“Any time a big-box moves outside the city limits, you’re looking at $1 (million) to $2 million in lost sales tax revenue,” Zwirlein said.

And we haven’t even mentioned the increase in e-commerce, which also doesn’t generate sales tax for Colorado Springs.

The city faces three major hurdles: two Taxpayer’s Bill of Rights (city and state), the Gallagher Amendment and Amendment 23.

While requiring a vote for any tax increase can be good, there are other parts to TABOR that hinder the city.

“The ratchet-down effect in years when the economy contracts is a real problem,” he said.

And revenue growth is limited by the Denver-Boulder Consumer Price Index.

“The CPI is an urban measure — we’re not Denver or Boulder,” Zwirlein said. “Those cities may buy a lot of things, such as fire trucks, that we don’t buy.”

During economic contractions, property values can go down, but mill levies can’t be adjusted upward to counteract this effect without a vote.

And TABOR, the Gallagher Amendment and Amendment 23 collide in such a way that property taxes don’t cover nearly as much education funding as they used to, but the state’s School Finance Act requires the state to “backfill an ever-increasing amount” of education funding, which consumes a larger portion of the general fund.

“In 1982, property tax funded 60 percent of K-12 education — now it’s 40 percent,” he said.

Here are a few of the recommendations made by the Sustainable Funding Committee (which Zwirlein was a member of), to help balance the city’s revenue structure, that could be implemented over the next five years.

Examine governance and ownership of Memorial Health System (“consider the inherent risks of a city this size owning a hospital anymore”); alter the governance of Colorado Springs Utilities and adjust utility rates to a market index over time — “let’s run it like a business”; implement an employment tax and sales tax on services; implement a sin tax; align revenue sources with where the money is spent; and increase the Lodgers and Automobile Rental Tax.

“We could increase LART significantly,” Zwirlein said, “and nobody would know the difference.”

Remember, this was just a quick look at all the data presented during the forum at UCCS.

To hasten a good night’s sleep, or to become a model and informed citizen, visit the city’s Web site to read the SFC’s full report, 294 pages, as presented to City Council on Aug. 10.

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.