City Budget Projections
Posted by Jeff Pruitt - 8/5/09 @ 12:00 pm - Filed Under City Council, Featured
In a previous post I described how sensitive the budgeting process is going to be upon the revenue projections the city uses. If they are optimistic then the administration could argue that no cuts are needed whatsoever. In a scenario like this the city should adopt three sets of different revenue projections and budget accordingly - much how the federal government did during their bank stress tests.
In order to illustrate this idea I’ve come up with three budget scenarios that I believe cover the trade space - optimistic, adverse and more adverse. I want to say up front that while I believe these projections to be reasonable they are not true economic forecasts - i.e. they are not backed by actual macroeconomic data. They are simply meant to be illustrative of the problems the city faces and how the revenue projections will alter the budgeting process. Before I get to the actual data I want to explain what I did.
First, I treated the budget process as a two year cycle meaning the necessary cuts were to be made over a 2 year period. Going beyond that pushes us into the next election cycle and too many things can happen after that - the fixes need to be put in place over the next two years.
Second, I assumed 2.5% annual growth of expenses after that two year period expired. At some point there are only so many “efficiencies” to be found and expenses, even due to inflation, will go up. Could government limit themselves to less? Of course, but for long-term budgeting purposes it’s safer to assume some growth and 2.5% is still pretty minimal compared to historical values.
Third, I recognized the fact that the city has ~$23 million in cash reserves but only requires about $9 million in reserves for a good bond rating. This “rainy day” fund could easily turn into a slush fund and I say that if it ain’t raining now then you might as well return the money to the taxpayer. So in all three plans I created a budget scenario that left us with $9 million in cash reserves - in other words deficit spending was allowed as long as we never fell below the $9 million mark. I realize this is controversial but again this is illustrative - if you want no deficit spending then the problem gets much worse.
And last, the budget projections were done out to 2016 but remember only in 2010 and 2011 were cuts made. Also, the starting numbers for 2009 are still not in yet so I’m using the projections made by the city during last year’s budget meetings. So let’s see what the city is working with:
Optimistic Revenue Projections
- 2010: Revenue -2.5%, Expenses +1%
- 2011: Revenue +1%, Expenses +2%
- 2012-2016: Revenue +3.2%, Expenses +2.5%
As you can see from this scenario there is no reason to cut the budget at all. Council could increase the budget by 1% and 2% over the next two years and still stay above the $9 million cash reserve mark. Of course this assumes that revenue increases starting in 2011 which I find highly unlikely given falling real estate values (and thus property tax revenue).
Adverse Revenue Projections
- 2010: Revenue - 2.5%, Expenses -1%
- 2011: Revenue -1%, Expenses -1%
- 2012-2013: Revenue +1%, Expenses +2.5%
- 2014-2016: Revenue +3.2%, Expenses +2.5%
Here revenue decreases by 2.5% in 2010 and decreases in 2011 by 1% but it’s still the start of a recovery. In this case the council could cut 1% from both the 2010 and 2011 budgets - this would be the equivalent of $2.6 million in cuts over 2 years.
More Adverse Revenue Projections
- 2010: Revenue -2.5%, Expenses -2.75%
- 2011: Revenue -2.5%, Expenses -2%
- 2012: Revenue 0%, Expenses +2.5%
- 2013: Revenue +1%, Expenses +2.5%
- 2014: Revenue +2%, Expenses +2.5%
- 2015-2016: Revenue +3.2%, Expenses +2.5%
This scenario involves 2.5% revenue declines for the next two years and then a slow recovery beginning in 2012. Under this scenario the council could cut 2.75% and 2% from the 2010 and 2011 budgets respectively. Monetarily this would be $3.6 million in 2010 and $2.6 million in 2011.
Obviously if one thinks the revenue projections could be even worse then the cuts must be even deeper to stay above the $9 million cash reserve mark. In my opinion the council should consider this a 2 year budget cycle and plan for the most adverse scenario in the 2010 budget. From there they can adjust the 2011 budget accordingly. Better to plan for the worst case and be happily surprised than the other way around - of course that’s just my opinion, I’m sure the administration will argue to plan for the optimistic and cut later (fat chance) if necessary…
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9 Responses to “City Budget Projections”
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Budgets are just nothing more than a projection. The more years of data you have, the better the projection can be. I am a firm believer in accruing costs over time. For example, you buy a new house and can live in it for years without spending a penny on upkeep. New paint, roof, carpet, water heater, windows, AC/Heating unit and more. It is new and so why should you budget for these items?
With government we have street repairs. The life span of a road is known. We also know how long many other items last. Based on this any budget that has recurring costs that come about due to failure/replacement due to use need to be accrual.
The city budget is a combination of everything that is spent in a given year pay-go. Instead I believe each agency needs to put fourth a forcast based on its needs (roads, library, police cars, equipment, etc) based on capital life spans and accrual these costs each year into separate funds that are used to pay for things in the future. had this been done, we would not have the sewer cost, unfunded police and fire pensions prior to 1977 and many other costs.
To take the fund to $9 million will return us more to a pay-go and eliminate deficits spending or the dipping into the pot at politicians discretion. Pay-go will force some future generation to pay for something they never used.
Jeff - We need to tell the administration that they are going to have to include at least $100,000 somewhere in the budget to cover the shortfall in Performance License Fees from Hardball Capital that were to pay the utility costs and the $230,000 due yearly from the city into the Stadium Maintenance Fund.
Jeff, I am surprised your blog is wasting time covering things like the City Budget when blogs like Fort Wayne Observed have already scooped you on the story most people want to hear about…. “Denny Worman running for State Representative again in 2010″. Not since FWO’s expose’ on Spring Peepers have they broken a story like this. Come on, tell Mr. Kalb to hit the pavement and start doing some reporting work.
Fwob must have a writer’s block thing going on. It’s just so warm and fuzzy I can hardly stand it. Anyone remember when Mitch was writing under Indiana Parley? http://indianaparley.blogspot.com/
From one of his first posts regarding the then 20 something blogger at Fwob before he took over.
Kinda makes you wonder what happened. Where’s Nathan, and where’s Mitch? Fwob has become quite the bore.
I see Liz Brown and some others on the council are questioning free health care for the city’s early (unionized) retirees. Nice perk if you can get it. My former company, which made $40 billion last year, doesn’t do that. GM and Chrysler did it until they went bankrupt while the UAW was screaming that they weren’t going to give up any of their hard won benefits. The UAW preferred massive layoffs of their fellow workers to preserve what they had “won” for the few who remain today. Then the bankruptcies wiped that out.
Surely our public employees don’t think that way, do they?
It just never ceases to amaze me that politicians love to change the rules. I have heard time and time again that they built the railroads, high ways, dams, buildings and infrastructure we have today and they deserve to be rewarded. I have always had a problem with this line of thinking.
They were paid to do a job, just like those working today are. They knew the task and the payment they would receive. Somehow after they have been paid and years gone by, they for some reason need to be rewarded for what they already were paid.
We saw this with Medicare. We saw it with Rx drugs. They even passed the catastrophic healthcare bill only later to repeal it after those who would benefit from it had to actually pay for it.
Union workers who are close to retirement are not entitled to healthcare if it was not part of their package. If they want to be covered, then it must be negotiated. It would have to be paid for by taking wages from the workers. My guess is that a person who was over 50 and expecting to retire at 65 would have to contribute 100% of their wages in exchange for healthcare in retirement. If they want to work free for 15 years, then we can set aside those funds today so that they are available in 15 years to pay benefits.
Healthcare is being thrown around like apples. The truth is it costs money and it must be paid for. If we the people want to have universal healthcare, then we the people must be willing to accept higher taxes now, without borrowing and passing the bill onto someone else. Otherwise we are nothing but thieves and robbers taking things we want today and giving the bill to our children and grandchildren.
Green Jeans,
Maybe I should double his salary…
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