Budget Overview 2011: Final Budget Adopted

by Noam Bramson | Dec 15, 2010

This is my eighth and final post devoted to the 2011 budget and to the trends and circumstances that shape it. If you have read every word of the prior posts, you deserve some sort of prize. Even if you only skimmed them, I express thanks for your interest … and for your patience with a rather long-winded discussion. In this difficult economic climate, there are no easy or pleasing choices, but there are better and worse choices, and we have a responsibility together to sort them out. I hope that the information I’ve presented will help us accomplish this goal.

So … this year’s budget process is now over. Last night, the City Council voted first for a package of amendments to the City Manager’s original budget proposal and then voted for the amended budget itself. Taken together, the amendments:

• cut the proposed property tax increase from 3.90% down to 2.81%; this final approved rate translates into about $81 per year for the average taxpayer;
• cut the property tax levy by $501,000, meaning that the City will actually collect less in property taxes in 2011 than it did in 2010; and
• increase the City’s fund balance by $550,000, which will strengthen our fiscal position heading into 2012, and also better enable us to address unanticipated events in 2011.

Keep in mind that most of the really meaningful budget actions have unfolded during the past two years or were already embedded in the City Manager’s proposal. So these amendments are a little anti-climactic and quite small in the context of an overall budget that exceeds $100 million. The amendments do not alter the larger analyses of budget components and trends in my prior posts, all of which still apply.

Budgets are often the subject of political wrangling — sometimes driven by principled differences and other times by partisanship. It is notable, therefore, that the budget amendments and the budget as a whole were approved on a unanimous bipartisan basis.

Throughout this process, my intent has been to achieve an appropriate balance between protecting the interests of taxpayers, providing for investments in essential services, and securing the City’s longer-term health and stability. Seemingly simply goals, but often in tension with each other and constrained by circumstances beyond our control. So far, I think we have achieved this balance in a reasonable way, and I hope you agree.

You can read the statement I made in conjunction with my vote. It restates some of the language in this and prior posts.

Our work does not end with the adoption of a single budget, but requires instead a constant attention to the shifting needs and conditions within our community. The year ahead may defy expectations, for good or for bad. And before long, we’ll be wrestling with options for 2012.

Finally, notwithstanding the difficulties of the moment, New Rochelle retains the strength and vibrancy of a great and growing community, with every reason for confidence in its future.

Thanks for reading. I welcome your comments and suggestions.

Budget Overview 2011: Myths & Red Herrings

by Noam Bramson | Dec 14, 2010

Seventh in a series on the 2011 budget.

Often the first step to solving a problem is understanding its source. Conversely, false impressions of a problem’s source can confuse debates and impede constructive solutions.

In my prior posts on the 2011 budget, I described the various factors that most significantly shape the City’s finances and drive our current fiscal challenges. Today, I confront some of the persistent myths that surround New Rochelle’s municipal finances.

Now don’t get me wrong. Taxes in New Rochelle are high, too high. But this is a regional phenomenon, not a local one. And, in fact, as the chart below indicates, New Rochelle’s City property tax rate is significantly lower than that of the other urban centers of Westchester. Measured against the market value of property, White Plains’ tax rate is about 17% higher than ours, Peekskill’s about 63% higher, and Mount Vernon’s about 100% higher!

Comparative Tax Rates (2010)

The Government Finance Officers Association has consistently recognized New Rochelle for its excellence in financial reporting, a testament to the professionalism of our finance staff and their conservative approach to budgeting. The City is independently audited every year (you can download the latest audit here), generally receives high marks for the oversight of its finances, and moves quickly to correct any opportunities for improvement. Furthermore, as noted in my last post, New Rochelle’s government is quite lean, measured both in terms of municipal employment and in terms of municipal expenditures.

This is the biggest of the myths and the most frequently repeated. It is a subject of conversation during every budget cycle, the dominant theme on radio call-in shows, a preoccupation for many who follow local government, and a predictable talking point in every election. In fact, I often feel that we spend more time re-debating old arguments about fifteen-year-old development agreements than we do discussing options for the future. That’s not good.

First, contrary to rumor, the majority of New Rochelle’s recent projects are now paying full taxes. Here is a complete break-down:

Full Taxes (No Abatement Ever Received)

• Weyman Avenue Retail (excluding Home Depot & Costco — see below)
• New Roc City — Lofts at New Roc
• Trump Plaza Apartments
• Palmer Center
• Palmer Square
• Davenport Lofts on Main
• 543 Main Street Apartments
• Shoprite (formerly Home Depot Expo)
• Avalon — Retail

Full Taxes (Temporary Abatement Expired)

• Weyman Avenue — Home Depot & Costco
• New Roc City — Marriott Residence Inn

Minimal Abatement

• Trump Plaza Retail (payments in lieu of taxes set at full tax equivalent, increasing annually at inflation rate)

Expiring Abatement

• New Roc City — Entertainment & Retail (partial abatement phasing out, will fully expire in 2014)

Significant Abatement

• Avalon — Residential (pays percentage of net operating income in lieu of taxes)

If you look closely at this list, you will see that nearly all the major developments are either paying full taxes or well on their way to doing so. The notable exception is the residential component of Avalon, which received a large incentive package from the City to become the luxury housing “pioneer” in downtown New Rochelle.

Taken together, these developments have a significant positive impact on municipal and school budgets:

• For the City, the various major projects completed in the past fifteen years generate net income of about $4.7 million every year. Without those projects, the City would have to raise taxes by more than 10% to bring in the same net income.
• For the School District, these projects provide annual net income of almost $1.3 million. That’s after accounting for the cost of educating public school students who live in newly-developed apartments.
• The County, by the way, nets about $1.5 million per year from these same developments, making the total benefit for property taxpayers roughly $7.5 million per year.

Net Annual Taxpayer Benefit: $7.5 Million

If you’re interested in the specific numbers on which this summary is based, look here.

Critics ignore these positive figures. Instead, they calculate the gap between actual abated tax levels and theoretical full tax levels, and then call it a loss. But their assumption is that, in each case where incentives were used, an identical project at full taxes was a real option. New Rochelle’s history suggests otherwise — if the City hadn’t intervened, our downtown’s dominant features would still be rubble-strewn empty lots and an abandoned mall.

Why Myths Matter

If we base our decision-making on a false narrative that mischaracterizes New Rochelle’s history, misstates the real choices available to us, or misreads the impacts of those choices on our budget, it will be far harder for all of us to build a better future.

So the next time you hear any of the myths above, please respond with the facts. New Rochelle’s financial management, conservative budgeting, and successful (but still unfinished) economic development strategy have helped give our community the lowest property tax rate among Westchester’s cities.

My next and last post in this series will take a look at the City’s final adopted budget.

Budget Overview 2011: Actions Taken

by Noam Bramson | Dec 10, 2010

Sixth in a series on the 2011 budget.

My prior budget posts describe the exceptionally challenging trends and circumstances that have impacted New Rochelle’s fiscal health. In this post, I look more closely at the actions taken by the City in response to (and also in anticipation of) a deteriorating economy. Together, these steps have helped New Rochelle weather the storm better than most communities, but not without consequences … and the storm is not yet over.

Already Lean

By the time the economic crisis began, New Rochelle’s City government was already quite lean. You can see in the charts below a comparison of municipal spending and employment in White Plains and New Rochelle. The figures are taken from late 2008, just about the time the economy really started to tank.

Municipal Operating Expenses (per resident)

Full-time Municipal Employees (per 1000 residents)

There are lots of differences between White Plains and New Rochelle that make this an imperfect comparison. My point is only that New Rochelle’s more recent cuts in programs and personnel have not been an exercise in reducing wasteful spending, of which we had little to none, but instead have involved separating essential spending from merely desirable spending — a considerably harder task.

Controlling Personnel Costs

Reducing the Municipal Workforce
Starting in 2008, the City implemented a selective hiring freeze. By 2011, the cumulative effect of this policy will reduce the municipal workforce by almost sixty positions or about ten percent, bringing our local government to just about the smallest size in New Rochelle’s modern history. Savings from attrition will total approximately $5.1 million next year.

The smaller workforce does not, however, come without significant sacrifice. The Police Department has pulled back from community programming in order to focus on core emergency response services. The Public Works Department is slower to repair potholes and sidewalks or attend to a variety of neighborhood concerns. Minimum manning standards can put certain Fire Department apparatus periodically out of service. As I said, removing desirable services from essential services is not done easily.

Freezing Salaries
As a general objective, the City Council supports an across-the-board salary freeze, encompassing every municipal employee in every department. We have implemented this policy to the degree possible, allowing increases this year and next year only for the segment of our workforce under multi-year contracts, which cannot be unilaterally abrogated by the City’s management. The savings achieved by these actions are difficult to calculate precisely, but $1 to $2 million for 2011 is a reasonable estimate. (One important caveat: for unionized employees whose contracts have expired, freezing salaries outside the context of a labor agreement may ultimately prove to be a raise deferral. This depends upon the nature of the eventual contract settlement, whether achieved consensually or through arbitration.)

Health Insurance Cost Controls
For quite a while now, New Rochelle has required employees to share in health insurance costs (the typical employee match is 18%). The City has also been quite successful in negotiating favorable rates with health insurers. As health insurance costs rise, the value of these long-standing policies and actions has become clearer: compared, for example, to the health insurance cost structure for the Westchester County government, New Rochelle is saving about $6 million annually, according to the best estimate of our personnel staff.

Cutting Other Expenses and Programs

Reducing Capital Expenditures
The City has dramatically reduced its spending on infrastructure and equipment. Such reductions have serious long-term implications and our current low level of investment cannot be sustained forever, but in the current climate there is little choice. The total 2011 capital budget is proposed to be $3.4 million, none of which is paid for with cash from our general fund. To put this number in perspective, our five-year projection of capital investment needs and goals is about $62 million. In better times, the City would make a general fund contribution to the capital budget of roughly $2 million, so think of that amount as the approximate savings for 2011.

Program Cancellation & Deferral
Several worthwhile, but non-essential, programs have been cancelled or deferred. The cancelled initiatives include some that I enthusiastically helped to launch, such as the traffic calming program, monument and memorial restoration, enhanced catch-basin cleaning, and an annual traffic studies allocation. I do not consider any of these programs wasteful, but recognize that they cannot be sustained in the present economic climate. Figure annual savings of about $500,000.

Energy Efficiency
This is still a work in progress, but we are off to a good start. We have already converted City Hall’s heating system from oil to natural gas with an annual savings of about $60,000. In addition, the City recently utilized a portion of federal stimulus funding to conduct detailed energy audits of three large public buildings. While those audits are still being analyzed, we are hopeful that the recommended system upgrades will produce net annual savings for taxpayers (reduced energy expenses minus annualized capital costs.)

Securing Grants for Major Projects

The City has been aggressive — and reasonably successful — in securing grants to pay for local projects without burdening New Rochelle taxpayers. Some present examples include:

1. the third phase of the North Avenue streetscape, paid for entirely by federal grants;
2. the Lincoln Avenue reconstruction, 95% of which is funded by the federal and State governments; and
3. the City Park rehabilitation, paid for almost entirely by federal and County grants.

Total outside funding for just these three projects amounts to roughly $20 million.

Securing Alternative Revenue Sources

All cities would benefit from a more diversified revenue base that is less reliant on property taxes. Municipal authority to raise revenue is, however, defined by and sharply circumscribed by State law, so tapping a new revenue source generally requires State legislative approval. Despite good support from our own State legislative delegation, New Rochelle’s success rate on this priority is mixed. We obtained approval to implement a new hotel occupancy fee that raises about $250,000 per year through modest charges on guests at local hotels. But we were unsuccessful in a state-wide push to give all cities in New York the authority to raise utility gross receipts taxes, a small charge attached to utility bills that is spread among all rate-payers, including those exempt from property taxes.

Another new (or at least rescheduled) revenue source is unique to New Rochelle. The City successfully renegotiated the terms of the sale of land for the Avalon project, front-loading land payments that had been set to occur a generation ahead, so that instead we receive $9 million now, spread over five years. A total of $4.5 million is being used to help balance the 2010 and 2011 budgets.

Financing and Deferring Costs

To be clear, I am not exactly boasting about this category of “savings.” While certain capital investments associated with long-term community benefits or physical improvements should be financed with bonds or notes, municipalities are better served by keeping their borrowing to a minimum and by avoiding borrowing entirely as a means of financing operations.

Even so, some selective borrowing can be justified at present: interest rates are very low, the City’s overall debt burden has declined significantly in the past decade (as shown below,) and some of the factors driving the present budget crunch will prove acute instead of chronic. With these facts in mind, the City has chosen to finance certiorari payments, bond essential equipment purchases, and utilize a State option to defer a portion of the extraordinary 2011 increase in retirement system contributions. While not saving money, these actions will spread some cost pressures over an extended period. For 2011, figure a rough cost reduction of about $2 million from these measures.

Outstanding City Debt (adjusted for inflation)

It All Adds Up To …

Now, of course, the foregoing is not a comprehensive list. For example, I made no mention at all is the interplay between economic development and our tax base, which I will explore more fully in a future post. Nor did I touch on a variety of smaller spending cuts or cost increases. Nonetheless, you can see that the City has been addressing economic challenges in a sustained and pro-active fashion, and that our actions have made a real difference.

But … I can almost hear readers asking: “Hey, Noam, if the City has taken all these steps, then why the heck are my taxes still going up?!”

Good question.

I wrote previously about declining revenues and rising expenditures. The cumulative impact of retirement contributions, declining mortgage and sales tax revenue, property tax grievances, and all the other items mentioned would have created a budget gap for 2010 and 2011 of more than $13 million. Filling that gap would have necessitated a whopping 36.5% tax increase, spread out over two years, just to maintain the status quo with respect to the size and operation of New Rochelle’s government.

Instead, the City’s dramatic cost-cutting measures have reduced expenses by about $9 million, while new revenue sources and some modest financing have further reduced the gap by about $3 million. That’s taken some of the pressure off City property tax payers, but not all: the total tax increase for 2010 and 2011 combined will end up being about 9%.

Cost Pressures and Actions Taken, 2010 – 2011

Property Tax Increase, 2010 – 2011

In other words, the City’s various economizing measures have knocked down the tax rate by close to 30%, but opposing trends over which we have no control have proven even more powerful. That’s not a very pleasing answer, but it’s an honest one.

My next post will look at a few of the red herrings and myths in the budget debate, especially the old and false canard that New Rochelle’s fiscal challenges result from economic development agreements. (Quick preview: downtown development has had a net positive impact on the City and School District’s budgets.) I expect to conclude with a look at the final adopted budget, likely to be voted upon by the Council on December 14th.