The Budget Crisis in Utopia
a resource for the Making Budget Choices activityThis Maine Municipal Association publication is presented for "Classroom Use Only." Its intended use is to stimulate and aid in discussion and role playing within a classroom setting.
The City of Utopia faces a budget crisis as city officials consider their budget for the coming fiscal year. In this activity, you and other members of your class become citizens of Utopia. As concerned citizens and/or city officials, you will help decide on Utopia's budget for the coming year.
Two large factories in the city have closed in the past six months, putting many residents out of work. Stores and other businesses have also started to lay workers off as sales decrease due to unemployment. The city manager predicts that revenues for the city will be $250,000 less in the coming year than they were budgeted to be this year. The current city budget for Utopia is balanced at $10,000,000 in revenues and $10,000,000 in expenditures. If the city manager is right about the decrease in revenue, the city will have only $9,750,000 in revenues for next year unless the council raises the property tax rate.
Should the council raise the property tax rate, cut city spending, or take money from the fund balance? That is the decision facing Utopia officials as they consider next year's budget. Unfortunately, it is not an easy choice. While there are some people who oppose tax increases and want city services cut, there are others who are strongly in favor of adding city services. Adding services, of course, costs even more money.
Revenue possibilities. The City of Utopia is already charging its water and sewer customers for the full cost of these services. The city can not expect any increase in intergovernmental aid or other revenue sources. Only property tax revenues can be increased. Because there is no new construction in the city, the total assessed value of property in the city has not increased. The only way for the city to raise new revenue is to raise the property tax rate. Utopia has a total assessed value of $850 million. The property tax rate for the current fiscal year is $6.5 per thousand dollars.
Possible cuts in expenditures. Last year, the city council acted on recommendations to streamline city government and cut funding of city services by five percent. The city manager says that Utopia is now operating as efficiently as possible. If more budget cuts are to be made, services will have to be cut. Here are the possibilities:
1. If the city changed from twice a week garbage collection to once a week collection, it could lay off 20 workers and save $350,000 per year.
2. The city could reduce maintenance of parks and public buildings, mowing the grass less often and putting off minor repairs. This would permit the city to lay off 5 workers for an annual savings of $87,500.
3. Some people have suggested that the city cut its funding for community service organizations. The city currently provides $50,000 each year to Outreach, an organization which operates the homeless shelter and food bank. The city also provides $150,000 each year to the Chamber of Commerce for its economic development projects for the city.
Requests for new services. But there are also several requests for additional funding. Robberies of convenience stores and restaurants near the edge of town have increased, and several merchants have asked for additional police patrols during evening hours. A group of parents, teachers, and students has asked for more after-school and evening recreation programs for children and youth to help them fight growing drug and alcohol abuse. Some merchants in the city's major shopping area think better street lighting would encourage more people to shop there at night. (They argue that many residents drive to shop at a mall in another county now, losing them business and the city sales tax revenue.) The city also started building a new swimming pool and tennis complex back before the factories closed when the local economy appeared much stronger. The pool, courts, and dressing room will be completed this summer, but new staff will have to be hired to operate these facilities.
The projected costs for these new programs are as follows:
1. Two new police officers and equipment $70,000
2. Three new recreation specialists $75,000
3. New street lights for business district $120,000
4. Staff for new swimming and tennis facility $80,000
The fund balance. Utopia has a fund balance of $1 million, but because sales tax revenues in the current fiscal year are below the current budget, the council has just voted to spend $50,000 of the fund balance to cover this loss of revenue. That will reduce the fund balance to $950,000. The Local Government Commission has already told Utopia officials that the city's fund balance is dangerously low.