Coping With Budget Shortfalls

Getting out of the gate early and communicating the municipal impacts of proposed state budget cuts to legislators and the public will be extremely important for municipal officials as they enter the municipal budgeting season. At the same time, it would also be prudent for local officials to realistically size up their municipal budget situation and start planning for the very difficult budget decisions that lie ahead.

How state budget decisions affect municipal budgets is not very well understood by most citizens. State programs like revenue sharing, local road assistance, and General Assistance, Tree Growth, and Homestead reimbursements are a mystery to most people unless they are directly involved in town government or participate in the program.

Proposed cutbacks to the State-Municipal Revenue Sharing program alone are $27 million for FY 10 and 11, on top of the $44 million taken out last year by the legislature when the FY 10-11 state budget was adopted. The new cuts take $12 out of FY 10 (the current year) and another $15 million out next year (FY 11). Together, they add up to a 26% reduction in funding this year, and a 33% reduction next year. Compounding the damage of the budget cuts are lower state sales and income tax collections which are the basis for the revenue sharing distribution.

Explaining how revenue sharing affects local budgets is a challenge for municipal officials. Most citizens don’t understand the program and for many legislators these budget cuts are viewed as municipalities just “sharing the pain”. The reality, however, is that revenue sharing is used by municipalities to lower property taxes. Municipalities are required by state law to use revenue sharing dollars to reduce the property tax commitment before it is levied. Cutbacks to the revenue sharing program force municipal officials to either increase property taxes, find alternative non-tax revenues, or reduce services.

Legislators and citizens need to understand that municipal budgets and property taxpayers have a limited capacity to deal with these cutbacks to municipal programs. The more they understand this connection, the more effective municipal officials will be in bringing a sharper focus to the tax shifting that is taking place under the pretense of ‘making the tough decisions’.

A public hearing on Governor Baldacci’s proposed supplemental budget was held on January 8 at the State House. MMA staff and municipal officials attended the hearing to voice their concerns about the proposed cutbacks to municipal assistance programs.

The battle has just begun for municipal officials who must be vigilant in their ongoing communication efforts to explain the local impact of state budget decisions.

To get a clearer picture of the municipal reaction to the proposed budget cuts, the Townsman conducted several phone interviews with town managers in various parts of the state.

Small Towns Up North

Candis Nevers has been a town manager in small towns in southern Aroostook County for over 30 years. She currently is a shared manager by the towns of Smyrna and Merrill.

She can’t remember things ever being any worse than they are now and says that the proposed cutbacks are “devastating news to us.”

Nevers says that small, rural towns are getting a double whammy from the revenue sharing cutbacks and Tree Growth changes.

“More than half of our land is in tree growth,” she says, and “we’ve been taking massive hits, year after year.”

Tree Growth is a problem for the Town of Merrill which has 16,435 acres in the program. If that land were taxed at its full value, this small town of a little over 200 residents would be getting $102,000 more in property taxes. Instead, the town gets only 24% of the “full value” tax revenue and the state’s reimbursement that was supposed to make up for this (state) property tax relief program keeps going down.

Revenue sharing and Homestead Exemption cutbacks, just add to the burden of the residential property taxpayers in the towns of Merrill and Smyrna, says Nevers.

“These towns are really hurting,” she says. Fortunately, the frugal towns have set aside “rainy day” money in their undesignated fund balance to deal with unplanned economic hardships. But, the town manager says, “We can’t do this forever. I don’t know what we’ll do if the economy doesn’t turn around.”

Rural Towns in Somerset County

Like other towns in rural parts of Maine, it’s the residential homeowners in St. Albans, pop. 1,863, who pay most of the property taxes to operate town government. The only other significant source of local revenue is the excise tax on motor vehicles, and they pay this too.

St. Albans operates its budget on a calendar year. Town Manager Rhonda Stark says that revenue sharing was down $6,400 from 2008 to 2009 from just the slowdown in the economy. For a town that gets less than $90,000 in revenue sharing, that “natural reduction” was a significant hit. Based on the recent news from Augusta, next year will be worse.

The proposed municipal budget for 2010 is down $78,654 from 2009. The lower budget has been accomplished by eliminating contributions to reserve accounts, or said another way, deferring capital purchases. But, that is a short-term solution to their budget problems.

Town officials haven’t dipped into surplus yet, but they might have to after the school and county tax bills are finalized. “That’s the real unknown”, says Stark.

She doesn’t get much comfort from looking at school and county tax bills from prior years. The school district bill went from $811,000 in 2007, to $926,000 in 2008, and then to over $1,074,000 in 2009. The county tab was about $223,000 in 2007, then $367,000 in 2008, and $377,000 in 2009.

“We (town officials) would like to keep the property tax rate the same, but that probably won’t happen because of the school and county budgets,” said Stark.

Hard Times in Western Maine

Over in Norway, long-time Town Manager David Holt says that the changes necessary to address his municipal budget shortfall will be difficult to implement.

Holt says that there are two budget problems, one involving the current (FY 10) budget and the other preparing for the FY 11 fiscal year.

He is proposing to deal with the current budget shortfall by not spending monies that were approved at last year’s town meeting for certain capital projects.

The FY 10 budget has an $80,000 revenue sharing gap to fill and about $50,000 of increased General Assistance costs to cover. Having spent the last 34 years in town management, Holt says he’s “not surprised to see the (state budget) cuts” acknowledging that the state didn’t have many options.

The size of the increased GA costs over the budgeted amount is more surprising, but Holt has an explanation. Norway has an unusually high amount of rental housing by low and moderate income people for its size, Holt says. The high unemployment rate in the area combined with cutbacks to federal and state human services programs are causing residents to use local government’s “safety net” GA program more heavily than expected.

Holt is now focusing his attention on next year’s municipal budget, which he says will involve some difficult decisions. The board of selectmen doesn’t want to increase property taxes and they would like to not have to reduce services, says Holt, but those two desires are somewhat incompatible.

“My job will be to help them find a way to make the hard decisions,” he says.

Holt sizes up the situation in Norway as one where residents are generally getting what they expect from town government, but given the current state of affairs, this will likely have to change.

“We’re going to have to cut back on some of the day-to-day services,” he says. That might include: a reduction in town office hours and staffing, a greater employee share of health insurance costs, and saying “no” to some social service agency requests.

Holt doesn’t foresee property taxes rising next year because of municipal spending, but does think that the school and county budgets will put pressure on town officials and the town meeting to accept a property tax increase.

“There are tough times ahead,” Holt says, and while town officials have always had to make difficult decisions, the upcoming ones appear to be moving to another level of difficulty.

Barebones Budget Downeast

Machias Town Manager Betsy Fitzgerald says the town is operating with a “barebones budget” and she’s not sure where she’s going to find the $60,000 to cover the revenue sharing shortfall projected this fiscal year for Machias.

“We’ll just have to say ‘no’ to some spending projects,” Fitzgerald says. “We’ll save by making equipment last longer.” Like other towns interviewed for this article, the reserve funds, equipment purchases, and capital projects are the most likely candidates for immediate cost cutting measures.

“We’re willing to give up funding items that do not directly impact the lives of our taxpayers,” Fitzgerald says. “We’re limping along,” she adds, pointing out you can only do that for so long.

One project that is likely to be postponed, Fitzgerald says, is a new roof for the town office, even though the present roof is leaking and worn out and funding was included in the budget.

The Machias town manager, like many other town officials, is looking for ways to maximize town spending. She acknowledges that much of what the town has been able to provide beyond the basics has come from grant funding. One area where she sees progress an opportunity is the regional solid waste facility. She thinks the town has a good shot at getting more towns to join the regional transfer station.

Putting a philosophical spin on her town’s financial situation, Fitzgerald says, “We’re pedaling as fast as we can, but still in first gear.”

Southern Maine Perspective

Down in Kittery, Town Manager Jonathan Carter says that conservative budgeting over the past three years has better prepared the town for what he describes as a “very bad situation” in FY 11.

The current fiscal year curtailments will be less of a problem because municipal officials lowered their revenue sharing expectations from FY 09 to FY 10 by 20%, according to Carter. Instead of the $146,000 shortfall that MMA estimated for Kittery when it did a statewide impact analysis of the FY 10 revenue sharing cuts, Carter says the town is looking at a $50,000 gap to fill.

Many of his town manager colleagues would consider Carter fortunate to have townspeople who routinely approve budget contingency reserves. As part of the FY 10 budgeting process, Kittery voters approved reserve funds for uncontrollable budget overruns, such as General Assistance, heating fuel, and even to be used as matching funds for grants. These contingency funds help stabilize the property tax rate from year-to-year, says Carter.

The Kittery town manager is more concerned about the FY 11 municipal and school budgets than FY 10 shortfalls. In October, the Kittery Town Council gave Carter his FY 11 budget marching orders which was to have “no tax increase”.

Carter has several ‘irons in the fire’ that he says will allow the town to address long-term budget shortfalls in a more comprehensive way. One of his budget cost containment approaches is to move certain municipal services to “enterprise fund” operations. These structural changes have already begun with the sewer department, which Carter says is now entirely fee-based, and the recreation department which is “almost there”, he says. On the radar screen for fee-based operations are the transfer station and possibly the land use/code enforcement office.

Municipal-school cooperation also has cost-saving opportunities, Carter says. The town and school have been working for over a year on consolidating and centralizing their financial operations.

Ironically, Kittery is not as affected by the GPA cutbacks as many other communities, because the town doesn’t get much GPA. Nearby Eliot, Carter says, is in a much worse situation because the school system is so dependent on GPA, which, interestingly, has led to conversations with Kittery about tuitioning high school students to Marshwood (the high school in Eliot).

“There’s a fierce debate going on in Kittery” over this tuition proposal, says Carter. Even though some residents don’t see the connection between tuitioning and local budget containment, Carter does. “All of these (restructuring) discussions are connected,” he says.

Outlook in Capital City

City officials in Augusta have a front row seat for all the state government budget wrangling, but the city’s no different than any other Maine community in feeling the effects of state cutbacks.

Looking at his FY 11 municipal budget, City Manager Bill Bridgeo says the city and residents stand to lose $484,000 in revenue sharing, $107,000 from changes to the Homestead Exemption and about $87,000 in reduced excise tax revenue.

Bridgeo says that city councilors want to keep the property tax rate stable, but they may reach a point where the city cannot avoid some level of property tax increase.

For the current fiscal year, the city manager plans to fall back on a “healthy fund balance” to make up most of the $380,000 shortfall caused by proposed state cutbacks.

Early glimpses of the FY 11 municipal and school budgets present a more gloomy picture. Bridgeo says the city’s revenue/expenditure budget shortfall appears to be about $1.2 million and the school’s budget gap is $1.7 million. That adds up to a $2.9 million shortfall for the entire city budget, which is around $50 million. The more discouraging news is that this municipal budget shortfall is based on a proposed budget that contains “no wage increases and a continuation of eight shutdown days”, says Bridgeo.

The math on trying to cover the $2.9 million shortfall with property taxes would necessitate a 12% increase, and that’s not going to happen, says Bridgeo.

The city manager says that the city won’t be able to rely on surplus funds for next year’s budget, acknowledging that he’s probably looking at more employee layoffs.

Last year around this same time, the city was faced with a $350,000 curtailment of its FY 09 budget. According to Bridgeo, that curtailment resulted in the elimination of 12 full-time positions in city government.

Bridgeo, who started his municipal management career in 1976, describes the current state of local government affairs as “grinding and demoralizing”. “I’ve never had to have so many hard conversations with employees,” he says. “It’s the toughest (experience) I’ve had to deal with in my career.”