Budget Analysis: Millington TN

Transcription

1 Budget Analysis: Millington TN PADM-7140 Summer 2010 Michael J. Higgs 7/14/2010

2 Background For this budget analysis I am reviewing the fiscal year budget of Millington, Tennessee, a city of 10,433 people, 12 miles northeast of Memphis. Originally Millington was the retail and transportation center of an agricultural community. Now the city is now primarily a bedroom community with a small farming sector. Its largest employers are the U.S. Navy at the Naval Support Activity Mid-South, and Ingram Micro, a computer product distribution company. The city operates a strong mayor form of government, with the popularly-elected full-time mayor serving as the chief operating officer. The mayor is supported by a small core staff and a board of seven part-time aldermen. The finance department, which is responsible for the budget, consists of the Finance Director and a single staff person. The city provides standard municipal services; police, fire, water, sewer, sanitation, street maintenance, recreational services and general administrative services. Millington does not operate its own schools however; they are operated by the Shelby County School System. Revenue Analysis The city of Millington has a reasonably diverse revenue stream for a small municipality. The city s General Fund derives 62% of its revenue from taxes that are levied and collected locally. The next largest component of its revenues, intergovernmental transfers, comes from the city s share of taxes levied and collected by the state. This portion is approximately 21% of the budget. The remainder of the revenue is generated through the sales of licenses and permits, charges for services, fines, forfeitures and penalties, and interest income. For the fiscal year reviewed the actual revenue of the General Fund was $9,643,779 compared to the budgeted amount of $10,740,300. This shortfall of $1,096,521 was 10.2% of the anticipated revenue and 1

3 the shortfall occurred in nearly every revenue category. There were only two of the thirty revenue sources which met and significantly exceeded the budgeted projections for the yea. Interestingly these were the local property tax, which exceeded projections by 2.6% and the local wholesale beer tax which exceeded its projection by 8.8%. The city met its obligations at the reduced funding level through spending reductions. The two principal local taxes which support the General Fund are the property tax and the local sales tax. The city property tax in Millington is $1.23 per $100 of assessed value of the property. The assessed value of residential property is only 25% of the appraised value. This formula is set by the state of Tennessee and is not subject to modification by the municipalities. The assessment percentage for commercial and industrial property is 40%, for utility property 55%, and for non-residential personal property, 30%. This means that the Millington property tax on a $300,000 residence is only $922.00, which is a relative bargain in comparison to the taxes in nearby Memphis where the tax rate is $ per $100 or $ for the same property. Millington s rate is also lower than the nearby cities of Bartlett ($1.49) and Germantown ($1.425). In all cases the city taxes are in addition to the Shelby county property tax of $4.04 per $100 of the assessed value for properties within city limits. As is the case with all property taxes, this tax has a number of advantages. It is a stable tax in that the tax base itself, property, is immobile and its value does not vary drastically from one year to the next. This allows municipal governments to plan budgets with relatively reliable revenue projections. Taxing property is also easier to administer than income or sale taxes as the city controls the process of assessment and collection, and property ownership is easily determined through existing processes and records. Also, property taxes cannot be avoided or evaded as easily as sales or income taxes can be. Another advantage is that the asset being taxed 2

4 serves as collateral. A lien can be place on the property to enforce payment or in the worst case, sold to satisfy the tax bill. Historically, an important advantage of property taxes was the steady increase in property values which drove up the revenues from the existing tax base without the need to actually increase tax rates. This meant municipal governments did not have to take on the unpleasant task of raising tax rates nearly as often, while still seeing revenues grow. There were few periods in our history, like the recent housing market decline, in which property values actually declined significantly. This meant, by and large, revenues continued to grow at varying rates despite periodic economic downturns. As to disadvantages of property taxes, the primary one observed is their growing unpopularity with taxpayers. Property taxes are more visible than sales taxes and typically the tax is paid as one lump sum annually, unlike deductions for income taxes. The arrival of the tax bill is a pointed reminder of one s obligation to the community. This reminder may be in sharp contrast to the perceived benefit received from the municipality in exchange for the taxes paid. Nationally opposition to property taxes has been growing for decades. One of the most famous limitations placed on property taxes was implemented by the passage of proposition 13 in California in This law limited the rate of property taxes in the state to a rate of 1%, and by states had set limitations on local governments ability to set tax rates (Brunori 2007, 59). Another disadvantage is the growing demand for exemptions and exceptions. Some, like freezing taxes for the elderly living on fixed incomes are generally well-supported by the community. Others such as special exemptions for businesses can be more contentious. The use of these business exemptions places communities in competition for attracting businesses. This competition can lead to agreements which benefit the business to the overall detriment of the community, depending on the costs of the exemptions granted. Just this week I attended a 3

5 meeting of the Millington Aldermen in which the city agreed to grant one of its largest employers, Ingram Micro, a twelve year property tax freeze. The agreement limits the firm s city property tax bill to 25% of its normal bill or $90,000 per year. This arrangement was brokered by the city s Industrial Development Board, in reaction to the firm s threat to move its business and its 320 jobs elsewhere. The agreement, along with a similar accommodation by Shelby County, is part of a payment-in-lieu-of-taxes (PILOT) program which is normally used as an incentive for firms to bring new jobs to the area. In this case the recession and high unemployment rate inspired the use of the PILOT agreement to retain jobs that would have been lost. For its part, Ingram Micro agreed to invest $5,350,000 into technology upgrades to its Millington facility, though this does not bring additional jobs to the area (Bailey, 2010, C1).This investment must be made within the next 5 years. An exact cost benefit analysis of this agreement is not possible due to the number of unknowns. However, the loss of the Ingram tax revenue would be accompanied by the loss of jobs, which would have some impact on sales tax revenue from commuters into the community. There is also potential for additional impact on sales and property tax revenues if some employees are residents who move to retain their jobs. It would mean fewer local shoppers and might put additional houses onto an already crowded market, pushing home, and property, values down further. It is also difficult to say conclusively what the concession cost the city. Millington has not raised the property tax rate since 2001 and current economic conditions preclude a tax hike for the foreseeable future. The other significant component of the locally generated tax revenue is the local sales tax. In the fiscal year reviewed this accounted for $3,178,357 or 52.6% of the local tax contribution to the general fund. This tax is distantly trailed by a local tax on wholesale beer sales providing $444,471 or 7.3% of local taxes and a local business privilege tax and tax on 4

6 business equipment contributing $415,236 or 6.8%. The local sales tax is actually Millington s share of the Shelby County sales tax of 2.25% of sales of goods, foodstuffs, and merchandise. By state code the maximum local tax allowed is 2.75% and all cities have the option to levy a municipal sales tax equal to the difference between their county tax and that maximum rate. This means Millington could impose a.5% local sales tax on top of the county s 2.25% and the state s 7%. Unfortunately, I ve been unable to determine how the municipalities share of this tax is calculated in order to estimate the amount of additional revenue such a levy would yield. In discussion on this topic, the city Finance Director estimated that increasing the local option by.25% would yield roughly an additional $300,000. However, such a move would likely be illadvised. Millington does not have a large commercial/ retail sector and such a move might be sufficient to force a portion of its retail trade to other nearby peer cities such as Atoka or to the greater variety of retail providers in Memphis. While it might not affect grocery purchases, which are most likely to be made near the residence, it could definitely have an impact on the city s only new car dealership. This is at the heart of one of the disadvantages of local option sales taxes: competition between municipalities. Another disadvantage is its regressive nature. Like all sales taxes, the poor pay a higher percentage of their income in these taxes than do the affluent, which makes them harder to defend politically. Brunori points out another disadvantage of local sales taxes: a shrinking tax base, in part due to electronic or e-commerce (2007, 74). Although, Congress has been working to close that loophole, many still avoid taxes through online shopping, costing states and localities notable revenue. Still, there are several advantages of the local sales tax: First, they allow for some additional diversity in the revenue stream, reducing pressure on the property tax and, to a small degree, export a portion of the city s expenses to non-residents. Second, they are efficiently 5

7 administered at the state level without cost to the city. The retailer or vendor collects these taxes in conjunction with the state sales tax and sends the total amount to the state. The state in turn distributes the appropriate share of the proceeds to the counties and cities, thus far without an administrative or handling fee. This makes them very cost-effective for the local governments. Third, this type of tax is well-accepted by the public. Citizens feel in control of their tax burden since they choose whether to purchase the goods or services which are subject to the tax (Brunori 2007, 73). Aside from taxes, other locally controlled sources include licenses and permit fees which provided the city $312,869 or 3.2% of its General Fund revenue. Similarly, it received $485,386 or 5% of its total in charges for services, specifically for recreation services and in larger part for fire protection provided the Airport Authority. The advantage of these sources is that they are tied directly to the measurable provision of public goods and services which can be recognized by the recipients. Their disadvantage is the relatively high expense of administration and low margin of return. These outputs include such things as building permits, beer and liquor licenses. There is some offset to this low return in the intangible value of enforcing the community standards through such things as liquor licenses and zoning enforcement through the issuance of building permits. There is little chance of increasing revenues through new or increased fees. The remaining significant portion of the revenue stream is that provided by intergovernmental transfers. As stated earlier, this stream accounted for 21% of the General Fund. These transfers are primarily the city s share of state levied and collected taxes. These taxes include the state sales tax, beer and mixed drink taxes, excise taxes and the state income tax on investment income. These make up approximately 50% of the intergovernmental transfers. The other 50%, $1,033,948 is the Shelby County transfer to the city for its Fire 6

8 department s participation in the county-wide fire fighting network. This constitutes roughly 30% of the Fire Department s budget. The advantage of this revenue stream is that it costs the city nothing to generate and practically nothing to administer, only the documentation of its receipt and disbursement. The disadvantage is that Millington has no authority or ability to directly change the amount or nature of these transfers. If it becomes overly dependent upon these transfers to fund routine operations it would be in dire straits in the event of their loss. However, these transfers do play a role in my recommended changes to the city revenues. Optimizing Revenues The city of Millington is in something of a quandary: its revenues were down by 10.2% due to the economic downturn. The same downturn makes increasing tax rates to compensate for those losses impractical, if not politically impossible. In general I believe the city has the right mix of taxes, both state and local, and fees to generate the revenue it requires. The addition of a wage tax, as I discussed in my previous paper does not seem practical for use here. It is estimated that 4,257 employees commute into Millington to work. It is unknown how many of those make above the $28,000 set as the proposed minimum for charging the wage tax, but even if we estimate 1000 people, that only generates about $75,000. This would also be a difficult concept to sell to the political leadership as no other nearby city imposes such a tax. This could make Millington vulnerable to business loss, from firms moving to the other nearby cities to escape the tax on its employees and the additional administration costs. Currently its property tax rate of $1.23 per $100 is a relative bargain for developers and businesses interested in the area. Once the economy is clearly in recovery, a small increase to the property tax rate, possibly as high as $1.30, might be possible. However, raising that rate 7

9 significantly would put the city in direct competition with the other nearby small cities of Germantown, Bartlett, and Collierville. Unfortunately for Millington, all of those cities have larger, more diverse commercial sectors, better cultural attractions, such as a symphony or acting company, more affluent populations, and higher average property values. Accordingly, Millington needs to retain its rate advantage and seek other opportunities. Fortunately, it has an advantage; an airport with the third largest runway in the state. As a result of the Base Realignment and Closure Act, the Navy terminated it aviation operations in Millington and ceded its aviation facilities and runways to the city. This is now the underutilized Millington Regional Jetport. The city currently owns a sizeable tract of 113 acres that borders both the airport and an active railroad line. To boost its revenue the city needs to expand its commercial sector and the combination of the airport and this industrial site provides a major asset for that purpose. While the current economic downturn makes courting new businesses more challenging, the larger combination of these facilities, a low cost of living, no wage-based income taxes, and low business taxes offer a very attractive package to market. In addition, a new north-south interstate highway, I-69, is planned for construction on the Millington outskirts. With appropriate planning and marketing, it is conceivable that the city could greatly expand its business sector around the transportation and distribution industries. While this would seem like an obvious opportunity to many, the political leadership of the previous city administration did not pursue this vigorously. Those who operate the airport are apparently content with the funds generated by serving as a lightly used alternate field for the FedEx hub in Memphis and the sale of fuel to the numerous military craft which make numerous training landings there. The city receives no income from the airport with the exception of sales taxes on fuel sales and the charge for fire protection provided the airport. In discussion with the city Finance Director on 12 July, it 8

10 was noted that the lack of interest on the part of the Airport Authority has prevented the introduction of a low-cost passenger airline to this facility and the relocation there of another large-scale aviation operation. Both of these additions to the Millington commercial sector would have provided additional jobs and potentially additional spin-off businesses and retail sales. Bypassing these opportunities would appear very short-sighted in view of the current economic conditions and the revenue shortage the city experienced. Perhaps the current mayor will find this asset more worthwhile and push the Airport Authority to pursue and accept greater role in developing the local economy. One would think that this effort, even if it required investing considerable funds to market the concept or to upgrade infrastructure for an interested party, would be a relatively simple concept to sell to the leadership and the citizens. Perhaps offering this approach as an alternative to a property tax increase would gather the required political support to motivate the Airport Authority into investing time and resources to such an effort. The other aspect of my plan to optimize the revenues of Millington requires that the city actively lobby the state legislature to modify the state tax code. The purpose for the lobbying would be to eliminate many of the exemptions of services from the sales tax. Presently all forms of professional, administrative, health, education, and other services are excluded from taxation. According to the Tennessee Department of Revenue, these exemptions result in the loss of $3.7 billion to the state and $1.3 billion to local government, if these services were only taxed at a rate of 2.4%, not the standard 7% (Davis et al 2010, 12). It could be expected that many of the professional groups of those providing these services, such as lawyers, CPAs, architects, etc., would raise strenuous political opposition to the reduction or elimination of these tax exclusions. Some, such as those for health and education services would be too contentious to include in such a proposal. Accordingly, Millington s leadership would have to cultivate support among 9

11 other small cities in the region and present a compelling argument based on the fiscal realities at the local level to convince a number of state legislators to actively advocate and write such a bill. Clearly this is a major endeavor requiring commitment, skill and a long term plan; however, it has the greatest potential for solving a problem of great consequence at both the state and local level. Expenditure Analysis Millington is a small city with only a few departments composing its government structure. From these I selected the Police Department which had a budget of $3,127,500. This budget supports an organization of 51 personnel whose purpose it is to protect the lives, property, and peace of the citizens of Millington. During the period reviewed the department actually expended $3,075,284. These funds covered all costs from salaries and retirement contributions, to uniforms, training, fuel for patrol cars and the utilities for offices and the jail. This can used to provide the cost per employee for fielding the police force to prevent crime and bring criminals to justice. This equates to an average cost of $60, per employee. This could be used to evaluate the city s costs for this function in comparison to other similar cities, or other types of municipalities such as Shelby County. Indeed, if it chose to, the city might be able to calculate the different prices of policing as conducted by the county in comparison with its own costs. It might find it beneficial to approach the county with an appeal to provide law enforcement at a rate cheaper than the city could police itself. Different measures than just cost would have to be considered in such an arrangement however. For example, the amount of time it takes to respond to a call could be a deciding factor in accepting these services from an organization that unlike the police, does not report to the directly to the city mayor. The average 10

12 price per offense is another measure of police output. During this period 449 offenses were recorded by the Millington officers. This would mean an average cost per offense of $$7, This is essentially just one measure of the cost of crime to the city. Another measure of efficiency would be the average price per arrest. During this period, 510 arrests were made for an average cost of $6, each. This is potentially another measure that could be used to determine the efficiency of the department, either in comparison with other years results, or with other departments. Yet another measure of efficiency would be the measure of the time it takes to respond to a call for assistance. This is a widely accepted measurement of Police success. Unfortunately, the city s method of record-keeping does not provide the number of crimes cleared which would be an excellent measure of the department s effectiveness. Nor do the available crime statistics provide information on traffic violations ticketed. This is one aspect of the force s performance that such be easy to cost and to determine efficiency. With access to the record of tickets given, you could determine individual officer and department efficiency in enforcing traffic laws. In general, a police department should be a good place to establish measures of effectiveness because the policing process requires a large number and types of reports and records for use in monitoring the incidence of crime and for prosecuting criminals. This abundance of data must also be accurate. The need for clarity in reporting is vital to ensure arrests lead to convictions, meaning the reports should be readable, understandable, and accurate as is desirable in any measure. This department also lends itself to the types of measures that can be used to form a strategic plan. For instance you can set goals to reduce a certain type of crime by a certain percentage. You could set goals for reducing or limiting the number of complaints about officers or the amount of time it takes to process a prisoner into the system. All of these 11

13 measure an outcome and are measures of effectiveness. If the measures are set for reasonable goals, they can help guide and focus officers on a worthwhile outcome. However, if such measures as individual closure rates or the number of tickets written are used, they can promote bad behavior among the officers or act as a demoralizing influence. Obviously, measures have to be chosen with care. Poorly developed measures could lead to erroneous conclusions and poor decisions. For example, if you calculated the number of hours spent patrolling a neighborhood and tracked instances of crime in the same area, you might be inclined to attribute any change in the crime rate to the level of patrolling. Using the simplistic measure of patrolling time, you may be able to establish a correlation between the two sets of observations, but with that information alone, you could not truly prove a cause-and-effect relationship between them. Additional work would be required to isolate any other potential causes for a change in crime. For example, the arrival or departure of a particular criminal could affect the crime rate, regardless of the patrolling time. It seems that these types of measures for the police department have limited usefulness. Some, like the cost of miles travelled by the police cars, could be useful for planning the replacement of those assets. The cost per officer for the operating the department could be useful for planning workforce levels or compensation. Others, however, like the average cost per arrest could provide a distorted view of the value of law enforcement. Such a measure might place all crimes at the same level of importance, whether it was murder or disorderly conduct. Overall, they do not and cannot measure the main purpose of the police; the prevention of crime. They can only measure the efficient or inefficient expenditure of funds to conduct a process. 12

14 Bibliography Bailey, Tom Tax Breaks Anchor Ingram Micro. (Memphis Tennessee) Commercial Appeal, 10 July. Brunori, David Local Tax Policy: A Federalist Perspective. 2 nd ed. Washington, DC: The Urban Institute Press. City & County Tax Rates (July 6, 2010). City of Germantown Property Taxes. (July 6, 2010). City of Millington, Tennessee Financial Statements June 30, County Tax Rates. (July 6, 2010). Davis, Britt, et al Task Force to Restructure the State of Tennessee Tax System. Valdosta State University. Typescript. How Are Assessment Values Calculated? (July 6, 2010). Millington, Tennessee. (June 30, 2010). Millington Tennessee City Ordinances. Change 11, July 6, Millington, Tennessee: Community Tax Rates. (June 30, 2010). Millington, Tennessee: Form of Government. (June 30, 2010). 13

15 Millington, Tennessee: Police Department- Crime Statistics Year to Date April 2008/ (July 10, 2010). Notice to the Public: City of Millington Budget Tax Department. (July 6, 2010). Tennessee Community Data Sheet: Millington. (June 30, 2010). 14