What Can We Afford in Vigo County?

Transcription

1 What Can We Afford in Vigo County? Robert C. Guell Professor of Economics Indiana State University Kevin P. Christ Associate Professor of Economics Rose-Hulman Institute of Technology Near the conclusion of Indiana Jones and the Last Crusade, the Grail Knight points to a variety of grails and says to Indiana Jones nemesis choose wisely, for while the true Grail will bring you life, the false Grail will take it from you is shaping up to be a year in which Vigo County leaders will be asked to choose wisely. Their decisions may alter the regional landscape for years to come. Those decisions almost certainly will involve significant increases in local tax burdens. A key question is Can Vigo County afford to do what it will be asked to do? But perhaps just as relevant will be the question Can it afford not to? We say almost certainly because despite a recent County Council decision delaying the vote on a tax increase to pay for a new jail, the county is under a federal court order to do something to alleviate overcrowding. Whatever that something is, it will cost money the county doesn t currently have. Taxes will have to increase. An even larger decision about our schools looms on the horizon. With a price tag ranging from $221 million to $382 million, the estimated cost of renovating or replacing our three high schools will set a new standard for locally financed projects. The annual financing costs associated with a bond issue for that project alone will add $18 to $32 million to the local annual tax burden. On top of these projects, Hulman Center renovations and a new police station could also add significantly to the local tax burden. In the last month ISU has chosen to, and been approved to, go it alone. Though it was always an intriguing idea to have a viable convention center in Terre Haute, it now seems unlikely. For the present examination we will ignore it. There is a $9.1 million dollar promise that the Mayor had made to build a new police station. We will also ignore this because it is relatively small. Finally, there are other proposed projects and problems on our horizon that we are purposely not including in our present analysis because there are simply too many unknowns. These include the waste-water treatment upgrades, the Terre Haute city government operating fund deficit, and the city s unpaid obligations. Ultimately, these issues will have to be resolved but it is unclear at the present time how they will be resolved. Thus, for simplicity only, we focus on the largest issues before the county: the jail and the schools. Selecting the priciest options from these two projects will cost $447 million dollars, resulting in new annual public obligations in the range of $37 million. Even the less costly options a scaled-back jail, and renovating instead of replacing the schools, yields a low-end estimate of about a quarter of a billion dollars, with new annual public obligations of around $22 million. The key question is can we afford to pay the taxes necessary to fund the bond debt associated with a quarter to a half a billion dollars? And if we can t or choose not to, what does that say about our community and about its future? The Data We begin our analysis by looking at the community s capacity to bear such costs. For us, this means looking at tax and debt service burdens as a percentage of local income. While there is no hard and fast rule about what portion of income a community like ours can afford to contribute to public obligations through taxes, we assume that we can get some sense of upper bounds by comparing Vigo County to all of the other counties in Indiana. The Bureau of Labor Statistics provides county population and personal income estimates at the county level, while the Department of Local Government Finance (DLGF) provides data on Certified Budget and Certified Levy for each of the taxing units in each of the budgeted funds in the state of Indiana. In Indiana, the school operating

2 budgets are provided to the school districts by the state. Additionally, the rainy day funds are typically funded from amounts carried forward from prior-year surpluses. The Certified Budget data (after removing the school operating funds and those rainy day funds) therefore represents spending by local governments from funds raised through strictly local taxes and fees. We consider this a reasonable proxy for the local tax burden. This allows us to compute local taxes as a percentage of personal income for each of Indiana s 92 counties. In addition, because the DLGF data provides debt service line items for the taxing units with debt, we were able to compute debt service as a percentage of both total local taxes and as a percentage of personal income. These data for the state of Indiana are provided in Table 1. What this analysis reveals is that Vigo County is in the bottom third of per capita personal income in the state (70 th of 92 counties) and is the fifth (or sixth, depending on measure) least indebted county in the state. Our current local tax burden (as measured by total local taxes as a percentage of personal income) at 3.9% is rather average, ranking 49 th out of 92 counties. Our conclusion from this preliminary look at the data is that the people of Vigo County are capable of taking on more debt and are capable of paying the taxes necessary to pay that debt. For us capability is defined relative to what other Indiana counties are currently doing. If we are capable of paying more, the natural follow-up question is how much more? We explore that after we examine what the debt will fund. Table 1: Vital Economic Statistics of Indiana s Counties Total Local Taxes/ Debt Service/ Debt Service / Total Local Taxes Rank of Total Local Taxes/ Rank of Debt Service/ Rank of Debt Service / Total Local Taxes Rank of Per Capita Per Capita County Adams 34, % 0.528% 13.15% Allen 41, % 0.331% 8.93% Bartholomew 45, % 0.339% 9.67% Benton 35, % 0.820% 10.81% Blackford 35, % 0.860% 20.48% Boone 62, % 0.771% 21.20% Brown 41, % 0.773% 15.94% Carroll 38, % 0.385% 9.69% Cass 34, % 0.550% 14.47% Clark 40, % 0.444% 12.78% Clay 34, % 0.672% 16.61% Clinton 34, % 0.714% 13.94% Crawford 32, % 0.462% 12.49% Daviess 38, % 0.328% 8.23% Dearborn 41, % 0.673% 18.17% Decatur 38, % 0.517% 12.17% DeKalb 37, % 0.682% 15.89% Delaware 32, % 0.391% 10.34% Dubois 50, % 0.480% 13.07% Elkhart 39, % 0.627% 16.64% Fayette 35, % 0.296% 7.66% Floyd 48, % 0.490% 18.14% Fountain 34, % 0.547% 12.13% Franklin 41, % 0.173% 7.77% Fulton 37, % 0.642% 14.95% Gibson 40, % 0.624% 14.70% Grant 36, % 0.373% 10.11% Greene 35, % 0.382% 10.76% Hamilton 64, % 0.613% 16.59% Hancock 43, % 0.916% 24.46% Harrison 38, % 0.516% 16.62% Hendricks 43, % 1.144% 28.23% Henry 33, % 0.603% 15.16% Howard 37, % 0.571% 11.81%

3 Huntington 37, % 0.412% 10.16% Jackson 39, % 0.463% 12.48% Jasper 41, % 0.206% 4.97% Jay 39, % 0.473% 11.42% Jefferson 38, % 0.298% 9.46% Jennings 34, % 0.349% 10.35% Johnson 43, % 0.794% 23.27% Knox 41, % 0.491% 13.61% Kosciusko 44, % 0.585% 15.99% LaGrange 34, % 0.418% 12.40% Lake 39, % 0.367% 7.43% LaPorte 37, % 0.577% 12.72% Lawrence 36, % 0.451% 12.14% Madison 35, % 0.503% 13.54% Marion 47, % 0.548% 9.72% Marshall 36, % 0.647% 14.93% Martin 38, % 0.242% 7.23% Miami 31, % 0.433% 11.96% Monroe 35, % 0.357% 8.98% Montgomery 38, % 0.790% 16.52% Morgan 39, % 0.337% 10.05% Newton 37, % 0.734% 13.66% Noble 35, % 0.627% 16.61% Ohio 36, % 0.288% 6.58% Orange 33, % 0.502% 14.11% Owen 34, % 0.534% 16.54% Parke 31, % 0.264% 6.04% Perry 35, % 0.518% 15.96% Pike 35, % 0.376% 8.29% Porter 46, % 0.508% 15.45% Posey 44, % 0.268% 6.85% Pulaski 38, % 0.426% 7.88% Putnam 33, % 0.720% 17.37% Randolph 35, % 0.465% 10.63% Ripley 39, % 0.506% 13.74% Rush 39, % 0.330% 8.15% Scott 34, % 0.503% 13.87% Shelby 38, % 0.672% 16.56% Spencer 41, % 0.468% 10.47% St. Joseph 43, % 0.075% 2.09% Starke 30, % 0.803% 17.91% Steuben 37, % 0.606% 11.07% Sullivan 31, % 0.566% 13.10% Switzerland 28, % 0.218% 5.21% Tippecanoe 34, % 0.575% 15.57% Tipton 40, % 0.586% 12.30% Union 33, % 0.980% 19.08% Vanderburgh 40, % 0.215% 4.92% Vermillion 34, % 0.605% 13.56% Vigo 34, % 0.232% 5.95% Wabash 39, % 0.476% 12.44% Warren 40, % 0.510% 11.69% Warrick 48, % 0.249% 10.77% Washington 35, % 0.447% 13.13% Wayne 36, % 0.296% 7.10% Wells 37, % 0.496% 12.08% White 38, % 0.794% 12.79% Whitley 39, % 0.503% 14.95%

4 The Needs/Wants The debt service required for each of the potential projects is displayed in Table 2, which shows the project costs and debt service for each and for each potential combination. The debt service estimates for the jail is based on 20 years of equal payments at 4% interest. The debt service estimates (for the high and low levels of the school project) are taken from the Umbaugh presentation made to the School Board on September 25. They are higher than the 20- year, 4% levels because of the peculiar fashion school renovations or replacements would have to be financed. (A separate financial entity would be created that would own the new buildings and the school corporation would then lease the buildings from that entity. This means that while the project is under construction, interest is accumulating. This raises the cost and the debt service by small, but not meaningless amounts.) Table 2: The Wish List Option Project Project Costs Debt Service 1A Scaled-Back Jail $40,000,000 $2,943,270 1B Mega Jail $65,000,000 $4,782,814 2A Schools - Renovation $221,000,000 $18,774,000 2B Schools - Rebuild $382,000,000 $32,429,000 Option Combinations Costs Debt Service Low 1A+2A $261,000,000 $21,717,270 High 1B+2B $447,000,000 $37,211,814 Taxes (and Tax Increases) in Vigo County The impact on local taxes of choosing these options is shown in Table 3. Local taxes paid in Vigo County whose proceeds go to local services totaled $146,770,443 in the 2017 DLGF data. In order for both the jail and the schools to be completed in the priciest ways, that would have to increase by $37,211,814 to $183,982,257. Even with very conservative assumptions about what projects are undertaken, the increase is substantial. When the least expensive school option ( renovations only ) is added to the scaled-back jail option, debt service would increase by $21,717,270 and total taxes would have to rise to $168,487,713 annually. Total debt service would increase from $8.7 million to either $46 million (on the high end) or $30 million (on the low end). We would go from one of Indiana s six least indebted counties to one its most and, if the high-end options are taken, its most indebted county. Table 3 Impact on Current Local Tax Burden Current Annual Local Tax Burden $146,770,443 + LOW $168,487,713 + HIGH $183,982,257 The taxes necessary to fund that debt service would also be substantial. Recall that at 3.90% of personal income, our taxes rank 49 th. To fund the projects, local taxes would have to increase to either 4.88% (high end) or 4.47% (low end). That would make Vigo County the 10 th most taxed county (high end) or the 18 th most (low end). For context, look at the Figure 1, which displays data on income levels and tax burdens for 75 of Indiana s 92 counties. (For this figure, we have excluded 9 counties with relatively high or low average incomes and eight counties with exceptionally high or low tax burdens.) Note that the remaining counties all fit in a relatively small

5 box with per capita personal income between $30,000 and $45,000 and with tax burdens between 3% and 5% of aggregate personal income. Vigo County is in the poorest third of Indiana counties, and in that sub-group has a tax rate that is rather average. Were we to increase taxes sufficiently to make the bond payments, we would be one of the highest taxed counties among our cohort of relatively poor counties. (There are three exceptions, not depicted. Benton and Union counties are sparsely populated. Benton has a relatively new high school and it receives local tax income from the many, many, many windmills located in the county. The other exception is Clinton county.) If the low-end option to schools is chosen, with the scaled-back jail and nothing else, then our tax burden would be similar to that of Fountain and Vermillion counties. What this suggests to us is that the $21 million in debt service seems affordable. At that level, we would rank 18 th (rather than our current 49 th ) in taxes overall. We would rank 10 th (rather than our current 87 th ) in debt service as a percentage of personal income. In our view, which taxes get increased to raise that money is less relevant us than this reality: there is only so much that we can afford. Recommendation In light of the realities that this analysis highlights, we think it is imperative that area leaders meet to collectively discuss the general tax-increases potentially facing this community in the near future. At a minimum, that would seem to include the Vigo County School Board, County Councils, and the County Commissioners. Because we ignored issues in this examination that ought not be ignored for long, the Terre Haute Mayor and City Council should also take part in these discussions for the city s problems must also be addressed. We suggest that they agree

6 to an upper-bound of tax increases in the neighborhood of $20 to $25 million, and then make an appropriate division of those revenues. In our view, the last thing we need as a community is for each taxing entity to go it alone, using their own taxing tools at their disposal without any consideration to what the other tax units are doing. Had the County Council voted for a tax increase last month to finance a new jail, they would have effectively imposed new constraints on what the School Board is likely to be able to sell to the community. That approach to community leadership seems imprudent to us. Our high schools are showing their age, and even the students recognize that their school facilities are falling behind those of other similar communities. Our jail problem will not go away. And it must be said that the other issues we have left out of our analysis can t be ignored for long. How we deal with these community imperatives may ultimately have a lot to say about what our community looks like decades from now could be a pivotal year for Terre Haute and Vigo County. We urge our community leaders to soberly consider the issues raised here and work collectively to lead a community response. In so doing, we hope they will follow the advice of the Grail Knight, and choose wisely.