City of Cleveland. Need for Municipal Income Tax Increase. Managers Update. September 14, 2016

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1 City of Cleveland Need for Municipal Income Tax Increase Managers Update September 14, 2016

2 Proposed Income Tax Proposal: Mayor Frank Jackson has proposed the City increase its income tax rate from the current 2.0% to 2.5%. The income tax increase would generate an estimated additional $83.5 million for the City s General Fund. And additional funds for Restricted Income Tax (RIT) in the amount of $9.3 million which is restricted for debt service/capital expenditures. This would be the first hike in the City s income tax since Reason for Proposal: Losses seen in certain revenue streams, such as in State shared revenue (i.e. local government fund, commercial activity tax, estate tax, etc.), property taxes and the traffic camera program, as well as projected increased expenditures. The income tax increase would replace the lost revenue and allow the City to have a structurally balanced budget and enhanced services. Further, the income tax increase would help the City fund costs associated with the DOJ Consent Decree (nearly $11.0 million upfront and $7.4 million annually). Process and Timing Legislation authorizing the 0.50% income tax increase to be placed on the ballot has been passed by City Council. The date for the vote on the ballot issue is November 8,

3 Municipal Income Tax Additional Rate Comparisons Municipality Tax Rate PARMA HEIGHTS 3.00%* EUCLID 2.85% NORTH RANDALL 2.75% YOUNGSTOWN 2.75% WARRENSVILLE HEIGHTS 2.60% COLUMBUS 2.50% LORAIN 2.50% AKRON 2.25% CLEVELAND HEIGHTS 2.25% CINCINNATI 2.10% CLEVELAND 2.00% * Highest Income Tax Rate within State 2

4 Municipal Income Tax Purpose of Tax As defined in Codified Ordinance Purposes of Tax: To provide funds for the purposes of general municipal operations, procurement of fixed assets or permanent improvements, payment of debt charges, the elimination of deficits in city funds and for all other lawful purposes, there shall be, and is hereby levied a tax on qualifying wages as defined, on net profits, and on all other municipal taxable income. Municipal Income Tax started in 1967 when City Council enacted the first Ordinance authorizing a tax of.5% on all income earned in the City. Increased by City Council to 1% on July 1, Tax rate stayed constant until March of 1979, when the rate went to 1.5% by a vote of the people. The tax rate increased again to 2% in January 1981 and has remained the same for the past 35 years. 3

5 Why the need? Review of City Finances For the last 10 years, revenue has not kept pace with the increase in expenses. In addition we will see increase in cost with the Consent Decree, Union Negotiations and Wage Driven Costs. The global recession and state budget cuts led to significant permanent revenue losses for the City: Permanent annual loss of $18 million property tax foreclosure crisis. Permanent annual loss of $30 million in local government fund (LGF), commercial activities tax, tangible personal property tax and estate tax.* Since 2010, the accumulated annual loss from State of Ohio Revenue is $146.5 million. * In 2010 the City lost $26 million in income tax alone. 4

6 Review of City Finances(cont.) Our municipal budget is supported primarily by income taxes (60%), admissions & parking taxes (8%), charges for services (7%), property taxes (6%), and other sources i.e. LGF, Licenses & Permits, Fines and Forfeitures (19%). Over half of the municipal budget is devoted to Public Safety (58%),and Public Works (12%). Public Works (includes Waste Collection, Snow Removal, Street Resurfacing, etc.), General Government services (22%), Judicial (7%), and City Council (1%). We ve been under cost control mode for some time now. Our ability to maintain and enhance services into the future will require additional revenue streams. Implemented Savings Measures In 2010, Furlough Days, Waiver of Benefits (During recession) Wage Pattern Contract Years General Fund Workforce Reduction FT 917 ( ) Mandated 3% reduction of operating & maintenance, costs and utility usage

7 2016 Sources of Funds General Fund: Revenues on a Non GAAP Basis 70.00% 60.00% 59.93% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 7.51% 6.60% 5.89% 5.87% 4.78% 2.99% 2.76% 2.55% 1.04% 0.08% 6

8 2016 Uses of Funds General Fund: Expenditures on a Non GAAP Basis 70.00% 60.00% 58.35% 50.00% 40.00% 30.00% 20.00% 10.00% 11.96% 9.70% 6.95% 2.97% 2.64% 2.09% 1.74% 1.32% 1.29% 0.43% 0.36% 0.21% 0.00% 7

9 General Fund Operating Budget Estimates for Fiscal Year 2016 & Year-end Projection July With Income Tax Increase 2017 Without Income Tax Increase Beginning Balance $42,096,566 $3,032,012 $3,032,012 Revenue Estimate $526,160,859 $604,698,445 $524,698,445 Total Resources $568,287,017 $607,730,457 $527,730,457 *Expense Estimate $565,255,005 $599,113,245 $570,061,933 Projected Ending Balance $3,032,012 $8,617,212 <$42,331,476> * No pending union negotiations and lawsuits included. 8

10 Impact With the successful passage of the income tax increase it will produce a structurally balanced budget and restoration and enhancement of services. Examples Division of Police Hiring additional Patrol Officers would allow for more community engagement and strengthen the existing crime reduction strategy. Division of Emergency Medical Services Purchase additional ambulances and add additional personnel to reduce overall response time to critical/life threatening 911 calls. Department of Public Works Additional funding will allow for more pothole/snow removal crews. These crews will increase activities on main and residential streets. The additional crews will also support leaf collection, residential street sweeping, and vacant lot maintenance, etc. Division of Environment/Health Additional staffing positions necessary to support the Childhood Lead Poisoning Prevention Program, the Food Fund Program, Infant Mortality and general nuisance programs. ALL THESE ARE EXAMPLES OF SERVICE ENHANCEMENTS 9

11 Impact Without the successful passage of the income tax increase, we will have to reduce the operating budget by the estimated deficit of ($42,331,476) This will mean significant layoffs and reduction of services. 80% personnel related expenditures 20% Operating & Maintenance. Hundreds of personnel 60% of Budget Public Safety Department Service reduction (i.e. Snow Removal, Waste Collection, other General Government activities). 10

12 Thank you 11