Budget Update, Bonds and Transit
Here's an update on the budget, bonds and transit.
Budget Update, Bonds & Transit
May 2, 2019
My apologies for the length of time between these updates. I had intended to send out thoughts on several issues, but work and family life intervened. Thank you to those who have asked for more of them - I’m going to try to get them out more frequently. In this update, I’ll focus on Asheville’s budget for the coming fiscal year starting on July 1st.
Since my last update, we have a new city manager, a new city attorney and are searching for a new police chief. Asheville still continues to grow – which brings both benefits and challenges that we on Council are trying to manage. At the time of this update, the national economy continues to chug along though possible signs of a recession are beginning to show. (We are currently in the longest national economic expansion since 1991-2001, but it cannot go on forever).
At Council, we are in the midst of budget discussions. We began on March 8th with a Council retreat to set priorities for the coming year. (For a great recap of this retreat, see the following Mountain Xpress article https://mountainx.com/news/budget-outlook-challenges-council-at-annual-retreat/). After agreeing that we first must ensure that Asheville can provide excellent core services (such as police, fire, and public works), a majority of Council listed the following top five strategic priorities:
- Implement Phase 1 of the Transit Master Plan;
- Develop a strategy for the sale or lease of City-owned land for affordable housing;
- Implement a plan and schedule for amending the Unified Development Ordinance to reflect changes made by the Comprehensive Plan (essentially, this means to modernize our development and planning rules);
- Develop a business inclusion program to increase minority contractor participation; and
- Expand partnership opportunities with the Asheville City Schools to eliminate disparities
This, of course, does not mean that the City will not invest in other areas nor that those not listed are unimportant to Council members, but rather that we can’t do everything at once and we must prioritize. If we spread ourselves too thin, we won’t get anything of meaning done.
As part of our retreat, City budget staff presented a 5-year projection of the City’s operating revenues and expenses which assumed that we kept the same levels of service. This is referred to as a “baseline” budget projection. You may recall that I have strongly pushed to make these operating projections part of our budget process. Multi-year projections improve transparency (Wanda Greene anyone?) since only by looking over several years can we really understand the true financial impacts of our decisions. I’m happy to say that we will continue to see these projections going forward and I encourage other governments to follow our lead.
The projections provided us with a sobering dose of reality. They showed that, even with additional property taxes from HCA’s acquisition of Mission Hospital, the City would still face an annual operating deficit in approximately 2 to 3 years – just with the baseline (i.e., keeping the same service levels). Like nearly every other municipality in the U.S., Asheville has a structural operating deficit which means that our expenses grow faster than our revenues over time. This is normal for cities, and has always been the case for Asheville, but it drives home the point that just providing the same levels of service is very costly. To be clear, Asheville is in good financial shape – we have solid fund balances and a AAA bond rating – the best there is. That said, our resources aren’t infinite and we need to be smart about how we spend your money.
You may have noticed that in the previous two paragraphs, I used the work “operating” when describing the budget. That’s because, like most cities its size, Asheville has an operating and a capital budget. An operating budget covers the day-to-day costs of providing services. These costs include employee salaries, utility costs and supplies. A capital budget covers larger expenses such as road and building construction – think infrastructure. Capital projects have a big upfront cost, but the benefits continue over many years. One good way to differentiate operating from capital is to think of them in terms of household expenses. Operating costs include things like the electricity bill and groceries whereas a capital cost would be a house purchase.
Just as most people need to finance a home purchase by taking out a mortgage and paying it off over time rather than paying the full cost upfront, cities routinely do the same thing by issuing debt. Asheville has historically not done so, preferring instead to “pay-as-you-go” – and it shows. Asheville has the worst rated roads in the state. We also have a capital projects backlog of $390 million over the next five years.
So how do cities fund capital projects? Many have an ongoing bond cycle where the city issues bonds at periodic times. This is a normal and prudent way of completing infrastructure projects. In cities with a good capital financing program, a city issues new bonds as it pays off old bonds which ensures that it does not over-commit itself. If Asheville wants to improve our roads and make a dent in our capital projects backlog, we need to implement a responsible capital financing program by issuing debt on regular cycles. This will require the City to clearly explain why the respective projects are needed and how the money will be spent, and to have voters approve it.
Now, back to the operating budget. I advise many cities Asheville’s size on their budgets as my job and it has struck me as a problem that property taxes make up such a significant proportion of Asheville’s revenues (and those of other North Carolina cities for that matter) for two reasons. First, it means that we are over-dependent on our real estate market to fund City services. While it isn’t unusual for property taxes to make up the largest single source of revenue for cities, cities in other states have more options for revenues including earned income taxes. If our real estate market stalls out or drops, we’re going to be in trouble financially.
Second, this means that City residents are nearly exclusively funding services that commuters and visitors use. Asheville is unique in that, despite being a city with a population of 90,000, we estimate that the City’s population swells to around 150,000 during the day thanks to non-residents coming into the City to work and visit. Right now, the only way non-residents financially contribute to the services they use (roads, police, fire, etc.) is through sales taxes. (As an aside, I notice that a lot of anger is directed towards tourists, but I hear relatively little about commuters who I would expect use City services much more frequently and spend less money during their time in the City than tourists.).
Asheville needs to diversify its revenues both as a matter of fairness to city residents and as a matter of ensuring our fiscal stability going forward, but we simply cannot create taxes on our own – we need approval from the North Carolina General Assembly. That said, I think that there is an opportunity to go to the General Assembly with a modest request for Asheville to get the ability to hold a city-wide referendum for a ¼ cent sales tax increase just in the city to be exclusively used for improving transit services in the city. Under existing law, the Buncombe County Board of Commissioners could vote to place a referendum on the ballot (county-wide) for a county-wide ¼ cent sales tax that would need to be used exclusively for improving transit county-wide. I’m not sure that we’re ready at this point to significantly expand transit service outside of the City, but it is clear that Asheville is very ready to improve transit services within city limits.
Why do I think that a referendum on a ¼ cent sales tax increase for transit in Asheville is a good idea? (again, let me be perfectly clear – the tax would apply just in the City of Asheville and would only go to transit improvements in the City of Asheville. Plus, City voters would need to approve it by referendum). First, better transit services address two pressing issues in Asheville – economic development and traffic. Right now, businesses in Asheville are having trouble getting workers and transportation is a significant part of that problem. As it relates to reducing traffic (which is the most bipartisan issue in Asheville), the only real way to address it is to have fewer cars on the road and more people taking transit will help.
Second, transit costs a lot of money and its cost is constraining Council’s ability to fund other core services such as police, fire, public works and infrastructure. If we have a dedicated revenue source for transit, we will be able to better address the needs in these other areas moving forward. A dedicated sales tax is how cities like Charlotte fund their transit systems. Third, I think that this is an issue for city voters to weigh in on through a referendum process. The ability to have a referendum on this issue is already available county-wide – this proposal would just apply in the City of Asheville and just to go to transit improvements in the City of Asheville.
Our City Manager will present her proposed budget on May 14th. Council will hold a public hearing on May 28th and we plan to adopt the budget on June 11th. I look forward to hearing any comments that you might have on the issues that I’ve raised and will be in touch again soon.