BY CHUCK VANDENBERG
FORT MADISON – City officials are looking for ways to bail the city out of what City Manager David Varley is calling a quickly sinking ship.
At a work session Monday at City Hall, Varley painted a bleak picture in the form of a 15-page summary looking at city finances over the next five budget years.
“Without some pretty big changes for the fiscal year 2020-21 budget we are taking on water, and for the 2021-22 budget the ship is pretty much sunk,” he told the council.
Varley said new state laws that require additional hurdles to increase revenue growth, the unknown structure of online sales tax payments and current economic trends make projecting general fund revenues tricky.
“We’re presenting this hopefully in time to give council advanced warning of the condition of the general fund, and some things will have to change a little bit to keep things going as they are,” he said.
Varley is projecting a 2% increase in property taxes over the five years, which is in line with the state’s new law that puts a soft cap on municipal revenue growth at 2%. That cap, however can be lifted by a 2/3 vote of the elected body at an additional public hearing.
With those calculations, Varley shows property tax revenues of $2.66 million in 2024-25. With other smaller tax revenue streams such as agriculture land tax, emergency tax levies and insurance liability tax, he’s projecting total general fund tax revenue in 2024-25 at $2.75 million.
That is also the first budget year where city staff has eliminated any state property tax backfill payments as current thoughts are those contributions will be phased out by Iowa legislators. In the 2019-20 adopted budget, that figure was about $89,000, and Varley phases that out over the next five years.
When combined with other revenues from general fund departments which includes police, fire, airport, library, parks and recreation, cemetery and building rentals, the general fund revenue peaks out at $3.25 million in 2024-25.
The city also gets transfers of revenue for employee benefits and pensions. Varley shows a 1.8% increase in there over the five-year projection as well as a $215,000 total annual transfer from funds such as hotel/motel, solid waste, sewer, storm water, water, and docks and marina.
With the transfers combined with the general fund revenue, Varley shows a total revenue in 2024-25 of just over $6 million, which represents a 1% average growth over the five years. Since 2012, that figure has averaged 2%.
Varley said salaries and benefits make up about 80% of general fund spending with staff development, maintenance and repairs, contractual obligations and debt making up the rest.
Currently salaries and benefits make up 80.5% of general fund expenses and Varley projects that at 81.2% in 2024-25 at a cost of $5.49 million. When other expenditures are added in, he shows total general fund expenses at $6.76 million for 2024-25. That figure represents a five-year average increase of 2.8%. The past seven years that figure was 2.7% with $5.9 million in expenses in the current budget.
The gap between revenue and expenditures is projected to expand deficit spending over the five-year projections.
“Once the red expenditure line goes above the green revenue line and stays there, something has to change. We cannot deficit spend every year,” Varley said.
“This problem almost always requires additional revenue sources, just to keep the same level of services in the future.”
One of those revenue sources being considered is a franchise tax on gas and electrical services provided in the city.
If the city were to institute a franchise tax it could include up to a 5% tax on both utilities. However, the city would not be able to collect the 1% current sales tax charged by those utilities. Any net gain would have to factor out the current 1%. For example a 3% imposed franchise tax would be a net gain of 2%.
City Finance director Peggy Steffensmeier said she put estimates together at the beginning of the year on what revenues would be generated on a 3% franchise tax.
“We took a look at that in January and the gas tax after taking off the 1% currently in place would generate an additional $220,000 annually,” she said. “A 3% on the electrical service in town would be about about $340,000.”
Varley said he believes the City Council could put the franchise tax in place, but wasn’t sure if it would take a resolution or an ordinance. The move could be appealed by the public, which would force the issue onto a public ballot.
As it stands now expenditures exceed revenues in the current budget and that deficit will increase to $750,000 with the 2024-25 budget, with no changes implemented.
Varley said he also likes to have a minimum working capital, or reserves to cover three months of city operations on hand at all times. In 2017 that fund had a balance of $2.1 million, and it is projected to carry a balance of $356,940 at the end of 2021. His figures show that fund will be depleted in 2022.
The council agreed to have another discussion on the budget outlook again in October, prior to the next general election.