A TAX CUTTING PRIMER: Gardiner officials address financial crisis
(from Maine Townsman, January 1999)
By Dennis Doiron*

* Dennis Doiron sits on the Gardiner City Council and is the chair of its Finance Committee. This month he begins his second term on the council. He is an Assistant Attorney General and serves as chief counsel to the Maine Department of Education, the Gov. Baxter School for the Deaf, the Maine School for Science and Mathematics, and the state’s cultural agencies.

In 1997, the City of Gardiner faced a financial crisis. Its "rainy day" fund (that is, the unappropriated surplus account) had been depleted to about $300,000 and the city had failed for a number of years to keep up with capital improvements on its roads, sewers, and sidewalks.

But most alarming was its high property tax rate. At 28.1 mills, the city’s rate was about 5 mills higher than any other rate in Kennebec County and one of the highest in the state. Aggravating the situation was the relatively low income of Gardiner residents, for although we had the highest tax rate of all nearby towns, we also had the lowest average family income.

In substantial part because of the city’s high tax burden, many homes and business properties were for sale or empty, indicating that a large number of people wanted to leave Gardiner and few people and businesses were interested in moving into the city.

In response to this crisis, the city council took a number of coordinated steps to reduce the tax rate, finance needed capital improvements, and increase the rainy day account. The city also wanted to accomplish these objectives while at the same time improving city services.

After two budget cycles, these efforts have led to a 20% drop in the mill rate. For the owner of an average-priced home, when the Homestead Exemption is factored in, property taxes have dropped by nearly 30%. In addition, in the past two years the rainy day account has increased by 300% and there have been over $4 million in completed or approved capital improvements.

And by all reports, the city’s services have improved, not diminished.

How did we do it?

The following describes some of the more important steps we took, and things we have learned along the way. Other municipalities might want to consider our list of budgeting rules when attempting to steady or lower their own tax rates while maintaining or improving necessary services.

RULES FOR BUDGETING

RULE 1 - Start the Budget Process Early

Prior to 1997, the city council did not start deliberating on the new budget until the city manager submitted a proposed budget on May 1, giving the council only two months before the beginning of the new fiscal year.

This schedule put the council in a reactive role. Basically, the council reviewed the manager’s proposed budget line-by-line and made incremental changes from either current or proposed spending practices.

To gain greater control over the budget process, in 1997 the council decided to begin the process early so that the manager could receive direction from the council prior to constructing her proposed budget and to give the council enough time to fully examine all spending options.

RULE 2 - Reach Consensus by Establishing Broad Goals and Objectives

Municipal budgets are difficult to construct because they must be approved by more than one person, in Gardiner’s case, by a majority of an eight-member council. Each member of the council, if given the authority, could build a budget that would reduce taxes to his or her satisfaction, but reaching a majority on a budget that includes painful, controversial decisions – such as laying-off employees or cutting services – often prevents the achievement of substantial tax cuts.

To increase the chances that a majority would ultimately agree on specific cuts, the council agreed to broad budget goals and objectives long before addressing any single budget item. In 1997 and again in 1998, these goals were established and communicated to the city manager and the public in February.

In 1997, the goals were to reduce the city’s property tax commitment by $400,000, to increase the rainy day account by not spending any money from the account and by depositing all end-of-year unexpended funds into the account, and to begin financing a multi-year capital improvement plan.

In 1998, the goals were to cut taxes by spending no more in the general fund account than had been budgeted in the current year and by using all additional revenues to reduce taxes, to continue increasing the size of the rainy day account by depositing the first $50,000 of end-of-year unexpended funds into the rainy day, and to continue funding the capital improvement plan.

RULE 3 - Establish a General Fund or Property Tax Commitment Spending Target Level

Too often municipal governments decide what they want to "buy" and then pass on the cost to taxpayers, rather than first deciding how much they can afford to spend. As stated above, for the past two years the council early in the budget process has set a total spending target for either the tax commitment or for general fund spending and has tried to stay within that target when making specific spending decisions.

Establishing a spending target is the most important goal to establish because it helps to discipline all subsequent spending decisions. It makes it easier to say "no" to spending requests and harder to say "yes" to increased spending.

RULE 4 - Review All City Functions and Spending

By agreeing in early February 1997 that taxes would have to be cut substantially, the council had time to review every city department and function. This was the first time in years that the city had thoroughly reviewed the services it was providing. For each service or function it asked basic questions: Was it necessary? What could be reduced or cut entirely? Could the service be provided less expensively and/or by other means?

This review, which lasted over five months, allowed the council to set spending priorities for each department, study different ways to perform certain services, and agree on which positions or services would be cut or restructured.

Perhaps most significantly, the city hired a consultant to review the functions and structure of the Public Works Department. Ultimately this led to reducing the size of the department and focusing its work on maintenance services only, with all large construction projects contracted to private companies. This restructuring led not only to substantial savings but vastly improved the quality of services performed by the department.

Because of the exhaustive review of all services in 1997, a much simpler review was conducted in 1998.

RULE 5 - Get the Public Involved

If a tax rate is far out of line, reducing the rate significantly will involve some very difficult decisions, including the most difficult decision of all, the laying-off of employees. Before a council can make these decisions, its members must feel confident that the public approves the cuts.

Anyone with experience as an elected official, however, knows that it is often difficult to know what the majority of people want or will support. In particular, everyone wants lower taxes generally, but many people will oppose the specific cuts needed to reduce taxes. Usually it is the people who oppose specific cuts who show up at public meetings to attack those cuts. In 1997, when the most difficult cuts were made, if the council had followed the wishes of the majority of people who attended council meetings, no significant tax cuts would have been achieved.

To get a better read on public opinion, in 1997 the council made sure that the public was fully aware of all the steps we were contemplating to reduce the budget before casting final votes. For about five months, either the council or the finance committee met every week to discuss various options to save money; each of these meetings was well attended; and, as importantly, the local daily newspaper provided extensive coverage. By the time final decisions had to be made on specific cuts, each of the council members had a firm handle on public opinion in the city and could more easily make the hard decisions required to cut taxes.

RULE 6 - Aggressively Collect Taxes

Prior to 1997, the city did not take active steps to collect overdue taxes.

As a result, the city had a total of $653,000 uncollected taxes for all years. Beginning in 1998, the city has informed each delinquent taxpayer by letter that if taxes are not paid by a certain date, the city will file property liens, foreclose on properties, and, the worse threat of all, publish the names of delinquent taxpayers in the local daily and weekly newspapers. In addition, the city has informed taxpayers who owe business personal property taxes that collection actions will be taken to court.

These steps have reduced the delinquent tax obligations to $450,000 today, a drop of over $200,000 in two years, and the tax collection rate last year was the highest rate since at least 1991.

RULE 7 - Reduce Taxes By Committing All, or Portions of, New Revenues to Property Tax Relief

In the past two years, almost all the property tax relief occurred because the council passed on the benefit of all new revenues and decreased assessments from the school district and the county to taxpayers in the form of tax cuts.

In 1997, the city’s general fund was budgeted at $3,553,000; this year it is budgeted at $3,505,000, a reduction of only $48,000. The total property tax bill for the city, however, was reduced over the two year period by $878,000. This was possible because in addition to the $48,000 cut in spending, we passed on to taxpayers the full value of the Homestead Exemption ($209,000), all increases in revenues from other revenue accounts ($596,000), and the full cuts in the tax assessments from MSAD No. 11 ($71,000) and county government ($2,000).

The bulk of the increased revenues came from the State Revenue Sharing program and from excise taxes, revenues that have increased not only for Gardiner but for all, or nearly all, municipalities in the state. Given the latest revenue projections by the State Office of Fiscal and Program Review, municipalities can expect additional increases in these revenue accounts in the coming year.

RULE 8 - Reduce the Mill Rate by Committing All, or Portions of, Property Taxes Derived from New Valuation to Property Tax Relief

As it did with increased revenues from non-property tax revenue accounts, Gardiner committed all additional revenues from new property valuation to reducing the mill rate. Over the past two years, taxable property has increased by $13,470,000. Tax revenues from these properties account for 1.7 of the 5.65 mills dropped from the mill rate since 1997.

RULE 9 - Reduce Reliance on Property Taxes by Increasing Revenues from Fees, Service Charges, and Other Accounts

Municipalities can raise taxes only through the property tax on real property or personal business property. They, however, have authority to raise non-tax revenues from service charges or user fees.

The benefit of service charges or fees is that they places all or part of the cost of a service on the persons who receive the service. It is, therefore, a fairer way to finance services because, unlike the property tax, people who are having financial difficulties can choose whether to receive and pay for the service.

If fees or charges pay for a particular service, it is important to allocate the costs of these services to the proper revenue account. For example, if a road construction project was undertaken to repair a sewer, the project should be paid by the ratepayers of the wastewater treatment system.

Over the past two years, the city has reviewed its programs to make sure that costs are properly allocated. The most extensive effort, involving a consultant and recommendations of a specially formed advisory committee, was to allocate costs between the city's fire service, which is paid by city taxpayers, and the ambulance service, which is paid by services charges and fees, to users of the service and to several municipalities who use the service. This month, the council will act on recommendations that include reallocating personnel costs for firefighters/ambulance professionals to 20% fire and 80% ambulance. Two years ago, the allocation was almost divided evenly between the two accounts.

Gardiner has not yet thoroughly reviewed all the fees or service charges it might impose. The most important service charge over the last two years has been used to finance the city’s extensive and expanding recreational program. Almost the entire program is funded by fees charged to participants. This year, the city is only spending $10,000 from general fund revenues on the program, the remaining cost for the program, $171,000, is entirely borne by fees.

Other services for which fees may be charged include building permits, application fees for administrative appeals, vendor permits, and the like.

One important revenue source open to municipalities served by a cable TV company is a 5% fee on customer service charges. By law, if a municipality imposes the fee, the cable company must collect the fee amount from its customers and, once a year, deposit the amount collected with the municipal treasurer.

Gardiner is not currently collecting the cable TV charge, but will examine whether to do so in the next few months. A 5% fee in Gardiner would collect over $40,000 a year and, if collected, would reduce the mill rate by about a quarter of a mill.

RULE 10 - Reduce Personnel Costs

Because personnel costs are such a large part of most municipalities budgets, no significant tax cuts will occur, or be maintained over a period of years, unless personnel costs are reduced.

Two years ago, Gardiner had about 60 employees. Over the past two years, about 10 positions have been eliminated or restructured. Only two employees needed to be laid off, however, because the city offered early retirement options to some employees or did not refill positions after employees left voluntarily. After the fire chief recently left for another position, the city took advantage of the opportunity to combine the fire chief and police chief positions into a single public safety director position for a savings of between $25,000 and $30,000 a year.

Over the past two years, the city’s payroll, excluding benefits, has dropped by about $66,000 a year.

RULE 11 - Borrow for Capital Expenditures

Given the low interest rates available to municipalities, it is often less expensive to borrow for capital improvement projects or capital equipment purchases than to pay for the full amount of the project in one year. Even if a municipality has funds available to pay for a project, it is generally better to keep those funds invested and borrow the money needed for the project.

In addition to the cost-savings, however, it is also fairer to taxpayers, especially elderly taxpayers, to borrow and make annual payments for the capital improvement throughout the life of the project. To put it starkly, why should an elderly taxpayer, who is barely able to pay her property tax bill, pay a share of the entire cost of a long-term, expensive capital project, when the project will likely benefit younger taxpayers 10 to 20 years longer than it will her?

In Gardiner, almost all capital improvements during the last two years have been financed through borrowing, including the lease-purchase of new dump trucks. If we had not borrowed, the only choice would have been to raise taxes significantly or to not undertake projects that were already long overdue. The cost of financing the debt is less that 5% of the city’s general fund annual budget.

RULE 12 - Don’t Horsetrade

Councilmembers over the past two years have generally stayed away from the all-too-common practice of trading their votes on certain spending items in order to receive votes on other items they wanted. In the not too distant past, one member of the council earned the nickname "One-mill" for his practice of not voting for the budget unless it contain the dollar equivalent of one mill for street and sidewalk improvements for his ward.

Only once in the past two years did some council members declare that they would not vote for a bond item – capital improvement spending that required a supermajority vote – unless the full council agreed not to eliminate a staff position. Fortunately, the rest of the council held firm on its decision to eliminate the position, a decision that has saved the city $50,000 for each of the past two years and will continue to save the $50,000 each year into the future. (The opposing members later voted in favor of the bond question.)

CONCLUSION

Each municipality has its own unique problems and unique strengths and must tailor its budget process, and especially its budget-cutting process, to its own situation. But the general rules above should be helpful for any town or city facing the task of reducing its property tax rate. These rules have worked well in Gardiner for the past two years and I am hopeful that they will work again in the coming fiscal year as we attempt to further reduce the city's tax rate.