Bainbridge finance committee chair: Here’s the story on city’s dwindling budget

As fortunate as we are to live on this beautiful island, Bainbridge isn’t immune from national economic downturns. And as taxpayers we aren’t immune from the fear that local government will run up excessive debt, as the federal government has over the past eight years.

As fortunate as we are to live on this beautiful island, Bainbridge isn’t immune from national economic downturns. And as taxpayers we aren’t immune from the fear that local government will run up excessive debt, as the federal government has over the past eight years.

Some recent opinion pieces by guest columnists on these pages have characterized our city’s finances in a way that, intentionally or unintentionally, plays on that fear.

What is the real story? Where does the city stand financially? What are we doing to control expenses and limit borrowing in the face of a 15 percent decline in tax and fee revenue this year? Here is some context about our city’s general fund finances that may be helpful. We’ll discuss water, sewer and stormwater utilities in a future column.

1. Unlike the federal government, our city is legally required to balance its budget. In April, the city administration reported that revenues fell short of earlier estimates by about a half-million dollars in 2007, and would probably fall short of 2008 estimates by another $2.5 million. So, the council and administration proceeded to reduce 2008 operating and capital expenses by that much – and more. Fortunately, revenues haven’t worsened since April. We are still on track to finish 2008 with a balanced budget because we have reduced expenses.

2. Our new city administrator reports that the number of city employees grew by about 19, to a total of 152, over the four years from 2004 through 2007. By contrast, that number is being managed down by eight this year, and budget balancing will probably require further slimming by attrition next year. In the past, from 2004 through 2007, city operating expenses grew by 30 percent. By contrast, the city administrator is currently projecting virtually flat operating expenses from 2007 to 2009, and council policies could require further reductions over that period.

3. Unlike the federal government, our city has a strict debt policy that prohibits borrowing for current operations. We’re scheduled Wednesday to approve borrowing for 13 specific capital projects – none for operations. Last year, the City Council approved a $4.1 million bond and budgeted to borrow $4 million more in 2008. This year, we’ve chopped that borrowing to $1.76 million. Just last week Moody’s gave the city another A1 credit rating, the same as the underlying rating in 2007.

4. The council is currently debating how much lower we should go below the legal debt limit. The 2006 Council’s policy said OK to debt service at more than three times the then-current level. This year’s Council Finance Committee has proposed to lower that limit to less than half as much debt (to cap debt service at 15 percent of revenues, rather than 35 percent).

5. One guest columnist said city bond interest costs result in repaying 60 percent more than the city borrows. But that ignores Economics 101. When the city borrows at the current favorable 4.5 percent rate (lower than CPI household cost inflation, and far lower than road construction cost inflation), the city repays using cheaper inflation-affected dollars – that is, dollars with less purchasing power than today’s. Most of us homeowners would be glad to lock in a 4.5 percent mortgage over 20 years, as the city can right now.

6. Too much debt ties up too much of our budget with inflexible debt service. But too little debt is bad, too. First, it makes current taxpayers pay up front for future benefits. Second, delaying essential capital infrastructure repairs and investments in order to avoid borrowing means we pay more for rapidly rising construction costs than we would pay for the interest on a bond.

7. Unlike the federal government, our main source of city income – the property tax – can’t legally increase more than 1 percent per year on existing properties. That applies every year, even when the inflation rate (currently 5 percent to 6 percent) drives city costs up far faster than 1 percent. And only 13 cents of your property tax dollar goes to the city. The rest goes elsewhere.

8. Notwithstanding opinions to the contrary, the city hasn’t “run out of money.” We expect the city to end 2008 with nearly $1 million in emergency rainy-day reserves and more than $1 million in other reserves and fund balances. As noted by Moody’s this week, the city’s general-fund surplus hit a high in 2003, and has diminished since then. Council’s Finance Committee recommends a new policy to rebuild that general fund surplus, to act as a stabilization reserve.

Please join us at our Sept. 16 financial policies workshop, as we consider how much to set aside for prudence and peace of mind, versus how much to invest in our infrastructure and services to the community.

Chris Snow is the chair of the Council Finance & Personnel Committee. Barry Peters is a council member.