Sunday, February 20, 2011

Yes in May, No in November

[Note: Unlike other of my posts, I reserve the right to make changes or corrections to this article.  Specifically if my math or facts are off a bit I'll correct them.  And I may change some statements to emphasize or de-emphasize a point.  If necessary, errata will be noted at the bottom of the article.]
Ferndale voters should pass the Headlee Override ballot proposal.  Then in November they should begin the process of replacing city council persons that would rather spend money on pet projects and self indulgences with candidates that promise restraint and self control.

The first part can be done quickly on Tuesday, May 3, in only a few minutes time.  The second part, replacing council persons with shorter "what I want to do for you" agendas with replacements promising "my agenda isn't as important as the city's" (as well as the ability to do simple math) will take over 33 months and longer-term memories than voters are normally reckoned to possess.

Households must manage their budgets, as should governments.  When a household's income is reduced its expenses must be reduced, depending on how much cash has been saved.  When a household can't meet its legal obligations (mortgage, utility bills) or its needs (food, clothing), the household is bankrupt and its assets liquidated to pay-off its obligations.

The popular theory is that governments should do likewise.  When their revenue shrinks so should their expenses. Just as employees don't have the privilege of demanding increased wages from their employers, governments shouldn't demand increased taxes from their citizens.

The difference is we created our government and charged it with the responsibilities of both custodian and guardian.  Its custodial responsibilities include the stewardship of public assets like buildings, property, parks, and infrastructure like streets, drains, and lighting.  It's also a guardian of the public and the public's assets through public safety and in keeping the peace between neighbors in the area of establishing and enforcing zoning ordinances.

But because we created it we are also responsible for it.  We are responsible for electing its trustees and for providing them the resources needed to discharge their responsibilities.  But citizens are not required to provide the resources for the trustees pet projects, pipe dreams, or indulgences.

That is why this article makes two related recommendations.  The first is to pass the Headlee Override requested by city council and recommended by the 12-member Financial Planning Committee so that the city may have the resources needed to meet its duties to the citizens.  The second recommendation is to replace at least three city council persons that have proven their willingness, or compulsion, to spend taxpayer money on frivolous and indulgent projects even when facts and economic conditions urged otherwise.

The immediate issue at hand, however, is May's ballot issue to increase property taxes by 5.4 mills through 2015.  There's is enough time before November to discuss council elections in other articles.

Many pass-the-override advocates point out it may take years to return to 2009's nearly $20 million revenue number.  They're correct in that it will take years to return to that revenue, but they're incorrect in using 2009 as the benchmark against which subsequent years should be measured.

They are wrong because 2009's $19.5 million budget was based on property taxes collected on 2007's inflated property values.  It's important to remember that inflated means the property values were irrational.  They were irrational because Ferndale's property values were not grounded on any objective measure like scarcity of land, Ferndale's location, the performance of its school system, job or population growth.  Instead, like real estate all across America, property values were based on speculation, weak mortgage qualifications, and a similar irrational exuberance that created the Internet Bubble that burst in 2000 and the savings and loan crisis that exploded in 1989.

So to find a rational budget number to begin with it is necessary to look at tax revenues before the housing bubble started; 2002/2003.  Since taxes are collected approximately two years after assessments a better budget year to begin with is fiscal year-ending (FYE) 2005's more modest $17 million ($16,955,150 to be more accurate).

To come up with some a grounded estimation of what our budget should be we can index 2005's budget to the rate of inflation and come up with more rational numbers ($ in millions):
Actual Revenue
So using an inflation-based, rather than an inflated-based projection, this year's budget should have been closer to $19.6 million rather than the $16.7 million it is, which is $2.9 million short of the indexed-to-inflation 2005 budget amount.

State revenue sharing also has a major impact on the city's revenue.  In 2005 Ferndale received $3.2 million, or 18.9% of its budget, from the state.  In 2011 that amount is budgeted to be $2.2 million--40% less than 2005's contribution adjusted for inflation, and only 13% of the budget.

If the numbers in the table above include state revenue sharing, the case for passing the Headlee amendment is only slightly less compelling with those numbers removed.  2005's revenue less state revenue sharing was $13.7552 million.  Adjusted for inflation that number should have been $15.8850 million in 2011, but will only be $14.6639 million, or $1.2 million short of where it rationally belongs.

If, as former city manager Bob Bruner estimated, each mill levied in Ferndale property taxes will generate about $500,000, then non-state-revenue sources are approximately 2.4 mills short.

Coincidentally, May's ballot language calls for limiting the first year's Headlee Override to just three mills.

Citizens created the government and have elected its trustees.  Dissatisfaction with council's earlier spending is, at least in the case of local elections, not a legitimate reason to vote no on the millage increase.  Nor is starving the beast a substitute for electing more fiscally conservative and market-aware  trustees.  Both the city's budget and its council need correcting, but medicine for one is not medicine for the other.  Even if the current council had a better record of fiscal restraint the millage increase would still be necessary.

In May voters should pass the millage.  November may require something different.

2011-2-24  Mike Shuler pointed out that immediately below the chart, 19.6 - 16.7 = $2.9 million,  not $1.9 million.

Inflation calculator

Inflation chart

Ferndale Budgets

Financial Planning Committee's 1/10/2011 Presentation to Council

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