Ex-councilman, CPA agree: Budget crisis is real

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BY DEENA WINTER / Lincoln Journal Star

When Curt Donaldson heard City Council candidates campaigning on promises to close the city’s projected budget gap and “prioritize” city services, he wondered exactly what that meant. In his mind, proposing to close a $9 million budget deficit by “prioritizing” translated to “cannibalizing everything but public safety.”

So the carpenter and former city councilman decided to take a closer look at the municipal budget. He has since spent hundreds of hours analyzing the budget over the past three months. He has a thick budget book in his kitchen and a file full of statistics.

He’s come to a few conclusions: The city’s revenue stream is essentially flat; the $39 million it gets from property taxes isn’t enough to pay for public safety alone, and Lincoln residents are getting a heckuva deal on their city government.

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Curt Donaldson

Curt Donaldson

“I’m a supporter and an apologist for government,” he says in his cerebral, halting, carefully measured synopsis of the city pocketbook.

And he has an admission to make: He contributed to Lincoln’s current budget problem. When he was on the City Council from 1993 to 1999, sales tax revenue began flowing into city coffers “amazingly.” After an Interstate interchange was built at 27th Street, the corridor to Superior Street sprang to life. SouthPointe Pavilions opened in the late 1990s. Sales tax revenue was strong, sometimes posting double-digit increases from year to year.

So the City Council and Mayor Mike Johanns gave some of the money back to the people by lowering the city’s property tax rate. The year Donaldson took office, in 1993, the city charged property owners 52 cents for every $100 worth of property value. The city has reduced the property tax rate nearly every year since then, and now charges 28 cents for every $100 in value.

“Politically, it was wonderful because the next year Johanns ran unopposed for mayor. I ran unopposed for City Council. It was like we were walking on water. And he (Johanns) rode that right into the governorship.”

In the early 1990s, sales and property tax revenue were about equal, until sales tax dollars surged ahead. Now, sales tax dollars account for 42 percent of the city’s revenue and property taxes account for 30 percent.

But the days of double-digit sales tax revenue increases are gone. During the past two fiscal years, Lincoln’s sales tax revenue has been virtually flat. So far this year, net sales tax collections have increased less than 1 percent over the last fiscal year. And now that state lawmakers have narrowed the sales tax base, the city is now projecting a decrease in 2006-2007 sales tax collections.

Looking back, Donaldson thinks perhaps he and his colleagues lowered the property tax levy too much in the 1990s and should have better planned for the city’s infrastructure needs. But he says it’s become sacrilege to suggest the city increase its property tax levy to offset the more volatile sales tax revenue source.

“Do I bear some responsibility for this? Yes. Maybe that’s why I’m working so hard on it now.”

Now the Republican is spreading a new gospel in presentations to business groups: Maybe it’s time to raise property taxes.

“Even Ronald Reagan changed his mind about taxes,” he said.

He sees proof in the charts and graphs spread out on his kitchen table: While the city population has increased 25 percent since 1990, the number of tax-funded civilian employees has dropped 4 percent. Only the number of public safety employees has kept pace with the population growth.

And the city takes a smaller percentage of residents’ personal income now than it did in 1990.

Meanwhile, the cost of employees, fuel, goods and services continues to rise. The cost just to maintain current city services in the coming budget will increase an estimated 5.7 percent, which translates to $7.4 million. Add in some expected new costs, and the city needs $9.7 million. But in December, city revenue for the tax budget was projected to grow just .6 percent, barring any tax increase.

It would take a 4.6 percent increase just to pay employees what they’ve been promised in labor agreements.

And therein lies the projected $9 million budget gap — which, by law, city leaders must close this summer.

The newly elected mayor, Chris Beutler, campaigned on a promise not to increase the property tax rate, at least during his first year in office.

“I think he’ll do what he said he’d do, and it will be a budget from hell,” Donaldson said.

If it’s true, as City Budget Officer Steve Hubka has warned, that the council has pretty much exhausted all of the short-term fixes it has used in recent years to balance the budget, then city government will have to shrink this year, assuming a tax increase is off the table, since most of the newly elected council members have made similar no-tax-increase pledges.

Donaldson thinks 50 to 100 city employees would have to be cut in order to avoid a property tax increase.

When Beutler asked Lincoln certified public accountant John Cederberg to help him analyze the city budget, Cederberg figured the projected budget gap was mostly due to conservative revenue projections and the difference between wants and needs. But in the past two weeks, Cederberg — who normally focuses his attention on the state budget — has learned otherwise.

“This is not a made-up crisis,” Cederberg said.

But in past years city leaders have always found relatively painless ways to balance the budget.

“The past is history,” he said.

“I didn’t anticipate that it is as serious and intractable as it is,” he said. “There are no tricks and gimmicks left that will close this budget (gap).”

Being flush with sales tax dollars in the ’90s made it easier for the city to negotiate labor agreements with the unions and expand city services.

“We saved some of that money but we also spent some of that money and baked it into our base,” Cederberg said. The city’s  $84 million tax-supported operating budget in 1996-1997 has grown to a $130 million budget today.

And city leaders have learned it’s a lot easier to lower property taxes than increase them.

“Once that levy goes down, it won’t go up,” Cederberg said. “That’s just a political fact of life in this city. ... Property taxes are the most hated tax we have.”

He thinks the public mistakenly thinks if the city increases its property tax rate 5 percent, their whole property tax bill goes up 5 percent. In reality, the city’s portion of residents’ total property tax bill is small compared to the school district. The school district gets 64 cents of every dollar collected in property taxes in Lincoln, while the city gets 14 cents and county gets 13.

Either people don’t understand that, or they don’t get as worked up about the amount of money Lincoln spends on schools versus city services like police and fire protection.

The city’s property tax rate dropped steadily from Johanns’ administration until Don Wesely’s, and he kept it virtually steady. Only Coleen Seng’s administration increased the levy and then only to fund voter-approved bond issues.

A countywide revaluation of property could have generated an extra $4 million for the city last year, but the City Council lowered its levy so that it used only about $1 million of the windfall.

So like any household or business in a pinch, the city has to figure out ways to either bring in more dough or cut its budget.

Cederberg thinks it’s time for the community to have a “Come to Jesus” discussion about whether to cut city services or pay more in property taxes. He thinks the public needs to be educated about the volatility of relying so heavily upon sales tax revenue to fund the budget.

It would take a lot to convince influential groups such as the Lincoln Independent Business Association to support increasing taxes. LIBA Executive Director Coby Mach instead focuses on city employees’ pay and benefits.

“There are those in the community that are saying we need to raise property taxes to offset the sales tax losses,” Mach said. “I would much rather convince this community to buy in Lincoln.”

He’d like to see the city retirement benefits reduced from a 2-to-1 match to a 1-to-1 match, which he says would save the city $3.3 million. But benefits couldn’t be reduced unless employee unions agreed to reopen negotiations, and what are the odds of that?

Mach figures if layoffs are the alternative, the unions might be willing.

Councilman Dan Marvin said the current budget gap is real and will be tough to close, but he said the $9 million gap assumes $3 million will be spent on capital projects, even though that budget was sliced down to about $600,000 last year. The city spent more on capital outlays back when it was more flush, but has cut back considerably.

But he said the city isn’t on the brink of bankruptcy: Lincoln is one of a handful of cities with a AAA rating from bond rating agencies. The city doesn’t have a lot of debt compared to cities like Omaha. And Lincoln’s property tax levy is significantly lower than Omaha’s. Most Lincoln homeowners pay more for cable TV than for the city’s share of property taxes.

He expects sales tax revenue will pick up again.

“I’m not saying there’s not going to be some kind of pain involved with this budget,” Marvin said.

Donaldson proposes that perhaps Lincolnites would be willing to consider increasing the property tax rate just enough to cover public safety costs. That would cost about $20 million. If not, he fears all other departments will be squeezed to the point where about all the city is left with is “a guns and hoses budget.”

Reach Deena Winter at 473-2542 or dwinter@journalstar.com.