A critical element of responsible city governance is long-term financial planning. Two years ago, the budget included a three-year fiscal stability plan. The plan identified the major issues contributing to the city's structural deficit (the gap between the ongoing cost to fund government and expected ongoing revenues), as well as some goals to reach by the 2008 budget in order to make progress toward solving the deficit. As the mayor's 2008 proposed budget represents the final year of this plan, the Public Policy Forum analyzes the categories identified by the city with regard to whether the fiscal sustainability goals have been met.

Revenue Diversification

One of the key issues standing in the way of the city's fiscal sustainability is its reliance upon state shared revenue. Dependence upon this shrinking revenue source has caused the city to utilize unsustainable cash streams, such as the Tax Stabilization Fund, to balance its yearly budget. As a result, the city has looked toward creating additional long-term revenue streams to ease some of the reliance on state aid. The city's revenue diversification goal in 2006 was to increase its non-property tax levy "own source" revenue by $30 million between 2005's baseline and 2008. According to the proposed budget, if adopted, general fund "own source" revenue will have increased $39 million; there was also an additional $13 million inflow of revenue into the sewer maintenance fund with the adoption of the storm water fee in 2006.

In number terms, then, the city seems to have done extremely well in meeting its revenue diversification goal. As is stated in the proposed budget, however, "these changes improve sustainability but cannot offset massive state shared leverage." Additionally, the city's prospects toward revenue diversification progress are limited. The city is unable to levy an income or sales tax; it is unrealistic to increase the property tax as much as would be needed to provide sustainability; and the city's ability to create more user fees (the main vehicle the city has employed the last several years for revenue diversification) or to increase existing ones is limited.

For example, the 2008 proposed budget increases the snow and ice removal fee. At its new rate, the fee is expected to generate $4.3 million. According to the budget director, it costs roughly that much on average for yearly snow and ice removal. Since the city is legally prohibited from collecting more revenue from a user fee than it costs to provide the service, the ability of this fee to generate increasing revenue for the city has been tapped out. Such limits exist for all of the city's user fees.

Therefore, while the city has met the goal set out three years ago, reliance on state shared revenue remains a formidable obstacle to fiscal sustainability.

Expenditure Control

Of course, developing a fiscally sustainable city depends on more than revenue; expenditures must also be controlled. In its three-year plan, the city set a goal to reduce levy-supported operating and capital spending by $35 million during 2007 and 2008. It is very difficult to determine whether the city has met this goal because the goalposts seem to have been moved; in the 2007 and 2008 budgets, there is no mention of the original goal. In the 2008 proposed budget, it is said that the city has reduced O&M baseline department spending by $22 million.

Because the budget does not allow us to determine whether the city has met its spending goal, we have looked to other spending indicators. Within its departments, the city has made many cuts over the past several years and has effected many efficiencies. Budget office numbers indicate that since 1988, the city's operating budget has increased slightly more than inflation, an indicator of the extent to which the city has kept its spending under control. Additionally, the city receives a sizable state aid payment every year from the Expenditure Restraint Program (ERP) in recognition of its spending control. (Note: One revenue problem the city is experiencing for the 2008 budget is a significant decrease in its ERP payment; however, this is not due to out-of-control spending increases at the city level. According to the comptroller, it seems that the state has changed the funding formula.)

The overall expenditure numbers seem to indicate that, while spending has increased every year, the spending trend has been roughly in line with inflation. Regardless, revenue has not kept up with inflation. It seems, then, that in the absence of sustainable revenue increases and/or decreases in the amount of debt, the city may have to take a more serious look at the affordability of some of the services it provides.

Health Care Cost Containment

While the city's level of success in overall spending control is unclear, its goal to get control of one of its most substantial and most rapidly increasing costs does seem to have been achieved. Health care costs have been on an ever-increasing trend for the past several years, and it is one of the most daunting in the city's cost-to-continue budget. In its sustainability plan, the city set the goal of achieving a $1 million annual reduction from trend grown in health care benefits costs by 2008. In other words, the city did not set out to decrease health care costs, but rather to decrease the increasing trend. The city wanted to "decrease the increase" by $1 million a year. According to the proposed budget, changes in health care administration have allowed the city to decrease the increase by an estimated $19 million combined in 2007 and 2008. Such numbers indicate achievement of the city's goal, and it is working to sustain those numbers in the future.

Debt Levy/ Capital Budget Control

Other key obstacles to budget sustainability have been the city's debt burden and the capital budget. The comptroller has issued several audits of capital projects with similar recommendations: the city needs to do a better job of budgeting costs and communicating those costs to the relevant departments. This specific problem was not identified to be addressed in the city's sustainability plan, but it is one that needs to be addressed in order to improve fiscal sustainability.

The idea of recurring infrastructure programs is also important to address because it refers to infrastructure maintenance. The city has a habit of justifying large capital budgets by stating they are one-time projects. However, many of those large projects are caused by deferring infrastructure maintenance. For example, in response to a comptroller report about the relatively long replacement cycles of city streets, the 2008 budget proposes to expend substantial funds to fix streets more quickly. Any future sustainability plans should include comprehensive capital plans with realistic schedules for continuing infrastructure maintenance. While some capital projects are inherently one-time (the construction of a building, for example), a plan that satisfactorily addresses recurring infrastructure maintenance needs should smooth out frequent, large one-time expenditures

The city acknowledges its relatively large debt burden, but also has always touted its timely debt retirement policies, which allow the city to achieve consistently high bond ratings. However, the city's debt burden has been increasing over the past several years and so it was included as an issue to manage better in order to achieve fiscal sustainability. In the 2006 budget, the city adopted a new debt goal for 2008 under which the amount of annual new tax-levy-supported debt would match the amount able to be retired in that year. The ideal annual debt issuance number was said to be $56.5 million. Indeed, new debt issues have decreased every year (from $71.5 million in 2004 to $67 million in 2006 to $61 million in 2007 and to a proposed $60 million in 2008). The budget discussion, however, seems to suggest that $60 million is about as low as it can go; new authorizations for the next three years are projected to be $60 million annually. While the city has decreased new debt issues considerably, it has not met its goal and does not seem to have a plan to do so in the future. This is particularly concerning since increasing debt has been one of the most disturbing fiscal trends in the city over the past few years.

In our analysis of the 2006 proposed budget, we praised the city for its three-year fiscal sustainability plan. The existence of such a plan showed the city's commitment to thinking strategically, planning for the future, and moving away from a focus on yearly budget balancing and toward long-term fiscal solvency. The city has made good progress toward all of its goals; some it has achieved. Throughout the budget, there are signs of the city's attempt to be more strategic in its thinking. A strategic plan toward capital budgeting is being crafted. The city is spending some money in the short term that will save money in the long run in the area of energy efficiency. Changes in the library system are being made as a result of a strategic plan. The fire department is planning on making cuts that may be unpopular but have been extensively studied and shown not to result in less safety. The police department is in the process of doing a number of studies to use its force more efficiently, and has shown progress toward evidence-based policing.

Nevertheless, the budget lacks a comprehensive plan for fiscal stability in the future. The budget is not only a ledger of expenditures and revenues; it is a policy document. As such, it would be stronger if the administration included a more detailed analysis of the successes and failures of its three-year fiscal sustainability plan, as well as a new plan for moving forward. Although the city did identify some issues that need to be addressed in the future to improve fiscal sustainability, a continuation of the original three-year plan would be preferable. This is particularly important because, even though the city has made substantial progress toward the goals set out in 2006, this year's budget makes it abundantly clear that even complete achievement of those goals is not enough to rid the city of its structural deficit.