Mr. Peterson asked for some clarification on the Budget Office's
responses to Mike Hohmann's questions. Mike wanted information on what
the Mayor proposed to do about planned investments in infrastructure,
public safety, internal service fund cash deficits and affordable
housing. I can't speak for the Mayor, but I will try to translate the
responses since I posted them.
A couple of preliminary points. First, government accounting and
government budgeting is not directly analogous to private-sector
practice. If you want to know the details, I will refer you to KcKinney,
Jerome, Effective Financial Management of Public and Nonprofit Agencies
(2nd ed. Quorum 1995).
Second, I can try to explain this, but it's probably more than you want
in an e-mail post and may raise as many questions as it answers. I was in
a graduate course at the Humphrey Institute last winter to get an
overview, but I certainly don't claim to be a public finance expert. With
that proviso, I'll try my best to explain.
Third, since it is closely related to the above, I will respond to Mr.
Brauer's question regarding my reaction to the Mayor's budget speech (I
referred to it as a missed opportunity and a recipe for trouble). I
apologize in advance for the length of this post.
Question 1: What is the City's plan to deal with its infrastructure?
As the Budget Director noted in her memo, in 1997, the City released a
200 page report entitled State of the Public Infrastructure. Sadly, this
does not appear to be on the City's web site, although it is available at
the Municipal Information Library. I'll see what I can do to post at
least the executive summary and the introduction on my City web page.
I'll notify the list if it goes up.
The report concludes that "The City of Minneapolis is not facing an
imminent infrastructure crisis." However, the task is to set "current and
recommended funding levels to sustain the infrastructure and a finance
process designed to correct deficiencies over a relatively short time
frame (20 years or less)."
In 1997, we were about $74M behind in maintaining our infrastructure, not
including Parks and Libraries. So, the problem is how to dig out of the
hole. The council (before I got here) chose to eliminate half of this gap
(which is really just a bunch of projects which need to be done) over
five years by making an installment payment toward these projects each
year.
The first challenge is financing the payments. The city has two choices,
either borrow the money (that is what the Budget Director referred to as
the "net-debt bond program") or, generate the cash flow to "pay as you
go". Cities borrow by issuing bonds and we have to pay interest on the
principal over time. Thus, pay-as-you-go financing saves the city
interest charges in the long run (here, $17 million or about 30% added to
the cost of the capital projects themselves). The trade off is that you
must have the cash flow to make the payments now instead of spreading
them out over time as you could if you had borrowed.
The city decided to stop borrowing to do these projects ("eliminate the
net debt bond program") and use pay-as-you-go financing to fill half the
gap in five years. The trick here is you have to commit more money each
year to ramp up your overall commitment to infrastructure.
Hypothetically, $2M in 1999, $4M in 2000, $6M in 2001 and so on.
Now, the next problem is where does the money come from. The Budget
office memo mentions two kinds of sources. In the above hypothetical, you
can see that it is better to ear-mark a part of the overall City revenues
each year to deal with infrastructure. By doing so, you make it a
more-or-less permanent part of the budget. In contrast, one-time-money
(lets say, from the sale of an asset) helps you make the payment in this
year's budget but does nothing to permanently ramp up the commitment to
infrastructure.
So, in 2000, the Council earmarked $4.8 in property tax revenue to close
the infrastructure gap. It allocated $1.8 million to wean the whole
package off of borrowed funds and on to pay-as-you go.
Question 2: How are we going to pay for the "Public Safety Initiative"?
The Public Safety Initiative is going to cost $30M over five years. We
don't have a final cost or finance package, but we are going to borrow
some of the money ("bond proceeds"), shift some current revenue from
other activities ("Current property tax levy"), sell some stuff, use the
money and reallocate some savings from another part of the operation. If
the savings aren't enough, we would need raise more tax money (over and
above that which is currently levied) to make up the difference. In
order to pay back the money we borrow, $4.5M, with interest, we'll need
new tax money. Finally, we need more tax money on top of all that; $1.5M
to be collected in three $500K chunks.
In her Budget Framework Address, the Mayor said that "Our 2001 budget
will include $500,000, the first of a three-year commitment to make this
investment in public safety happen." As I interpret this (and again, I
have no additional information from her), this looks like the first $500K
in new tax toward the total of the $1.5M needed in new money. What the
Mayor does not mention is that once we ramp our commitment up to the
$1.5M level, we will be paying that $1.5M yearly payment every year for
the next 27 years!
Question 3: Internal Service Fund Deficit
To understand this problem (remember, you asked) you have to understand
something about governmental fund accounting practices. In this context
"fund" does not refer to money, but to a particular pot of money. For the
details, I recommend to those hearty souls still reading this post that
you refer to pages 48-52 in McKinney's book.
Government accounting is structured into funds, each of which has a set
of self-balancing accounts. The "General Fund" is one. It is the City's
general checking account, sort of. Internal service funds are another
kind of fund. There's a dozen more.
According to McKinney, "Internal service funds account for the financing
of goods and services provided by one department or agency to other
departments or agencies or a governmental unit on a cost recovery or
reimbursement basis . . . ." McKinney, p. 49.
So, what happened here? Our internal service providers did the work but
didn't get paid because the "client" departments didn't have the money to
pay the bill. It became like a huge accounts receivable problem. The
total, cumulative deficit, according to Note 17 in our 1999 Financial
Report, is $32.316M.
What are we doing about it? In 2000, we identified $2M to pay this off
and another $2M in cost reductions. The workout plan is not finalized
but, as you can see, the issues are very similar to those presented by
the infrastructure gap. Where is the money going to come from? How do we
finance yearly payments which ramp up our overall commitment to filling
the deficit? Can we pay-as-we-go? Must we borrow?
Question 4. Affordable Housing.
I posted the MCDA's response to this question separately.
Believe me, these are just a few of the many challenges, financial and
otherwise, which we face.
A Recipe for Trouble:
The lesson I take away from the above is that (surprise!) there is no
such thing as a free lunch. City services, no matter how necessary or
desirable, must be paid for in full, if not by the present taxpayers,
then by our descendants. That common-sense message simply does not seem
to sink in down here.
In order to deal with deficits, gaps and over-obligations of the past, we
have three choices: raise revenues and/or cut programs and/or find
efficiencies. The City budget process establishes a "current service
level", the total bundle of goods and services funded under the current
year's budget. In preparing for next year's budget, the city moves the
current service level forward (although not entirely in real dollars),
adds some services and (perhaps) deletes others. Once passed by the
council, this becomes the new current service level and the core for the
following year's budget consideration. There is no real effort to unpack
the entire bundle. Even in cities which have attempted to identify core
services, set real priorities and make cuts accordingly, these attempts
have largely failed due to lack of leadership and lack of or failure to
create common values. Moreover, the idea of systematically evaluating
government's output - for efficiency, quality, coherence with public
demand or whatever -- is apparently a cutting edge idea in public sector
management.
Again, there is no free lunch. If we want it, we have to pay for it -- if
not now, eventually. Like everyone else, the City's cost of doing
business is subject -- at a bare minimum -- to inflationary pressures. If
you think we are offering exactly the right mix of services and products
at complete efficiency, the whole package will still cost 1-3% more next
year than it did this year. New services and products (like graffiti
abatement) are extra.
Ignoring inflation has a huge impact on the city's tax policy. If you
paid $100 in taxes last year, can you really object to paying $103 this
year if the annual rate of inflation is 3%? It costs you nothing. It
simply moves the "current service level" ahead in real dollars. Yet, we
fail to do this. Actual levies from 1990-1996 failed to keep pace with
inflation. Increases since 1996 have not (as of yet) brought us back to
where we would have been had inflation been taken into account. Thus,
while we continued to spend, we weren't even taking in enough revenues to
do the prior year's work.
Second, in doing its budgets, the City departments have not accounted
for the inflated cost of supplies for years. Departments are having to
pay 1999 electricity bills, gasoline bills and the like with allocations
which, even if adequate years ago, haven't been adjusted for inflation
since. Add to this a policy of internal across-the-board 3% cuts, cuts in
state aid to local governments, unfunded mandates from other levels of
government and demand that localities pick up service gaps left by other
levels of government (like affordable housing) and I think we can all see
why we're in this mess. You can absorb these costs for only so long
before the whole house of cards collapses. That's all before adding one
dollar to new services, whether we need them or not.
Why don't we want to pay more taxes (assuming we all could afford to)?
Because we don't trust government to use the money wisely. Therefore, we
conclude that we are already paying too much. We look at the Schubert,
Block E, the Target Store and others and wonder what the hell is going
on. We suspect that government is not efficient. We object to the mix of
goods and services produced by government. We don't think anyone listens
to us even when we complain loudly and clearly (NRP Phase II).
We've borrowed from our future and now it's time to start to pay back.
And it's going to hurt. Regressive property taxation is going hurt people
on fixed income as the largest generation ever prepares to retire. It's
going to hurt poor people as they try to engage the best economy ever to
try to pull themselves up into self-sufficiency.
So now what?
The Mayors' speech didn't go far enough to level with all of us about the
true magnitude of this problem or the sacrifice required to solve it.
We're in trouble, that's clear. Only decisive and committed leadership
will get us out of the deep weeds.
We need to level with taxpayers. This is the only way to earn their
trust. We need to explain exactly where are we and exactly what do we
need to do to go where we need to be. We must establish what level of
financial health we want to have and establish a plan to get there. How
will the plan be implemented and who will be responsible for seeing it
through? We must clearly state how much flexibility we will have each
year, if any, for new programs. I'll bet that it's darn little.
The council and the Mayor need to level with one another. We have a
global economy, we're a regional financial center and we're still focused
on wards. E pluribus unum, today. We need to develop a real strategic
plan and effective priorities based thereon. It's time to stop doing
deals and start doing policy. It's time to focus politics on what we hope
to achieve, what goods and services we plan to deliver at what cost, and
depoliticize how these services are delivered.
We need to level with our managers and employees. It is time to change
how we do business; radically and right now. We must boost efficiency,
quality and customer satisfaction and be able to prove to the world that
we did. We must offer world-class products and services or none at all.
No more under-funded, half-hearted programs. Enough is enough.
We need to level with the legislature and see what can be done to
reestablish fair tax policies and aid to cities throughout Minnesota. Our
fates are linked. So go the cities, so go we all.
Our outgoing Finance Officer said it last year: "We have got to stop
spending." We have got to stop promising more than we can deliver.
However, the conventional wisdom seems to be that those who turn off the
money tap, justified or not, will lose their jobs. Those who raise taxes,
justified or not, will lose their job (just ask President Bush). The
truth is that we might have to do a lot of both before we get through
this problem.
In the end, it will be up to the voters. You all out there have to
support elected officials who will risk enough to lead; who will risk
enough to tell you the truth even though you might not want to hear it;
who will tell you both "yes" and "no" when the time is right to do so.
Will you support us if we decide that Your Issue (whatever it is) is just
not going to be a City Priority, considering everything else which is on
our collective plate? If you don't get your variance, can we still talk
about affordable housing? It's up to you.
Change is in the wind. We can leverage it or it can crush us. We still
have a chance to pull this all together. But, the longer we wait, the
fewer options we have. It won't be easy; it might not be pretty and many
of us stand to lose in the short term for the sake of a solid, stable
city in the future. Shall we at least try?
"First ponder, then dare." H. von Moltke.
Barret W.S. Lane
City Council -- Ward 13
Minority Leader
