The City Council tonight saw last Monday's 4-3 vote on the FY2009 reversed, with the Council -- in a fit of rhetorical dispute -- decide to maintain the planned spending levels while reducing the proposed tax rate to 54 cents per $100 of valuation.
The vote will result in a drop of the fund balance below the 12% floor set as the City's minimum goal, by almost a full percentage point, in a move that the City's interim finance director described as a step towards "going to hell in a handbasket."
This evening's budget discussions come after an interesting few days of lobbying and arm-twisting, if the N&O's report is anywhere close to the mark (and we suspect it is.) Bill Bell does not often find himself on the losing side of a vote, particularly one on a topic as momentous as the budget.
All of which made tonight's the most divisive session since the departure of Thomas Stith from Council after last fall's election.
More troubling still, the divisions fell along racial lines -- lines that run accidentally by race, in some ways, generally reflecting the long-term and newer members' different views. Yet the discussion often brought up hard issues that were literally black and white in color.
After the consent agenda (to be covered in a separate post), the Council turned to a budget discussion that was significantly more divided than the typical discourse.
Baker referred to "a number of discussions since the ninth [of June]" around the budget proposal, leading Mayor Bell to lead off the agenda item with his concerns over the tax rate, emphasizing again his desire not to raise tax rates about 54 cents per $100 of tax value.
Bell came back to the undesignated fund balance of 12%, a savings account level well above what he claimed was an 8% recommended level (more on whether that's the right number later), and one around which there's been speculation is needed to maintain a AAA level -- though Bell pointedly noted that three different times going back to 2003, this balance had been allowed to dip below 12%.
More specifically, the Mayor noted that we've "vastly exceeded the fund balances that we've appropriated" due to unspent monies elsewhere in the coffers. "I would recommend that we fund the undesignated fund balance at an amount less than 12%, which would allow us to maintain a less than 54 cent tax rate," Bell said.
Not surprisingly, mayor pro tem Cora Cole-McFadden spoke up to support Bell's position, stating that "the tax burden should not be so great on our citizens. Many of the least among us do pay property taxes, and whatever we can do to lessen the burden, we should do that, and be more compassionate."
Cole-McFadden's comments were immediately echoed by Howard Clement, who noted the "economic uncertainties we all are experiencing" in calling for a "reasonable and less budensome" tax rate.
The million dollar half-cent question: would Farad Ali feel the pressure, and join the Council's senior members on the item?
Not so fast: Diane Catotti noted that she had a proposal to get to 54 cents in terms of a tax rate, one that wouldn't involve a drop below the 12% level.
Next up was Ali, who noted that he had "just today" received information on the fund balance level needed to maintain the AAA rating, and that the balance would just be one portion of it. He noted that in 2006, we met over 16% funding for the fund balance; in 2007, 12.9% was met instead of 12%.
In 2006, budget director Bertha Johnson noted, the extra funds came from a new accounting system involving many closed-out purchase orders, leading to the extra funds being used to balance out the 2007 budget. "There's a big difference between what we project out for multi-years... The real number is the number the auditors come in, and they verify in our [annual financial report,]" Johnson added, noting that changes in tax rates and revenues impact the actual levels collected.
Ali noted that we can't project the actual undesignated fund balance until the auditors arrive, and noted -- through a dialogue with Johnson -- that we'd exceeded our projected fund balance by a significant amount. An amount significant enough, from the sound of Ali's questioning, to justify dropping below 12%?
Folks, this ain't the Olympics -- but it sure sounds like someone's on the diving board, preparing for a backflip.
"Typically departments do not spend their entire budgets," Johnson noted, though she did point out that this year's budget did include a 1% across-the-board cut for every department, lessening perhaps the chances of having such a surplus left over this year as in past years.
Ali asked what would happen if the fund balance was dropped to 11.5% -- wouldn't there still be a chance that we'd have a balance reaching 12% during the year? And Ali noted that the excess that came up between the projected and actual fund balance, assuming a maintenance of 12%, was used towards capital projects or balancing future years' numbers.
"It is not the fiscal discipline we need at this juncture," intoned Eugene Brown in response, warning about a fund balance cut -- for reasons he noted ranged from the uncertainty of the upcoming lacrosse suits, to the rise in foreclosure rates raising the risk of lower tax collections.
"Where can we find this? We might as well put it right out on the table, folks. Eureka! We have found it," Brown said, noting a "last-second" addition last fiscal year of $1 million for planning a swimming pool at Walltown.
"Now this is a pool that this Council has yet to agree upon," Brown said. "Indeed, we are now spending cose to $10 million on this rec center, which even at that prive will make it one of the most expensive in the Southeast, coming in at ... around $400 a sq. ft.," Brown added, while stating that a pool could add an additional $7 million to the tab.
"Again, my colleagues, this is a million dollars in pay-as-you-go money -- which means we can use this to save $1 million, and reduce our tax rates for this year. This is a pool we have not voted upon. This is a pool that we do not have the money to build," said Brown.
Brown's comments met with significant applause from the floor, interestingly enough.
Bell started to move the item to a vote, but Cole-McFadden came back with a pointed question as to how the 1% reduction would impact youth programs. "It is not fair to penalize them and still pay exorbitant salaries, and whathaveyou, and they suffer."
Baker responded that the City Manager's office was targeted for a 1% cut, which included the youth programs, though the manager emphasized that most departments should be able to cover this through their vacant salaries from unhired positions. The Office of Youth would be impacted by just $3,000.
"I'm very uncomfortable" with that number, Cole-McFadden replied.
Bell came back to Brown's point. "I think this Council needs to come forward ... If the majority of this Council does not want a pool at Walltown, then I would agree" there's no need to spend money planning it, Bell said. "If in fact you don't want the swimming pool, you need to go ahead and vote and say, we don't want the swimming pool."
"But I'm not going to be in support of a motion that takes away planning dollars" when no one has made a decision whether to build the pool, Bell said.
Catotti called for "a broader discussion" for the project, given that there's no money in the capital plan for a pool. "If we were to defer money for design at this point, shifting it for one year, we could have that broader conversation." (Catotti's answer seemed to be an interesting parry to Bell's challenge to Council, sidestepping what would be a very unpopular vote.)
Baker responded to another question from Catotti, noting clearly that there didn't seem to be support any longer for the tax rate supported 4-3 at last week's meeting.
Catotti quickly reminded the audience that Council had just authorized almost $7 million for the Walltown center's construction. "The question is about the pool, an unfunded item."
"For years... communities that have been perceived as serving a predominately black population" have been underserved, a visibly angry Cole-McFadden responded. "They... were neglected for years and years. Not just Walltown, but other black communities. We owe them, to put faith in at least doing this pool, put this design out there. We need to stop this going back to the 30s, 40s, 50s. This should be a new day."
$1.5 million is now the target, Bell noted, given the $1.25 million that would need to be cut to get the tax rate to 54 cents, plus a quarter-million dollars for the warrant program.
Mike Woodard piped up, noting he was feeling like Arthur Dent, the hero from "The Hitchhiker's Guide to the Galaxy" -- a reference to the protagonist finding the answer to life, the universe and everything was 42 (an unusually geeky reference for this particular Council.)
"This conversation tonight is a lot like Arthur Dent's search. We're looking for the answer to what our budget should be," Woodard said. "If we're talking about our budget tonight, all I'm hearing is that we're getting to one number -- 54, or 54.57. We've lost the search for the priorities."
Woodard noted that the Walltown rec center was on the City's capital plan since 1954, long-delayed, and it was "right" to build the rec center. "I fought for it in the 2005 bond referendum," he added. But he noted the Council had not taken the time to discuss as a body whether to support the pool.
"Would you hire an architect to design your house, if you didn't have the funding [to build the house]?" asked Woodard.
Woodard called for a one-year delay in planning the pool, until this could be discussed in more depth by Council.
The City Councilman and rumored '09 mayoral candidate emphasized the City's fund balance number wasn't an "inside City Hall" item, but instead Durham's core savings account, noting that the ice storm a few years back required use of that savings.
"It should not be used as a lever or a pressure value to meet a certain target that was disclosed at the eleventh hour," Woodard warned, implying that not all Council members were privy to the discussion on the fund balance.
Budget director Johnson noted that two ordinances were in place in the budget -- one that reflected last week's vote, another which would bring the tax rate to 54 cents while preserving all spending, including the Walltown rec center.
Bell noted that the priorities, including the Walltown planning piece, weren't discussed at the last priority meeting. "That was a priority two weeks ago. Why isn't it a priority now?" said Bell.
"We've proven in the past that we've had undesignated fund balances of 10%, 11%, even 12%, and we've managed," said Bell, noting that quarterly budget reports could allow for cuts along the way if needed. "I'm not going to try to lead the public to believe that if we suddenly reduce the fund balance... that it would be irresponsible, and we'd be going into the savings. I'm suggesting that we give [the taxpayer] some relief," Bell said, a comment met with applause from the audience.
"People are getting an increase simply because of their revaluation," the mayor reminded the audience, referring to individuals whose properties increased in value beyond the average level.
"We all agreed on what the priorities were. We didn't agree on how to fund it," he said. "Don't try to pull blinders over people's eyes. You pull this money out" and it'll never get back in, an angry Bell said.
"To be fair, we have talked about priorities since January," Woodard responded. "The discussion about the fund balance, to me, that's a priority. But the discussion about that came out last Monday at 2 o'clock, five months after we started talking about priorities."
"In fact, the majority vote last Monday included keeping the fund balance at 12%, and keeping" the funding for the Walltown pool, Woodard reminded the Council. Woodard warned that major corporations have lost their jobs in recent months "because they guessed wrong, they took risks they shouldn't have taken."
"We've heard bits and pieces of this conversation [about the fund balance], but I've heard numbers tonight" that the Councilman has yet to see, Woodard warned.
Bell responded that 12% had been a goal, but not one that had to be an absolute, saying it had been a target for city staff, nothing more. "We have to go based on experience, and that's what I'm going on," the mayor said.
Ali interrupted with a question for budget director Johnson: What are the factors that go into making the determination of a AAA bond rating?
Interim finance director Keith Herrmann came to the podium, starting with a crack that he was reminded of a Father's Day card he received yesterday: "You're the world's greatest dad, but my frame of reference is limited."
Herrmann reminded the Council that the City's target truly was 15%, but with a floor of 12% fund balance. The median such level for the other AAA rating among other N.C. cities were 14.3%; 14.7% is the national average, with Durham's 12.9% level dropping the whole state average.
Durham also received warning letters from rating agencies when the budgeted fund balances dropped near the 10% level earlier in the decade, after the State made an unexpected change in the approach to tax revenue sharing. Moody's warned that "continued reduction in reserve levels, particularly to fund operating expenses" was not appropriate for a AAA rating, while Fitch expressed that "corrective actions" would be taken, for instance.
"My takeaway is that we got away with it once before, when we lost state shared revenue.... We bounced back fast enough. Last itme we got beat up pretty bad for a couple of years afterwards," said Herrmann. "There are ramifications for doing this," Herrmann added. "There is no excuse... The policy is, do we have the will to stick it out."
"Patrick warned me not to say the following words -- going to hell in a handbasket -- but this would be a huge red flag," Herrmann warned. "It is impossible to predict what the cons would be , but the cons are a credit rating downgrade" that could lead to an expensive increase in the cost of debt.
Ali noted that he would "stand beside you" with the comments, but asked Hermann to address the core question. Hermann noted that there were three other factors to the rating; among these, Durham's tax rate collection was very high, 98%, to Ali's prodding -- with this being another factor in the rating. Ali asked for the debt coverage ratio
"You named four things I've heard about," Ali said. "They have certain ratings for AAA levels... and Durham hits all of them." Ali said that the fund balance warning is "in a vacuum," because Hermann hadn't spoken to the other three. It was like missing "one piece of a four-legged horse," Ali said.
"We got three legs that are dong well, so I want to make sure we gain understanding as a Council," Ali said. Are we at good, great or out-of-this-world on the others? Herrmann noted he was unprepared to answer the other questions.
"I take Keith's message very, very seriously," Catotti responded, and warned that the City was also pushing its debt coverage levels as well. Durham has also moved further into certificates of participation in this year's budget, she added.
Collection rates are also falling, Catotti noted, due to foreclosures and economic challenges. "I heard the message loud and clear we are supposed to be" rebuilding the fund balance, Catotti said, "not going backwards."
"Why would we take the risk? I'm just a bit more risk-averse than the rest of you," a now-agitated Catotti responded. "I share the concerns for our less-fortunate citizens," she said loudly. "I take that very, very seriously," noting that for a $50,000 home you're talking a $2.50 annual impact.
Catotti added that this discussion was happening because the Council couldn't move away from 54 cents last week while trying to increase salaries for public service staff and neighborhoods. "I just think it's really important that we keep all this in perspective."
"I don't think we should be [accepting this proposal] to save people $10," Catotti closed.
Cole-McFadden asked how much money accumulated in lapsed salaries in the past fiscal year, and what happened to those dollars. "Some things are just done because the money is there, and we don't see all that. If we decrease that fund balance" we would see the fund balance rise back up as long as Council kept a close eye on spending, she said.
"If we watched what we're doing, City Council, we'd have more than enough" to meet all the needs.
Clement noted that the Council had brought the fund balance down near 10% for several years, yet the fund balance "without us monitoring" worked its way back to 12%. "My point is, fearmongering is something that I abhor. I see this happening on the national scene, and clearly I don't want this to happen here in Durham."
"This means that basically, we are now or will be trying to win the Triple Crown on a two-legged horse," Brown replied -- noting the debt service levels and fund balance levels were both at risk. He thanked Herrmann for his candor, asking the simple question, "Why go there?"
"It may not have an effect on our bond rating. But I don't feel comfortable making that argument," said Brown, in a rejoinder to Clement.
"I'm going to be candid with everyone here," said Brown. "I don't think I'm the only one. I have forgotten about the $1 million we put away in the last minute, last year. I'm confessing that, right now. That's why I got rather excited."
"I support a recreation center in Walltown," Brown said. "I think the neighborhood is deserving. But we have talked about this for five years," he added, noting the Council had built "a blueprint" for how not to manage projects like this.
"You build a hospital for $400 a sq. ft.; you don't build a recreation center for this," he added.
Brown added that the City is thinking of buying the old YMCA on Trinity Ave. owned by Duke. "That facility... has an existing swimming pool, and it's five minutes from Walltown. We cannot give every neighborhood that wants it, just because they want it, a swimming pool."
Brown reminded the audience that Lyon Park has received a rec center, with $10 million going to Barnes Avenue for 30 single-family homes. "This rec center [if pool is included] will cost more than all of this," he said. "We are addressing the issues in our inner cities, in neighborhoods that have been overlooked. But that doesn't mean we should overlook issues of fiscal responsibility."
"I don't want a tax increase, but this is something we have to do," Brown said, pointing to three reasons: the weather and the drought driving the need for investment in water supply and reservoirs; an "unprecedented" fuel price increase; and parity in pay for City employees, to preserve them in a "competitive era."
"Raleigh is looking for 70 new police officers," said Brown. "For us to turn our back on you would be irresponsible," referring to the D.P.D. and fire officials in the audience.
Mike Woodard brought the discussion to a close by noting that the question of the fund balance shouldn't have been brought up on the night of the Council meeting. "We should have had thorough, complete answers, and much more analysis" than was had on the question.
He noted that supporters of the fund balance decrease called for trusting the experience of those suggesting it, responding that cautionary statements and credit reviews were the reply. "A no vote on this motion takes us down this path again."
Bill Bell called for a vote on Woodard's motion to support the budget as proposed last week, which passed 4-3, with Woodard, Catotti, Brown and... Clement (!) voting yes on the motion. A very confused Clement seemed unsure what just happened; Bell called for a new vote, which came back the expected 3-4 failure, with Ali flipping over to oppose the budget as proposed last week.
Ali then proposed a movement to vote for the proposal to lower the tax rate at the expense of a lower fund balance -- a motion seconded quickly, but met with a substitute motion by Woodard.
Woodard made the request to defer the $1 million in the Walltown pool planning for one year, which would allow the tax rate to come down to 54 cents (or close thereto) while preserving the fund balance at 12%, for a 54.2 cent tax rate.
Bell called a vote on the substitute motion; this vote again failed, 3-4 on racial lines.
The mayor brought the original motion back, which this time passed on a 4-3 vote, again on racial lines. The motion approved rolls back to a 54 cent tax level while dropping the fund balance below the 12% target.
The new fund balance? 11.08%.
Cutting the tax rate by reducing the fund balance is totally irresponsible. Brown, Catotti, and Woodard deserve credit for fighting this unwise move.
Durham's capital $$ is already being eroded by inflation of costs on endlessly delayed projects. That capital money is going to get a lot thinner when the credit agencies downgrade Durham's bond rating, making borrowing for bonds more expensive.
Does Mayor Bell pay any attention to national news, the economy, and financial institutions that have been hammered for making poor credit decisions? Durham may have gotten away with letting the fund balance slip in the past, but it is a different credit environment today. I am afraid Durham will pay dearly for the majority's short-sighted action on this budget. That AAA credit rating is nothing to fool with, but that is exactly what the Mayor has just done.
Posted by: Todd Patton | June 16, 2008 at 11:37 PM
Uh oh.
Posted by: Michael Bacon | June 16, 2008 at 11:44 PM
Raising question about important financial considerations (when it appears sufficient homework wasn't done in advance of the meeting about those issues) is fearmongering? That alone is very troubling, and the list goes on from there.
Posted by: Samantha E. | June 17, 2008 at 07:04 AM
This may be a fool's errand, but how can we Concerned Citizens communicate to the Mayor and Council how irresponsible this is?
Posted by: eah919 | June 17, 2008 at 08:53 AM
Just think of how boring Durham would be without the racial politics.
Posted by: Tar Heelz | June 17, 2008 at 09:09 AM
The quote above is from Bell, not Catotti:
"But I'm not going to be in support of a motion that takes away planning dollars" when no one has made a decision whether to build the pool, Catotti said.
Posted by: Diane Catotti | June 17, 2008 at 09:31 AM
This is the height of absurdity. There is no way they should lower the fund balance. Bad move. Bad Bell. Bad.
It is sad the argument seemed to come down to do we spend money planning a pool in a largely black community or do we tap our savings account. I can certainly see where the black council people would take the defensive about Walltown, but that doesn't excuse making a poor decision. The larger issue is about fiscal responsibility. Our Council was pretty good at this in the past, now we seem to be headed down a very hazy path. One wonders if the Council would have done this if Ken Pennoyer were still around. He seemed to have a good way about guiding council in their financial decisions.
Posted by: Adam | June 17, 2008 at 09:43 AM
Councilwoman Catotti: Thanks for the correction, my mistake -- now corrected.
Posted by: Bull City Rising | June 18, 2008 at 07:42 PM