Sunday, April 12, 2009

Why did Toledo income tax decline 'shock' administrators

Today's paper has an interesting article attempting to address the huge budget deficit that officials claim has caught them off-guard.

The story praises two professors from The University of Toledo who were hired to provide an estimate of income tax revenue. When they finished their work, their estimate came in much lower than what the city finance office was projecting.

"City officials were caught off-guard by the new numbers.

"I think most of the council members were very surprised that their numbers would be that low, and the administration was clearly shocked," said Councilman George Sarantou, chairman of council's finance committee."

But WHY????

(SIDE NOTE: And just why does Toledo need to hire a couple of professors to do this? Isn't that the job of the Finance Department? And if the Finance Department was so off in their projections, why are they still employed????)

Anyone looking at the unemployment numbers, the temporary layoffs - and then the permanent ones, as well as the city's own actual income tax receipts for 2008 could have easily seen that Toledo was heading for a major problem.

Their 2008 budget contained many assumptions that never came to fruition (my questions about those assumptions are here) which had a negative impact on revenues.

Council and the mayor should have known that estimates of revenue based upon 12 months of certain operations (like monthly air traffic monitoring) would never achieve the projected totals if they only performed such operations for part of the year.

But they did not amend their budget to reflect this, even after being asked. Instead, they left the revenue numbers as submitted which meant they could spend more, since the budget for expenditures could be as high as the unrealistic revenue amount.

Last November, I made this post regarding the Mayor's proposed 2009 budget assumptions (in bold) and my thoughts on those estimates:

Revenue Assumptions:
Income Taxes are estimated to decline in 2009 approximately 2.09%, or $3,603,078 from the 2008 estimate, reflecting 2007 levels.

In 2008, Incomes Taxes were estimated to be 2.5% more than in 2007. Interestingly, 2007 estimates were 2.6% higher than in 2006. The problem is in current collections. According to the October Finance Committee report, as of September 2008, overall tax revenue to the city was down "nearly 6% from 2007." The only way to tell if this is a good projection would be to compare it to the 2007 final amounts.

The article also says that the primary reason Toledo is in this situation is the unexpected decline in income tax revenue at the end of 2008. But if their September finance report was correct, Council knew that as of September, their overall collections were down 6%.

Prior months reports showed similar declines, indicating a sustained pattern of failure to meet key revenue projections.

In January, I wrote:

"Last year I analyzed the projected revenue and raised all kinds of questions about the city's estimate of how much money would be received. My questions were never answered, but my concerns proved to be accurate. I'll go out on a limb and say the same thing will be true this year as well - that the city has over-estimated the revenue and will have some rude awakenings when they realize that their income is not meeting projections."


In fact, arbitrarily increasing the revenue amounts to cover planned spending seems to be an option the city considers valid:

"...from Bob Reinbolt, Mayor Carty Finkbeiner's chief of staff:

"He said the city's $6.4 million rainy-day fund would be applied to the 2008 deficit. Because $2 million of that was earmarked for the 2009 general-fund budget, the 2009 plan would need to be revised with more cuts, inflated revenue assumptions, or anticipated savings.

But even using the entire rainy-day fund would leave the city's 2008 budget $1.7 million in the red."(emphasis added)

I cannot believe they would even consider such a scheme, especially in times of increased unemployment, people leaving the city and business closings. What they're saying is that they may arbitrarily decide to just raise the estimated revenue in order to present a budget that is 'balanced' on paper.

Isn't that part of what got us into our current mess
?"


With all these available facts, why are they now claiming to have been surprised by decreased revenue projections? One can only speculate, but if they claim the deficit was something that could never have been anticipated, then they have no culpability for the problem.

If that is, indeed, the case, then they all need to go - council, mayor and the finance department. Toledo cannot afford to have such clueless individuals in charge if this is what we get as a result.

4 comments:

2Bn11FA said...

I have a question. I believe I heard on WSPD that the City of Toledo has an investment account(s) worth over $200 million buckaroos! Why?

if the City has enough revenue to set aside money for investing arent' they taxing people too much? if the City has enough money for a "rainy day fund" isn't the city taxing people too much?

it has always been my understanding that governments should be on par with Not for profit companies...they get what they need to operate and no more.

if I have $200 million and a $27 million hole in my budget...why not sell some of the investments and cover the shortage...at the same time making the personnel and program reductions necessary to avoid the deficit in the first place...then give the people of toledo back THEIR money from this "investment" account.

Governments must be made to understand that THEY have NO MONEY that isn't taken from the citizens first. This seems to be such a difficult concept for politicians to understand. it boggles my mind!

Maggie Thurber said...

2Bn - I'm not sure about any 'investment' account. I know the city has cash (like the float from when tax receipts come in but before they are expended) and that often is invested knowing that the cash usually isn't needed right away. This is similar to a sweep account where cash from a checking account is placed into an interest-bearing account overnight to generate income and then 'redeposited' back into the checking account in the morning for use by the client.

They also have grant monies and fund accounts to which they do not need daily access. Those are often invested.

The rainy day fund is highly recommended by all accounting standards in order to deal with emergency-type issues. If they didn't have one, they'd be cited by the state auditor. However, they've spend all of that for the 2008 deficit I believe.

Most of the investments cannot be sold because they are guarantees for bonds or as described above.

As for not making money, I'd agree with you. They should determine the least cost for the basic governmental functions and then have a tax that only gives them that much income.

However, government really doesn't work that way.

However, they do have real estate they could sell at fair market value - rather than giving some of it away for a mere pittance....

Hooda Thunkit said...

Maggie,

"(SIDE NOTE: And just why does Toledo need to hire a couple of professors to do this? Isn't that the job of the Finance Department? And if the Finance Department was so off in their projections, why are they still employed????)"

In my years of watching the City's actions, they tend to farm out tasks that should be done internally:

1. To provide cover for the employees, should the task somehow get botched.

2. So that they are free to disregard the outside opinion, if it does not agree with what they wish is to be.

Clearly duh mayer didn't like the low numbers projected because it would have put a severe crimp in his spending plans, so he used is own numbers.

I believe that the technical term for this is called "arrogance..."

Tim Higgins said...

Maggie,

What a surprise to learn that the people who hold the reigns of power and control the purse strings of government have no real clue as to the state of the local economy nor of the revenue to be generated from it.

I, like you, also think that it's wonderful that the city can count on information from paid consultants from UT that it undoubtedly should be getting from the Finance Department. Perhaps one way to help our numbers is to dismiss city workers surprised by what everyone else knew and maintain these consultants.

Perhaps next on the list of dismissals should be Mr. Reinbolt, who believes it proper to cook the books in order to balance them, something in the private sector that would get him some time in a jumpsuit.

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