City Tax Collection to Cover Expenses

INTRODUCTION

Financial Condition

Financial condition is defined as the ability of a local government to balance recurring expenditures with recurring revenues, allowing cities to provide necessary services on a continuing basis. A city in good financial condition can maintain adequate service levels during economic downturns and is able to develop resources to meet future needs. In contrast, a city in fiscal stress struggles to balance the budget, experiences service disruptions and has limited resources to finance future needs. Maintaining a sound financial condition requires governments to adjust to long-term changes in community needs and develop the ability to plan.

There is no single measure that fully captures the financial condition of a governmental entity therefore it is necessary to take a comprehensive approach that focuses on both external and internal fiscal factors.

Financial Indicators for a Fiscal Condition Analysis

There are over 40 standard indicators that can serve as an evaluation basis for the financial condition of a city. The indicators used in this course will be as follows:

Revenues

· Total Revenues

· Total Revenues per Household

· Intergovernmental Revenues as a Percent of Operating Revenue

· Property Tax Revenues

· Sales & Use Tax Revenue per Household

· Restricted Revenues

Expenditures

· Total Operating Expenditures per Household

· Fringe benefits

· Fixed Costs as a Percent of Operating Expenditures

· Debt per Household

This fiscal condition analysis, however, will focus only on the five (5) most important financial indictors:

Revenues

· Total Revenues

· Property Taxes

· Sales Taxes

Expenditures

· Operating Expenditures

· Personnel Costs

Adjusting for Constant Dollars

Adjusting for inflation converts current dollars into constant dollars. The conversion from actual dollars to constant dollars allows for analysts to consider the appearance of growth that may be due to inflation. When dealing with dollars over time:

Before entering the budgeted amounts in the excel spreadsheets, you need to convert each dollar amount to constant dollars. Due to inflation, the purchasing power of the dollar changes over time, so in order to compare dollar values from one year to another, they need to be converted from nominal (current) dollar values to constant dollar values.

The easiest way to do that is to use an inflation calculator, such as the US Inflation Calculator found in the assignment resources.

REVENUE INDICATORS

Revenues determine a city’s capacity to provide services. Important issues to consider relative to revenues are growth, diversity, reliability, flexibility, and administration. Under ideal conditions revenues will grow at a rate equal to or greater than the combined effects of inflation and expenditure pressures from new and/or expanded services. They should be sufficiently flexible to allow necessary adjustments in response to changing conditions. They should be diversified in their resources so as not to be overly dependent on residential, commercial, or industrial land uses or on external funding sources such as federal grants or discretionary state aid. User fees should be regularly evaluated and revised to cover the true cost of providing services. Analyzing a revenue structure will aid in identifying the following types of problems:

• Deterioration in revenue base

• Internal procedures or priorities that may adversely affect revenue

• Over-dependence on obsolete or external revenue sources

• User fees that are not covering the cost of providing services

• Changes in tax burden

• Inefficiency in collection or administration of revenue

Total Revenues per Household

Description: The warning trends that should raise a red flag for the city are decreasing net operating revenues per household. This was largely because of an increase in the county property taxes collected. Also the DPS and the Municipal Court substantially increased their revenues. And finally the city received income from a federal grant, which it had never received before. The period between 2018 and 2020 shifted back to normal, and this is why one sees another slight decrease.

Warning Trend: Decreasing total revenues per household.

Property Tax Revenue

Description: Property tax revenues are conditioned on ownership of property and measured by its assessed value. The warning trend suggests that a decline in property tax would be harmful to a city’s operation. Maumelle’s property tax revenues have been increasing every year. The pattern of increasing property tax revenues should continue in future years due to growth and Maumelle establishing a charter school.

Warning Trend: Declining or negative growth in property tax revenues

Sales Tax Revenue as Percentage of Total Revenues

Description: Sales and uses revenues are revenues from taxes that have a taxable base which is expected to reflect general economic changes in the short-run. From 2019-20 the amount of sales and use revenues increased.

Warning Trend: Decreasing amount of sales revenues as a percentage of total revenues.

EXPENDITURE INDICATORS

Expenditures are a rough measure of a city's output effort. Generally, the more a city spends, the more service it is providing, or it is providing higher quality service however increased expenditures can also be a sign of problems in ineffective budget control or excessive growth, decline in personnel productivity and growth in services not supported by revenues.

Most cities are required to have balanced budgets; however, there are a number of subtle ways to balance an annual budget yet create long-term imbalances. Some of the more common ways are to use bond proceeds for operations, defer maintenance, or utilize temporary cuts from year-to-year. In each case, the budget remains balanced, but in the long-term significant deficits could be developing.

Ideally, a city will have an expenditure growth rate that does not exceed its revenue growth rate and will have maximum spending flexibility to adjust to changing factors. A review of city expenditures can identify deficiencies should they exist such as:

• Excessive growth of overall expenditures as compared to revenue growth

• An undesired increase in fixed costs

• Ineffective budget controls & models

• Excessive growth in programs that create future expenditure liabilities

Operating Expenditures per Household

Description: Operating expenditures per household reflect changes in expenditures relative to changes in population. Increasing per household expenditures can indicate that the cost of providing services is increasing at a pace beyond the city’s ability to pay. Operating expenditures have increased year-over-year three years running from 2018-20.

Warning Trend: Increasing operating expenditures per household.

Personnel Costs per Household

Description: Employee wages and benefits can represent a significant cost to a city. Some benefits are mandated such as FICA, workers compensation and unemployment. Others, such as health insurance and retirement are discretionary.

Warning Trend: Increasing benefits as a percent of salaries & wages.

Concluding Remarks

The data presented shows that the number of municipal employees per household is actually decreasing in Maumelle and has been decreasing since 1996. This trend displays an increase in effectiveness and efficiency in city service, to operate at the same level of service, despite a decrease in the total number of municipal employees per household.

The data for each indicator is the same as the warning trend except in the case of personnel costs per household. The data for each indicator compares to other indicators favorably well, as the organization shows that it is able to efficient and effective.

The city is not facing decreasing revenue per household, so the warning trend is not in play there. Property tax revenue has declined from 2018 but is up from 2019, so the trend is unclear from just these three years. Sales tax revenue rose in 2019 but declined below 2018 levels in 2020, which is a worrying sign, and the city should be worried that not enough money is being spent in the city. Operating expenditures have also risen, which is a warning trend.

Increasing Operating Expenditures per Household (OHE) is a warning trend for the city. OHE represents the total amount of money spent by a city on operating expenses divided by the total number of households in the city. This figure can be used as an indicator of a city's financial health. When OHE is rising, it means that the city is spending more money than it is bringing in. This can eventually lead to financial problems and even bankruptcy. There are several reasons why OHE might increase. One reason is that the cost of living in the city is increasing. This means that the city has to spend more money on things like salaries, benefits, and services (Kushner & Ogwang, 2017). Another reason is that the city might be losing revenue due to factors such as a decrease in sales tax or an increase in property taxes. Finally, the city might be experiencing an increase in expenses due to unexpected costs such as natural disasters or lawsuits. Whatever the reason, increasing OHE is a warning sign that a city's finances are not in good health.

Ultimately, a city's financial health can be gauged by many factors, but one important metric is the percentage of salaries and wages that are paid out in benefits. If this number begins to increase, it can be a sign that the city is struggling to meet its financial obligations. This is often due to a decline in tax revenue, which forces the city to cut back on services or raise taxes. However, this can also be a sign of financial mismanagement, as benefits are often one of the first areas to be cut when budgets are tight. As a result, increasing benefits as a percent of salaries and wages is a warning trend for a city's financial health (Interlante, 2022).

Additionally, a city's financial health can be decreasing amount of sales revenues as a percentage of total revenues. This is because sales tax is one of the most important sources of revenue for cities, and a decrease in sales tax revenue can have a significant impact on a city's budget. In addition, a decrease in sales tax revenue can also lead to a decrease in property tax revenue, as properties become less valuable when there are fewer people buying homes and businesses in the city (Otiso et al., 2013). As a result, a decrease in sales tax revenue can have a ripple effect on a city's finances, and it is important for cities to monitor their sales tax receipts closely (Jenn et al., 2015).