Dwindling reserves an ’inherited decision'

Amid talk of a looming 16 percent to 20 percent property tax increase to shore up the city of Grand Island's cash reserves, many wonder why the existing reserves were spent so low.

"When you assume office, what you inherit are the many decisions made before you," said Jay Vavricek, former Grand Island mayor.

During Vavricek's term from December 2002 to December 2006, the cash reserves dropped from an all-time high of $14.7 million in 2003 to just less than $6 million.

Without drastic change, the reserves are expected to be at $2.5 million for the start of the 2008-09 fiscal year, which will begin on Oct. 1. Ideally, they should be around $4 million to $5 million, said David Springer, the city's finance director.

"You inherit those decisions," Vavricek said. "And the many decisions are personnel related, collective bargaining, union agreements, projects. The biggest source of expense, as with any business, is personnel and benefits."

Besides the people expense, Vavricek said he also inherited some costly projects that the built-up reserves were meant to fund in a "planned spend-down." Most notable were the South Locust/Interstate 80 interchange and the Wood River flood control project, for which the city is paying off $9 million in bonds through 2017.

Springer said the widening of Capital Avenue was another major planned expense to be covered with the built-up reserves.

Former Finance Director Chuck Haase said the reserves were also being built up to gain favorable financing for two potential major projects -- a new power plant and a new wastewater treatment plant. Neither of those projects has come to fruition.

What did come to fruition along with planned expenses, Vavricek said, were some unfunded mandates -- unplanned expenses.

"Those include the Heartland Events Center and the voter-mandated LB840 program," Vavricek said.

The city put $7.5 million into the events center and $750,000 a year into the economic development program.

Vavricek said he wasn't necessarily "comfortable" with the drawdown of reserves during his term, but the city had committed to it. The city had even been ordered by the state to draw down its "excessive" reserves from $14 million, which was nearly half the city's $30 million general fund budget.

But the trend of the cash reserve drawdown continued even as Vavricek left office.



Unsustainable spending

Current Mayor Margaret Hornady said she has inherited an unsustainable spending pattern that Vavricek started.

"We inherited a major challenge to keep up with all the new projects," Hornady said, citing the new library, Law Enforcement Center and fire station started during Vavricek's term.

Vavricek said all three of those projects were voter-mandated. He said he added very few city employees during his term -- and even cut some. He recalled only one major expense that he and the council committed to without a voter mandate -- the northwest flood control project.

Nevertheless, the new projects will take their toll, Hornady said.

"They may have been voter-mandated, but the timing of them wasn't," she said.

Springer said the new projects should have been phased in over time.

"One of the problems is the prior administration took on too many projects too quickly," Springer said. "We built the library, the fire station and the Law Enforcement Center all in a space … where they were concurrently in process."

The city's debt load has doubled from about $11 million in 2003 to $23 million now, he said.



Lowering the levy

The expense problem is complicated by what Hornady, Springer and City Administrator Jeff Pederson said was an unfortunate cut in the city's revenues.

Vavricek said the city's property tax levy was lowered twice during his tenure because of two things.

First was the passage of a half-cent sales tax increase in 2004 after voters were promised property taxes would be lowered. Property taxes were dropped in 2005.

Second, there were record new construction and valuation increases. Vavricek said it was necessary to city integrity to lower the levy during such record growth. He vetoed the council-approved property tax levy in 2006.

"He vetoed it with no word of explanation whatsoever," Hornady said. "You tell me that wasn't a gambit for running for his proposed write-in campaign for mayor (in 2006)."

"The city administrator and the finance director had both advocated for a tax increase or at least to stay at the 25 cents" in 2006, Springer said of the levy of 25 cents per $100 of valuation. "His change of that at that council meeting was unknown to us."

It caught the council so off guard, Hornady said, that the council didn't consider a veto override.

Hornady said the levy cut from Vavricek's veto was too big in conjunction with the reduction in the levy made just after the half-cent sales tax passage.

"The promise on the election was that half the money collected on the half-cent sales tax would go to reduce property taxes. More than half was taken," Hornady said.

Applying half the city's new sales tax to property tax relief would have meant a 2005 city tax levy of 0.27500 -- or 27.5 cents per $100 of assessed valuation -- instead of the 0.2500 for which Vavricek and then City Administrator Gary Greer advocated.

"I didn't want to go below 0.27500, but that was really the city administrator who did that," Springer said.

Springer said the city council was never informed of his own recommendation that the property tax levy in 2005 needed to be at 0.275000 and shouldn't go below that.

Why?

"Because the city administrator didn't tell the council," he said.

So how is the city council to make good financial decisions when it can't hear the recommendations from its finance director?

"Isn't that a good question," Hornady said. "This one certainly went by me (as a 2005 council member)," she said.

Had the city set its property tax levy at 0.27500 after the 2004 passage of the half-cent sales tax and kept it at the 0.27500 level through the present, the city would have an additional $2.75 million in the bank right now, Springer said.

That's enough that a property tax increase wouldn't be necessary to restore the cash reserves to the $4 million to $5 million level deemed to be fiscally responsible.



Who's responsible

So who's to blame?

A mayor doesn't vote on the budget. The council does.

Hornady herself voted in favor of many of the budgets supported by a drawdown of the cash reserves.

"The Capital Avenue and South Locust and Wood River projects had been on the boards for so long, and we built up cash reserves in anticipation of the drawdown," she said. "What we maybe didn't anticipate are some other things."

Only Councilwoman Joyce Haase and the late Councilwoman Jackie Pielstick cast no votes against the budget in the last six years. Both cited concerns with the drawdown of the cash reserves.

The budget problems are a big reason Joyce Haase isn't running again.

"I'm too frustrated to continue on when no one takes it seriously," she said. "“We don't stick to a budget. I don't see a plan -- a financial plan. Where are we going?"

Haase's husband, Chuck, said that when he was finance director, he had to follow the city's fiscal policies -- about 20 policies established about 20 years ago.

He recalled one of those policies being spending cash reserves on a one-time expenditure or capital projects, not day-to-day spending. He thinks that policy may still be in place but is not being adhered to.

"You have to have revenues and expenses match," Chuck Haase said. "The city's current service level does not appear to be sustainable."



Lack of information

Councilwoman Haase believes a big part of the problem has been educating the council -- particularly new council members. She recalls when more information flowed from city administration to the council.

"I'm just waiting for the collision, but I'm just one. I can't change it. There's so much for people to understand," she said. "(City) employees don't have a concept or a care about what shape we're in. We need to weed out to what we really, really need."

Despite the current tough financial shape, the city's spending hasn't been for naught. Hornady points out that there are new assets for the money spent.

Additionally, the city does have about $1 million to $2 million of cash sitting in Lincoln in the form of sales tax dollars collected that haven't yet been remitted back to the city. That could serve as a cash fund of sorts in the event of an emergency, Springer said.

Springer tossed out the likelihood of a 4-cent to 5-cent per $100 property tax levy increase at the council's June 17 meeting. Each cent would raise about $240,000, he said.

Even with a 5-cent hike -- putting the city's levy at about 28 cents per $100 of valuation -- the rate is still one of the lowest in Grand Island's history. It's a far cry from the 70-cent levy in 1990 and even the 37-cent levy held constant through the late 1990s through 2003.

Grand Island's city property tax levy is also one of the lowest in the state. Hastings is at 47 cents. Fremont at 35 cents, North Platte at 49 cents. Bellevue is 55 cents. The nearby communities of Kearney and York are also low -- at 15 cents and 14 cents, respectively.

"We've been almost 18 years without a tax increase, but our costs have risen," Springer said.

The city's three largest departments -- police, fire and streets -- also rely heavily on fuel, which has taken substantial price increases.

Vavricek said Grand Island's property tax cost is a good value for the fire protection, streets, police protection and parks taxpayers receive.

"Even if it increases, city services are an outstanding bargain," Vavricek said.

"The bigger problem is we're spending more than we take in," Springer said. "That's due primarily to personnel costs, which are 70 percent of our costs."

"Plus it's a growing community. Service demands have not plateaued, and government needs to be responsive to that," Pederson said.

It's a balancing act that Pederson, Springer and Hornady said they are committed to solving -- with the full knowledge and assistance of the city council.

"I have no idea what we're going to do," Hornady said this week from the mayor's office in City Hall. "We haven't figured it out yet. Of course, I'm concerned about it.”