Commmissioner's Introductory Remarks at Budget Hearing
[Editor’s Note: The following is an edited version of Mr. Young’s remarks at the beginning of the Board of County Commissioner’s FY 2012 budget hearing at Catoctin High School on April 5, 2011.]
On December 1, 2010, this Board of County Commissioners began its term in office with an $11.8 million budget deficit for Fiscal Year 2012 and with a $31 million base structural deficit. With the consent of the commissioners, a Budget Review Committee was quickly established.
The members of that committee were: County Manager Barry Stanton; Assistant County Manager Dave Dunn; Human Resources Director Mitch Hose; Finance Director John Kroll; and Budget Officer Mike Gastley.
They were instructed to identify and present to the commissioners cost saving measures to eliminate the shortfall and reduce the structural deficit without having to raise property taxes or either the urban or suburban fire tax. They were also told to work with the other county division directors and not to create any new fees. They were told to look at middle management and non-county required grants, and to work with – and communicate to – the Frederick County Board of Education our request to absorb one half of the county’s deficit.
We, as commissioners, are thankful and appreciative of this elected school board’s commitment to work with us to accomplish these goals without a request for a Maintenance of Effort waiver, as six other counties have done.
This was all done without fighting and arguing, or the “Church Street shuffle,” as it was called in years past. It was done by working together because as it is our budget, it is our deficit. Their contribution of half of the county’s deficit is a return of $3.2 million to the general fund.
This $448 million proposed budget is $10 million more than adopted last year. It does not consist of any pay raises or cost-of-living increases for county employees for a third consecutive year. We have eliminated 160 positions and downgraded another 15, taking us back to the equivalent work force of 2006. Of the 175 positions, 106 real people were laid-off (the other positions were already vacant).
Budgeted property tax revenue was off for the first time in recent memory, down by 2.36 percent, causing a reduction in property tax revenues of nearly $6 million. Budgeted income tax revenue came in higher than expected by 12 percent, or close to $16 million, as reported to us by the state comptroller’s office.
Now, the first question someone may ask is: “How do you have a proposed budget that spends $10 million more (next year) when you cut, reduced or eliminated 175 positions?”
Well, this proposed budget does have a reduction of 4.55 percent in salaries or $3.1 million, not including another $2.5 million in salary reductions from grant-related programs. However, benefits are up 19 percent, costing about $7 million, due to this board’s commitment to stay with the five year ramp-up of Other Post Employment Benefits (OPEB), which includes the retiree’s health contribution plan.
The county began to fund OPEB in Fiscal Year 2007 by pre-funding about $2.7 million. The original concept was to follow a five-year ramp up (20 percent per year) over the FY 2008 through FY 2012 time period. There were fluctuations in the funding levels from year to year due to budget considerations, with FY 2011 being under funded by about $5 million.
For FY 2012, the commissioners have committed to fully fund the final year of the five-year phase-in model. While the county could have saved about $4.6 million in FY 2012 by converting to an eight-year phase-in, this would have prolonged the ramp-up period and ultimately would have cost the county more money through the loss of investment revenue compounded at a lower rate of return. With the five-year ramp up now funded, the county can look forward to relatively stable OPEB contributions that should fluctuate only by changes in healthcare cost and the addition or reduction of employees.
There was also an increase in debt service of nine percent, costing about $3 million in additional costs in FY 2012. Additionally, due to a shift of responsibilities about two years ago from the General Fund to the Urban and Suburban Fire Tax districts, there was a more than $8 million impact. This proposed FY2012 budget returns $4.5 million from the General Fund as a cash contribution to the Urban and Suburban Fire Tax districts, balancing them for one year with no tax increase.
As you can see, we have serious problems and challenges in the Fire Tax districts for FY 2013, FY2014, and beyond. We have been living on fund balances for the past five years. This will have to be addressed within the next eight to 10 months.
This proposed budget does reduce Grant-in-Aid by 25 percent or $125,710. It still contains $377,131 in Grant-in-Aid contributions from the taxpayers to local non-profits. This budget reduces non-county agency funding by 50 percent or $179, 359. It still contains $179,360 in contributions to non county agencies from the taxpayers.
While we have relinquished the Head Start grant back to the federal government for a savings of over $2 million, Frederick County is still contributing the facilities rent-free. We went from 10 percent to seven percent of grant-funded employees with this management change. Even after this reduction, the county still has about 160 grant-funded positions that impact the General Fund.
While we did eliminate seven county-funded positions at the Department of Social Services, a state agency designed to assist our less fortunate citizens, we are still contributing around $800,000 in personnel costs to that agency, or 31 positions.
Frederick County is also still subsidizing Citizens Rehabilitation (Nursing Home) and Montevue Assisted Living (Nursing Home) to the tune of about $4.4 million in this proposed. This will have to be dealt with in the very near future to get it straighten out. The taxpayers of Frederick County can not be expected to subsidize a brand new facility at this level. A debate should be had of why we are even in this business.
We did not touch – or raid – the recordation tax of real estate for Open Space. Last year in adopting the current FY 2011 budget more than $4 million was transferred from this account to the General Fund.
So, you can see that the $10 million in additional spending is attributed to OPEB (retiree health care), balancing the Fire Tax, and our increased debt service – NOT pay raises or additional personnel.
While we did make some progress on the structural shortage in this proposed budget, we still have a serious structural deficit issue to deal with. In other words, we are still spending more than we are getting in recurring revenues.
Frederick County has been struggling to close a deficit in recent years, which takes into account all sources of revenues (current and one-time, such as fund balances) and expenditures.
What is more troubling is that the county has been facing a growing structural deficit since FY 2002. A structural deficit exists if the expenditures exceed the current operating revenues (mainly from property and income taxes), without inclusion of one-time revenue sources such as prior years’ fund balances or transfers from other sources.
One-time revenue sources should be used for one-time expenditures, such as a cash infusion into the Capital Improvements Program (CIP) for a specific project.
Though there have been one-time designations of funds for specific CIP projects and Frederick County Public Schools needs, most of the fund balance has been used to balance the on-going needs. While the use and recognition of a part of the fund balance is acceptable, the perennial use of the entirety is not. This board is focused on reducing and ultimately eliminating this structural deficit to solidify the future fiscal health of the county.
We believe this proposed budget points us in the right direction and starts to restore fiscal sanity in Frederick County.
This proposed budget does take into account a $20 million fund balance – not a surplus – from the previous year, which is not unusual. However, fund balances should be use for one-time expenditures and not recurring expenditures, which practice we are working to correct.
This proposed budget may need to be tweaked as additional impacts come from the State of Maryland as the annual General Assembly session comes to a close. We are prepared to deal with any impacts if necessary.
With this proposed budget Frederick County still maintains its strong bond rating:
Fitch AAA (From AA+ due to recalibration)
Moody’s Aa1 (From Aa2 due to recalibration)
Standard & Poor’s AA+
This is just the start as we have to get our financial house in order and work toward reducing taxes on our residents. If the people want lower taxes it can be done, but it will take tough decisions by the Board of County Commissioners. We are ready to make those tough decisions.