June 9, 2009
City Council President Michael J. Hart & Members of the City Council
RE: FY10 Budget Message
Dear Mr. President and City Council Members:
Introduction and General Budget OverviewEnclosed, please find the FY10 Budget. This budget is balanced with no request for an override or debt exclusion. Although our financial situation can only be described as grave, the financial situation of our constituents is even graver. I do not believe that a Proposition 2 1/2 override or debt exclusion would pass this year.
This budget, as you can see from the section below marked “Budget assumptions” is based upon our very best estimate on how much State aid will be included for the city of Haverhill in the pending State budget. We estimate that State aid will be $6.4 million less than last year, counting the special earmark we received last year for the Hale debt. This earmark that was cut this year. However, we do not yet have the final State aid figures, and this budget could change. This budget should be considered flexible.
If State aid was the dark cloud on the budget, the one bright spot is that local real estate taxes continue to improve, despite the recession. Local real estate taxes are up by about 3.7%, because of the 2.5% increase allowed by Proposition 2 and half and because of the continued expansion of the tax base.
I am submitting my budget only after a new round of talks with the unions concerning health care concessions. I have repeatedly warned that unless there were health care changes, we would have no choice but to make cuts and have layoffs. I continue to urge our unions to work with us to change our health care system to restore some of the jobs we are forced to cut.
I believe in leadership by example. Accordingly, this budget includes my staff and I taking pay cuts. I have also cut my own travel allowance—the Mayor’s office is not immune from cuts. The funds saved by cutting my pay cut has been applied to the library budget.
Along with the budget, I am also submitting a plan to restore city services, increase our reserves and preserve long-term fiscal stability in our city. Parts of the plan require legislative approval, and parts require the approval of our unions.
General OverviewThis year’s total city budget is $144,511,246. This represents a decrease of $1.4 million from last year, a 1% total reduction from last year’s budget of $145,584.331 ($146,941,514 prior to 9C reductions).
Total budgets do not tell the total story. The real story is in what is known as the “operating budget”; that portion of the budget which is the actual portion of the budget to fund the activities of the city. The operating budget does not include debt, pensions, or health care costs.
The non-school operating budget is down $1.6 million, a 5% reduction.
It is important to understand that our fixed costs for items like health care (up by $1.2 million), utility costs, built in step increases, longevity pay, pensions etc continue to go up. When State aid and revenues are down, but fixed costs go up, there is no alternative but to either drain reserves, cut programs or both as this budget does.
Every budget in the city is cut except schools, where Federal stimulus money has resulted in the education budget being up, not down, and veteran’s services where an increase is mandated by law.
The budget cuts are driven by a dramatic cut in State aid, easily the largest cut in State history.
To meet the total reduction in revenues, largely driven by drastic cuts in State aid, we are taking the following steps:
Health Care ConcessionsSadly, I have not assumed any further health care concessions in the budget other than the concessions agreed to in previous contracts. (Police agreed to pay higher co-pays a year ago in exchange for a pay raise.)
Changing the co-pays and deductibles to match the program offered by the State would save as much as $1 million a year, divided between the city and the school budgets. That $1 million would save jobs, and help us to provide our citizens with the critical services they need. All municipal unions were told unequivocally that without health care concessions there would be no choice but to have layoffs in this budget.
I have indicated to every union that the savings from any concessions made on health care would be used to save jobs in their union group. Thus far, no union has agreed to further concessions, (beyond those made a year ago by the police and library unions), but talks continue. - Footnote-2
We have assumed State aid in the amount of $49,292, 015. This is less than the amount which we extrapolated from the House of Representatives budget but more than the amount from the Senate Ways and Means Committee. These estimates are subject to change.
Local Option Taxes
There are proposals in the legislature to give local communities local option taxes on telecommunications equipment, hotels and meals. The only proposed local option which could add any significant revenue to the budget is the meals tax. I have not assumed that revenue in the budget.
There seems to be a widespread consensus in the legislature that we will have the local telecom tax for poles and wires only, but not for equipment. This would not add any additional funds to the budget.
There was an appellate court case which already gave us the right to tax poles and wires and we have been doing so. I have made the assumption in the budget that we will be allowed to tax poles and wires and I have continued that revenue (approximately $140,000) in the budget. I have also taken the $200,000 we were keeping in assessor’s reserve in the event that case was overturned and applied it to the budget.
Hotel and Meals Tax
Our best estimate is that the hotel/motel tax will add about $35,000 to the budget. I have not included this. The meals tax will add about $1 million. Since that option has not passed the legislature, I have not included that revenue.
We have assumed that a court might order us to pay the entire amount of police pay, whether or not we receive Quinn bill reimbursement, so I have made that assumption in the budget. We have assumed $148,555 in Quinn bill reimbursement, roughly half of what we received last year when we received $328,363. - Footnote-3
The major factors influencing the budget, which I call the budget drivers, are State aid, health care costs, local tax receipts and salary costs.
Steep cuts in state aid
The major factor requiring cuts in services and layoffs is the dramatic reduction in State aid—easily the largest reduction in the history of the State or the City. In total, the city received $6.5 million less in State aid this year than we did last year, an 11% reduction. This total includes the special earmark we received last year to help pay the Hale debt, an earmark that was eliminated by the State this year.
Not counting the earmark, State aid is down $4 million, an 8% reduction. It can not be stressed enough that this is the largest State aid reduction in history.
State Aid Cuts, FY 09 to CY 10
Health Care Costs Continue to Rise
Our past efforts to control health care costs, including having every union agree to pay more on their health care, have succeeded in holding down costs. We estimate that our previous efforts net a $1.5 million a year savings. Despite this, much more needs to be done.
This year, health care costs are up this year by $1.2 million. This amount understates the problem. We have larger than needed health care reserves, so we are drawing from the reserves to balance the budget and we are underfunding health costs. While this gets us through this year, it makes it all but certain that our employees, and the city, will pay higher premiums next year.
The best and most efficient way to lower health care costs is to get out of the business of health care for employees and join the State health insurance plan—the GIC. - Footnote-4 The GIC (Group Insurance Commission) provides top quality and low cost health care to over 300,000 State and municipal employees and retirees. Over sixteen (16) different communities, including our neighbor Groveland, have joined the GIC.
The GIC is less expensive for two reasons, neither of which we can match. First, the State trustees of the GIC, which includes representatives of organized labor have plan design discretion. They can raise and lower co-pays and deductibles in order to keep the plan cost effective. The legislature, despite intense lobbying from Mayors, has declined to give communities the same plan design flexibility to control health care costs. - Footnote-5
Second, the GIC is a far larger bargaining group than any municipality. In fact, the GIC is the second largest health care provider in the country, second only to Kaiser Health Care in California. That bargaining power gives the GIC the power to keep health care premiums at a reasonable rate. If our employees joined the GIC, employees would have far more plans to choose from with lower premiums. Joining the GIC is not a concession by our employees, it is a benefit.
Keeping the status quo on health care is not in the long-term interests of our employees. Having a healthy, prosperous city is in all of our interest.
Local Tax Receipts and real estate taxes
Local Real estate taxes
Local real estate tax receipts are up by 3.7%, and are the one bright spot in the budget picture.
Taxes went up by 2.5%-- the increase allowed by Proposition 2 and half-- but tax receipts are up by 3.7%. The difference lies in the growth in the city, particularly in the business sector, which gives us continued long term recurring revenues. We estimate that despite the severe recession, new growth will grow by about $850,000 this year. Our plans to build our tax base by expanding business and by transit oriented development downtown has worked, and continues to work, and is a key reason why the effects of the State aid cutback, as bad as they are, will not be as significant here as they are in other cities.
Local receipts are projected to decline by $926,000 or 6.4% despite increases in some fees. The biggest factor in local receipts is the decline in chapter 40R money, which is counted as a local receipt. Excise taxes are down as people are buying fewer cars, the decline in building permit fees, as people are building less.
Drawing Down Reserves
Fortunately, we have reserves. Those reserves are the result of years of careful fiscal planning. In particular, they are the result of last year’s budget, where we put $1.4M into reserves; cut 14 positions from the budget and imposed a hiring freeze.
Without reserves, there would be no way we could meet the dramatic reduction in local aid and the increase in health care costs without either laying off dozens of public safety employees, or asking our citizens for an override or debt exclusion. Our reserves have prevented this budget crisis from becoming a budget catastrophe. Draining the reserves is clearly not what we want to do, but it is preferable to any of the alternatives, all of which are even worse.
The hiring freeze we imposed last year as well as holding the line on spending, has resulted in our having $2.6M in free cash. We used $800,000 of this certification in free cash to meet the 9C cuts in February, leaving us with $1.8 million in free cash.
Sadly, to make this budget, we are also draining a number of other reserves including our reserve for capital projects, water reserves and our snow plow reserve.
It is my strong recommendation that our top priority be to rebuild our reserves. Rebuilding reserves gives us the flexibility to meet emergencies, and will prevent the FY 11 budget from becoming a catastrophe. Rebuilding reserves will also help us to maintain our bond rating, a critical factor in our long term fiscal stability.
Cutbacks, Furloughs and Layoffs
The dramatic cut backs in State aid, even when we draw down reserves, require us to make cutbacks in every single department in the city including programs we do not want to cut—public safety and public education. Only the draw down of reserves prevents us from having to make the more dramatic cutbacks that other cities our size are now making.
Altogether, we are cutting around nineteen (19) full time positions in this budget request. With the positions we cut earlier this year from 9c reductions, this brings us to a total reduction of thirty (30) positions.
It is our hope to be able to add a number of these positions back through stimulus and grant money, as will be discussed later. Even if all of our grant requests are granted, there will still be cutbacks in services and layoffs.
These cuts are spread throughout the city and all city departments are affected. The city auditor will provide the council with a list of cuts along with the budget.
This budget asks all non public safety employees to take between five (5) and ten (10) unpaid furlough days, saving a total of $200,000. This causes hardship to our employees and our constituents and is not something we want to do.
The department heads are working on a plan to reduce or eliminate the furloughs. If there are furloughs, I recommend that we close City Hall Friday afternoon during the summer months.
Budget Experiments and Changes to Make Staff Reductions Work
In order to get by with less staffing, we are instituting a number of innovations that we hope will allow us restore some of the positions and will allow the remaining offices, hopefully, to function with fewer people than we once thought was possible.
Expanded Use of Floaters in City Hall
To meet the cutbacks in services in city hall, this budget expands the number of clerical “floaters” from one to three, and gives our human resources director the authority to transfer floaters from one department to another on an as needed basis. We are hopeful that with floaters we can meet some of the peak demands in the various offices.
I recommend that if we received additional funding we keep some flexibility in the budget to fill in those spots where we find we have a problem. - Footnote-6
Expanded use of software
Our new Expedited Permitting Software should reduce foot traffic within City Hall as more residents can apply for permits and check permitting status and information 24/7 on-line.
Result: Services Maintained, but Cut Back
Although we are reducing service, this budget does preserve our critical and vital services in the City. Although there are reductions in public safety, we believe those reductions will leave the citizens safe. Although there are reductions in the library staff, the library will remain open, fully accredited and all of its function intact.
At City Hall, all of the core essential functions of the City will remain functioning. We propose a reorganization which will allow several jobs to be paid for with other sources namely, water and wastewater funding, community development block grant funding, and federal stimulus money.
Even with that reorganization, there will be cut backs in services in our core functions at City Hall. Here are the effects of the budget and the plan to close the gap:
The fire department budget is cut $350,000. The fire chief, who would prefer to add stations, recommends that if we have to cut the cut be at the Bradford Fire station since a good deal of Bradford is double covered by another station.
Plan: We will aggressively pursue stimulus money, called a SAFER Grant, to keep the station open. In addition, the fire union is at the table and making proposals to cut the budget but still keep the station open. - Footnote-7
This budget eliminates eight (8) police officer positions from the Police Department, (one position is currently vacant) and two other positions. We are applying for stimulus money to replace each of the officer positions.
Two (2) of the positions can immediately be funded with federal stimulus money. A third officer is a vacant position. The remaining five (5) officers will remain funded until September 1. We have an outstanding grant application through the federal government for up to five (5) police officers. We are hopeful of getting at least two (2) or three (3) officers funded or getting a grant for two (2) civilian dispatchers. This would allow us to have the same number of police on the street as we do today. Between now and September 1, there are no cuts to the number of police on the street.
Plan: If we receive additional funding, establish a public safety reserve with any new funds that come in. This would give us flexibility to either keep the Bradford Fire station open if we do not get the SAFER Grant, or add the police back if we do not get stimulus money, or, perhaps, both.
In sharp contrast to the budget crisis of a few years ago, the library remains open, all of its services functioning, albeit at a reduced level. The library, with a waiver, will be eligible to be a fully accredited library by the Commonwealth of Massachusetts.
This budget contains the funding to keep the library open on Saturdays throughout the year. Despite the emails you have received, this budget contains adequate funding to keep the library open on Saturday. - Footnote-8
Public education represents the future of our City. We have had a great tradition over the past five (5) years of increasing money every year for public education. In fact, funding for public education is up $9M over the past five (5) years.
Thanks to stimulus money to replace other cuts which were made, the school budget is up this year by $1.8 to 2.5 million. Schools and veteran’s services represent the only operating areas of the budget which are increased; all other service areas are cut. - Footnote-9
This budget cuts two inspectors to half time and eliminate on clerk in inspectional services. We are applying for stimulus money in the CDBG program that will allow the inspectors to remain full time, but half of their time would have to be spent in the target areas.
The inspectional services may not have enough clerical help with this reorganization. We need to be flexible, and, if necessary, add an additional staff person as a floater to handle any difficulties.
Core City Hall Services—Treasurer, City Clerk, Assessor, Auditor, Purchasing
The core city hall services have no lobbying group. No one sends us emails on their behalf. The truth is that these services are the vital breadbasket of our city, and without these functions we would not be able to collect the money to provide police, fire, libraries and public education. The core services at city hall and the highway department have together taken the brunt of the hits over the years. On each occasion, the city hall workers have risen to the occasion, done more with less, and kept services intact.
This budget cuts those services back even further. The City Clerk will lose another part time worker, the treasurer, assessor, and inspectional services will also lose a clerical work. We are hopeful that with floaters and the new permitting software will help. If we receive additional funding, a portion of that funding should go to establish one or two additional floaters in city hall.
No group has been cut more over the years than the highway department. Like the core services, the highway department has no lobbying group, no group of organized enthusiasts to send emails or their behalf or to attend council or school committee meetings to lobby for them. But cutting the highway department beyond the functioning level will leave the city dirty, potholes unfilled, grass un-mowed.
We have been able to cope with previous cutbacks by using our existing contracts to bring in outside groups to assist with road paving, pothole patching, tree trimming, tree removal and other functions. If we gain additional funds from the legislature, adding funding for those contract provisions should be a top priority.
A Plan to Restore ServicesThis budget gets us by for a year, but we need to continue to look at long term solutions, not just year by year solutions. The five year budgeting that we look at routinely shows us with a continued problem in the following years of our budget. Making fundamental changes now, which is what I propose, will take of tomorrow’s problems today, before they occur.
The plan that I propose will give us some breathing room over the next few years, and allow us the time to continue to build up our tax base in the long-term.
Use Stimulus Money to Supplement the Budget and Restore Cut PositionsFederal stimulus money is designed to supplement State and local governments. There is, sadly, no stimulus money that goes directly to cities; the vast majority of stimulus money goes to schools or to transportation projects.
We are applying for stimulus grant money to replace police officers, and add firefighters. We have obtained stimulus money for long-term energy improvements and we recommend that we use the administration portion of that funding to pay for our recycling coordinator and to promote our new recycling initiative.
We have obtained stimulus block grant (CDBG) money and we are applying for permission to use a portion of it to replace the two inspectors we are cutting to half time.
Refinance the Hale Debt
Along with this budget, I am introducing a Home Rule Petition to allow us to refinance the Hale debt and extend the terms for an additional three (3) years.
Under normal circumstances, of course, we would want to pay off the Hale debt as quickly as possible and remove this albatross, the largest municipal debt in the history of Massachusetts, from our necks.
However, these are not normal circumstances. This is the worst recession in seventy years, and we need some breathing space if we are going to be able to provide vital services to our citizens.
Along with this budget, I have introduced a Home Rule Petition to allow us to refinance the Hale debt and extend the terms out an additional three years. This would give us short term relief of between $600,000 and $1 million.
Join the GIC
Joining the State GIC, Group Insurance Commission, is the single most important thing we can do to restore our city to fiscal stability. It is impossible to overstate the significance and importance of joining the GIC at a contribution rate we can afford.
While we can not join the GIC for another year, it is critical that we do join. Unless we make this one fundamental change, we are going to be talking about cuts every year over the next few years.
Institute a 1-2% Local Option Meals Tax if We are Allowed to do SoIncreased taxes are never popular, but sometimes they are necessary. This is one of those times.A local 1-2meals tax will mean that every time you go out to eat and spend $50, it will add $1 to the bill. Every time you spend $25, it will add 50 cents to the bill. A local 2% meals tax will still make the meals tax in Haverhill less expensive than going out to eat in New Hampshire. It is not a perfect solution, but we if we are going to pay the Hale debt and meet the crushing burden of the State aid cuts; this is the tough medicine we need to take.
We should resist the urge to make new taxes our only solution. No amount in new taxes and no new tax revenues will ever be able to make up for the deficits in health care. Only changing the health care system will, in the long run, restore us to structural balance.
A local 2% meals tax will add about $1.5 million a year to our treasury. A 1% increase will add about $750,000 a year.
It is not at all clear that the legislature will give us the authority to impose a local meals tax. That option was included in the Senate budget version but not in the House version.
ConclusionThis budget strains, but does not break, our ability to deliver services to our citizens. The cutback imposed by the State, and the failure of our unions to agree to health care concessions, gives us no choice but to make cuts we clearly do not want to make. - Footnote-10
The real danger in this budget, however, is the draining of our reserves. If a year from now the recession is over, this decision will have preserved vital services. If the recession continues, or if another round of 9c cuts are imposed half way through this fiscal year, then we will have no place left to cut.
For that reason, it is my strong recommendation that if we receive additional funding, that the additional funding be used to rebuild our reserves and that we resist the urge to add back the programs cut in this budget. Maintaining reserves is critical to our long term financial stability.
This budget, and State aid cuts are challenge. We will meet the challenge.
James J. Fiorentini, Mayor
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