OCEAN CITY — The Mayor and Council got their first look this week at a draft long-term financial plan for the next five years and the biggest takeaway is continuing to reduce or at least maintain the property tax rate might not be possible in the future.
Throughout the recently completed fiscal year budget work sessions, the council made decisions on certain projects and programs in the context of the current fiscal year with an eye on future predicted trends in revenue and expenditures, but the elected officials wanted a broader view of the town’s financial outlook for the next five years to determine how decisions made this year could set in motion dominoes falling in out years. At the close of the budget wrap-up session last week, Councilman Tony DeLuca said the council would have to “discuss the ugly and we have to discuss the very, very difficult,” as it planned for future budgets over the next five years.
City Manager Doug Miller and Finance Administrator Martha Bennett had already embarked on a comprehensive long-term financial plan through fiscal year 2022, taking into consideration a variety of factors including predicted trends in revenue and property assessments, growing salaries and benefits, existing and future debt service and other expenditure. Miller and Bennett presented to the council this week the draft long-term financial plan, a weighty tome to be sure full of charts and graphs predicting future revenues and expenditures, but perhaps the biggest take away is setting the property tax rate at the constant yield, which has resulted in modest reductions the last two years, might not be practical going forward.
The constant yield is the same amount of municipal funding needed to maintain the same level of services and programs as the prior year. For the last two years, setting the property tax rate at the constant yield has resulted in modest reductions. For example, the tax rate for fiscal year will be set at 46 cents per $100 of assessed value, down from 47 cents in fiscal year 2017. However, Bennett said flat or reduced property tax rates in the resort might not meet the growing needs for services, capital projects and infrastructure improvements in the years to come.
“In my opinion, constant yield will not realistically provide the resources needed to provide the services in the years ahead,” she said. “It doesn’t allow for even nominal increases due to inflation let alone the need for safety and welfare.”
Bennett said while reducing the tax rate to meet the constant yield has been a successful policy for the council with reductions the last two years, it might be time to consider gradually increasing the rate to meet future needs.
“We need to look seriously at that because constant yield is over 50 percent of our budget,” she said. “By keeping that flat all these years, I don’t think it will meet the needs in the years ahead.”
Based on the weighty long-term financial plan presented on Tuesday, the tax rate might have to be steadily nudged upward to meet the growing demand for services and a laundry list of capital projects and other needs over the next five years. One chart presented showed the fiscal year tax rate for 2018 at 46 cents and predicted it would need to go to 50 cents in 2019, 51 cents in 2020, 54 cents in 2021 and back to 50 cents in 2022.
“The tax rate is 46 cents for 2018, but it could go as high was 54 cents in 2021 if every assumption we made in here is correct and every project was funded at 100 percent,” she said. “You have to decide what projects you want and what your feelings are on the assumptions made for salaries, costs, assessments and real estate and how you want to incorporate that into the plan. Like I said, these are the bones of the plan and we need your input to go further with it.”
Miller said the long-term financial plan presented on Tuesday came at the direction of the council so they could make decisions this year with an eye on what is predicted five years out. He said the plan included certain assumptions based on trends in predicted revenues and anticipated expenditures.
“It is a priority of the council to look at our long-term financial status so you can make important decisions in a larger context,” he said. “We want to emphasize we are calling this a draft because we have made certain assumptions in putting this together and you may disagree with those assumptions. If you do, that’s fine. It will just change the forecast.”
Bennett said she carefully took into account predicted revenue changes along with capital projects already on the books and those in the planning pipeline along with other predicted expenditures. The plan includes a close look at the town’s current debt obligations and those that are anticipated in the near future. She said out of that research came the framework for the five-year financial plan, but it was up to the Mayor and Council to determine the town’s future fiscal direction.
“What I’ve done here is prepare the bones of the plan and I look to you to provide the mind and the heart of the plan,” she said. “How you use these assumptions, how you feel about them and what decisions you have to make with capital projects and planning over the next five years directly affects how we need to set revenues and expenditures.”
Current and anticipated capital projects make up the lion’s share of the expenditures over the next five years with roughly $64 million predicted through the next five years. The big nut on the capital improvement plan is the major renovation of the Public Works Complex at 65th Street with the town’s portion at $11 million for the estimated $25 million project.
Also included is $4.1 million is various recreation and parks projects over the next five years, $3.5 million for a new midtown fire station starting in 2020, although the council voted earlier this month to back-burner that project, and another $1.5 million for a new public works facility at 2nd Street that will replace the old Whiteside facility downtown.
“They need to be integrated into the plan,” she said. “We need your input into what projects might be missing, what projects are the highest priority, where do they need to be placed in this plan and when do you want them to happen. We have to decide whether to pay cash for them or borrow money for them.”
While there are concerns about maintaining or continuing to reduce the property tax rate, there was plenty to feel good about in the long-term financial plan. Bennett said the debt service on general obligation bonds sold to pay for many of the capital projects is expected to decline over the next five years, even with the addition of the $11 million for the public works campus renovation.
“After 2018, you see a $1 million decline because we’ll have paid off a number of the bonds by then and it gradually declines from there,” she said. “Within 10 years, you’ll have less than half of the debt service you have now.”
In addition, the council has been diligent in steadily growing the town’s unencumbered general fund balance, a rainy day fund of sorts that can be used in many ways. The stated policy of the council has been to set the general fund balance at 15 percent above the budget, but that number has steadily grown.
“You’ve been very successful with this,” she said. “We have tried to keep it around 15 percent and we’ve been more successful that we thought we would be. At this point, the fund balance is 23 percent, so that does give you some leeway as you work through some of the things in this plan. That gives you some flexibility if you want to use any of that fund balance for pay-as-you-go projects.”
