Council Endorses ‘Plan B’ Budget, Plans To Use Reserves For Constant Yield Tax Rate

Council Endorses ‘Plan B’ Budget, Plans To Use Reserves For Constant Yield Tax Rate
City Hall on 3rd Street is pictured. Photo by Chris Parypa

OCEAN CITY — Despite uncertainties surrounding ongoing pandemic and the impact on the economy, resort officials last week signed off on a fiscal year 2021 “Plan B” budget that would actually amount to a property tax reduction for most.

After marathon virtual work sessions last week, the Mayor and Council met on Friday for a budget wrap-up meeting for the fiscal year 2021 spending plan with a handful of options on the table. City Manager Doug Miller and Budget Manager Jennie Knapp earlier last week presented essentially three options for the fiscal year 2021 budget beginning July 1.

The proposed combined budget for all funds came in around $156 million and includes certain enterprise funds such as water and wastewater, for example, which are largely self-sufficient. The all-important general fund budget came in around $97 million and was balanced based on anticipated revenues and expenditures for the coming fiscal year.

The first option presented last week, deemed the pre-COVID-19 budget, was prepared before the pandemic and all the existing and potential economic ramifications that come with it. That proposed balanced budget set the property tax rate at the constant yield rate of .4559, or the rate that would generate the amount of funding needed to maintain the same level of services, projects and programs as the prior year.

The proposed Plan B budget, which was the preferred option for the Mayor and Council and was ultimately endorsed by the elected officials last week, also sets the property tax rate at the constant yield rate of .4559. However, Plan B predicts a reduction in revenue by about $1.9 million in fiscal year 2021 due to the ongoing pandemic.

The Plan B budget includes moving money from the town’s reserve fund balance, a rainy day fund of sorts for emergencies, which the COVID-19 pandemic certainly qualifies. The town’s stated position is to maintain the fund balance at 15 percent of general operating budget. Based on fiscal year general fund expenses, the town’s unassigned fund balance stands at around 26%, or around $8 million over the stated goal of 15%.

The reserve fund balance and how best to use it was the subject of tense debate during the budget wrap-up session. Councilman John Gehrig said the town needed a firm policy on the percentage of fund balance to maintain because it has drifted well beyond the stated goal of 15%.

“This is exactly why we have a reserve fund, but we don’t need a reserve fund for our reserve fund,” he said. “The reserve fund is meant to be used when we have an emergency. We’ve politicized this to where now 15% is the floor when it should be the ceiling. If we set it at 15%, that’s where it should be.”

However, Councilman Mark Paddack questioned Gehrig’s assessment of the appropriate level of fund balance and how it should best be used. For the record, Paddack and Gehrig sparred throughout the work session on a variety of issues related to the budget.

“For Councilman Gehrig to say we’re politicizing this reserve fund is ridiculous,” he said. “A couple of weeks ago, he made a big show that if we weren’t going to invest it in economic development, we should return it to the taxpayers. At that time, we were right at the beginning of COVID-19. We know now it was prudent to leave that additional 7% in the reserve fund.”

In any year, the adopted budget is a fluid document. However, because of the uncertainties surrounding the current situation, the reserve fund will be more important than ever and budget amendments could come more frequently, according to Miller.

“There is a lot of uncertainty,” he said. “We will know by the first budget amendment in September or October where we are with COVID. By then, we’ll know what kind of season we had. It might be that we have to come back in with some significant cuts in expenditures to make it through the year. For now, we have to set the tax rate and adopt a budget.”

Paddack praised Knapp and Miller for their foresight in building and maintaining a healthy reserve fund balance for just this type of situation.

“My understanding is 15% is the minimum,” he said. “Because Jennie and Doug and our department heads are being prudent and fiscally responsible, we do have some extra money in that reserve fund and thank God we do. We’re going to be able to set a constant yield tax rate that’s consistent and we’re going to be able to cover our expenditures because of that.”

Mayor Rick Meehan agreed with the uncertainties of the current pandemic and the potential impact on the reserve fund balance.

“The reserve fund is a very fluid situation,” he said. “We don’t know how much we’re going to take out of that as of June 30 to cover revenue losses and we can always revisit that. We don’t want to have more than we need, but I don’t think anybody knows what that number is right now.”

For her part, Knapp said the Plan B option ultimately endorsed by the Mayor and Council took fund balance into consideration based on her projections from reviewing the 2008 recession.

“I looked back at the recession in 2008 and tried to translate those trends into this budget,” she said. “Even if we get back up and running, I think our business will be affected this summer. We can’t go into fiscal year 2021 as if everything is normal. Whatever we don’t recover in fiscal year 2020 will have to come out of fund balance.”

Knapp said despite the revenue hits the town is taking and will likely continue to take, there were some potential offsets.

“While we’re taking some losses on the revenue side, there are some things working in our favor on the expense side,” she said. “Fuel prices are down, we’re not hauling as much trash, we are not bringing in part-time employees as soon as we thought we would. Some of that will offset the losses were seeing on the revenue side. It’s a balancing act, but that was my stab at it.”

After considerable debate, the Mayor and Council ultimately adopted the Plan B budget with the tax rate set at the constant yield of .4556. It will be presented for first reading on May 4 and likely adopted on second reading on May 18. Council President Lloyd Martin attempted to bring the discussion full-circle after what had been an often-tense work session.

“We all have different philosophies on how much we can give and how much we can save and what we should do,” he said. “If we have a loss of $6 million, we’ll still be fine and make it through. We’re planning right now for this virus to go away as soon as possible, and I’m optimistic things are going to get better.”

About The Author: Shawn Soper

Alternative Text

Shawn Soper has been with The Dispatch since 2000. He began as a staff writer covering various local government beats and general stories. His current positions include managing editor and sports editor. Growing up in Baltimore before moving to Ocean City full time three decades ago, Soper graduated from Loch Raven High School in 1981 and from Towson University in 1985 with degrees in mass communications with a journalism concentration and history.