Standard & Poor’s downgraded Uncle Sam’s credit rating because the government failed to make enough progress toward reducing the federal deficit. The city of Frankfort could face a similar fate even though it’s required to produce a balanced budget every year.
At issue is how much money the city should hold in reserve. Finance Director Steve Dawson told The State Journal’s Kayleigh Zyskowski last week that reserves lower than $8 million put the municipal bond rating at risk. Bond issues are the city’s way of borrowing to finance major projects, one of which is due between 2014 and 2016 to upgrade Frankfort’s antiquated sewage collection system as ordered by environmental authorities. A lower bond rating would cause the city to pay higher interest rates – like an individual with bad credit who has to buy a car.
The reserve account hit a low mark of $7.1 million in 2008. That prompted the City Commission then in office to take drastic – and controversial – measures. The board imposed a $5 monthly garbage collection fee on city property owners and started phasing out the “longevity” pay system that previously granted longtime workers a 3 percent raise every three years in addition to any “cost-of-living” adjustments.
Pay policy and garbage fees have remained nagging issues for the current commission. Last year, when commissioners discovered the reserve account had climbed back to $8.4 million, they were emboldened to waive the garbage fee for six months. They later granted city workers a 2 percent pay increase.
A three-member majority went on to adopt sweeping changes in garbage collection and fees. Frankfort is the first city in Kentucky to implement a “pay-as-you-throw” program. Throw away more and you pay more, but most people have lower fees than before the change. Pay-to-throw is expected to bring in just about half as much in fees as the previous plan did. The rationale is that it will provide residents an incentive to toss less and recycle more, thus saving money in the long run. But the startup costs include about $1 million over the next five years for the rollout carts that enable mechanized pickup.
The 2 percent pay hike for city workers comes at a time when state employees have had no raise the past two years and are likely to get none the next two years. Fiscal Court and the Frankfort Plant Board granted their employees just a 1 percent increase last year.
Dawson said these and other expenses could force the city to drop its reserves to about $8.2 million going into the next budget. He’s worried that the critical surplus may be difficult to maintain if revenue is disappointing in the 2012-2013 fiscal year.
City revenue, like a family’s income, boils down to what comes in. It flows from multiple sources and is hard to predict because of the many variables. When local businesses prosper, the government makes more from the net profits tax. When workers throughout the community make more money, they pay more occupational tax. When property values rise, the city collects more property tax.
Without growth, the city can still increase revenue by raising rates but that’s an unpopular alternative, as the garbage controversy demonstrated. People want tax relief when times are hard. Families have to cut back and they expect government to do the same.
City Hall needs to keep its credit rating favorable to hold down future borrowing costs. This means conserving the surplus – not blowing it. Commission members should resist the temptation to go on a spending spree whenever the savings start to recover.