Thursday, October 13, 2011

Fairview Fire District Proposed 2012 Budget May Deepen Financial Crisis

The Fairview Fire District Long Range Planning Committee announced at a public workshop meeting on May 26, 2011, that recent budgets have not contributed enough money to the apparatus and equipment reserve fund.  The money that should have been set aside was used instead to decrease the fire tax levy.  If Fairview continues this strategy, it will be out of money when future obligations come due.  Fairview's proposed 2012 budget continues this strategy, therefore threatening to deepen Fairview's long term financial crisis

How much should be contributed to reserve fund?

Fairview Fire Commissioner Bob Gephard is justifiably proud of the fact that he initiated the first long range planning study of the District in quite some time.  One result of this work is the Long Range Committee Capital Equipment and Building Plan posted on the District’s website, which shows specific apparatus and equipment expenditures going out 15 years to 2026.  This document shows that if nothing is ever contributed to the apparatus and equipment reserve fund, the District will be in the hole about $4.1 million by 2026.  However, the current fund balance is actually about $335,000 more than that document assumed, so the District only needs to come up with $3.8 million.  On the other hand, it needs to come up with it by 2025, not 2026, because 2025 is when the last significant expenditure occurs.  Dividing the $3.8 million by 14 years gives about $270,000 per year that the District must contribute to the apparatus and equipment reserve fund in order to meet anticipated expenses.

The following chart shows how this would play out on a year-by-year basis.

The red bars show the amount projected to be spent each year, according to the Long Range Committee Capital Equipment and Building PlanThe blue bars show the amount available in the Fund at the beginning of each year.  The green bars show the amount contributed to the Fund each year – in this case $270,000.  Note that in 2026, the blue bar is zero, indicating that the yearly contribution of $270,000 is just enough to carry the district into 2026, paying for everything with no money left over.

What if less than $270,000 is contributed to the reserve fund?

If only $153,000 is contributed to the apparatus and equipment reserve fund every year beginning in 2012, there will be just enough money to carry the district into 2020.  Unfortunately, the District's ladder truck, which will then be 18 years old, is scheduled for replacement that year, and the reserve fund will be nearly $1 million short of the projected $1,716,160 replacement cost.  Oops!

How much does proposed 2012 budget contribute to the reserve fund?

Fairview's 2010 budget contributed only about $143,000 to the apparatus and equipment reserve fund, and Fairview's 2011 budget contributed nothing to the reserve fund.  Fire Commissioner Bob Gephard stated at the May 26 meeting that he regretted supporting the move to not contribute to the reserve funds, seeing that neglect of the reserve funds is at the heart of Fairview's long term financial crisis.

So on September 26, 2011, after careful consideration, the Fairview Fire Commissioners passed a proposed 2012 budget that contributes nothing to the apparatus and equipment reserve fund.  Zero!  Zilch!  Zip!  Scratch!  Null!  Nix!  Nada!  Even Fairview's Treasurer, James Passikoff, during his presentation of the proposed budget, noted that adding nothing to the reserve funds, “ ... is probably not a good move.”  Under the circumstances, this strikes me as a bit of an understatement.  In my view, the failure of the proposed 2012 budget to contribute $270,000 to the apparatus and equipment reserve fund is the single most inexplicable decision.  It appears that the Board has learned nothing from the May 26 meeting which described the long-term financial crisis.

Proposed 2012 budget makes high-risk assumptions

Unfortunately, the proposed 2012 budget makes a series of high-risk assumptions on smaller items.  Consider the following quotes from Passikoff's budget presentation on September 26 (emphasis added):
  • “We've got a potential to get another $45,000 from Dutchess Community College when the dorms open next September.”
  • “We also have a chance of getting a SAEFER grant of $75,000.”
  • Fairview currently has four firefighters eligible to retire.  An early draft 2012 budget contained $100,000 needed for a “buyout” in case one of them retired.  Passikoff said, “We ended up taking that out.  We're gambling that nobody's going to [retire].”
So let's see:  “We've got a potential ... We have a chance ... We're gambling ...”  Not my words — Passikoff's.  These gambles add up to $220,000 that hopefully will fall in favor of the District.  But what's the chance that all of the above optimistic assumptions will hold?  As far as I can tell, there isn't any “fat” in other parts of the proposed 2012 budget.  So if any assumption fails, the District may need to borrow money at taxpayer expense to make up the difference, essentially costing taxpayers more money in the long run.

Proposed 2012 tax levy is low-ball

The proposed 2012 tax levy continues Fairview's strategy, begun in 2009, of starving the District of resources, as I explained in Big Three Fire Districts Use Divergent Tax Strategies.  It's true that the proposed 2012 tax levy is 9.3 percent higher than 2011's (or 10.7 percent higher, if you take the budget viewpoint).  The problem is that Fairview's 2011 tax levy is artificially low in part because it contributed nothing to the reserve funds.  If the 2011 budget had contributed a nominal $250,000 to reserve funds (lower than the $270,000 that's now needed), then the proposed 2012 tax levy would actually be slightly lower than 2011's.  A similar analysis shows that if the 2010 budget had fully contributed to reserve funds, the proposed 2012 tax levy would be lower than 2010's.  In other words, it's only because recent budgets have neglected the reserve funds that the 2012 tax levy seems large.

In my view, it is more relevant to note that the proposed 2012 tax levy is 5 percent lower than Fairview's pre-meltdown 2008 tax levy.  In other words, one could add $150,000 to Fairview's proposed 2012 tax levy and still not exceed Fairview's 2008 tax levy.  From the perspective of 2008, Fairview's proposed 2012 tax levy is low indeed. 

Fairview's Financial Crisis May Deepen

Given the difficult times we've lived in since the economic meltdown of 2008, it is understandable that Fairview's 2012 budget cannot in any way reverse or compensate for the mistakes of the past.  But one can reasonably expect a budget that does not make Fairview's dire financial situation worse.  Fairview's proposed 2012 budget, by underfunding the apparatus and equipment reserve by $270,000, and by making $220,000 of other high-risk assumptions, threatens to do just that.

Friday, October 7, 2011

Big Three Fire Districts Use Divergent Tax Strategies

Each of the Big Three Fire Districts of Dutchess County — Arlington, LaGrange, and Fairview — seems to have employed its own tax strategy for meeting the continuing fiscal challenges of the 2008 economic meltdown.  LaGrange's strategy seems a relatively moderate reflection of the economic meltdown, Arlington appears to be on a spending spree, while Fairview appears to be starving the District of resources.  This viewpoint about Fairview is consistent with the fact that Fairview has not been contributing adequately to its reserve funds in recent years, as described here.

The following chart gives one way to see the dramatic differences among the three strategies:

Each bar in the above chart shows the cumulative increase in tax levy, compared with the 2008 tax levy.  That is, each bar shows how much more money has been collected between 2008 and that year than would have been collected if every tax levy to that point were equal to the 2008 tax levy.  For example, a 2009 bar shows the difference between the 2009 tax levy and the corresponding 2008 tax levy, expressed as a percent of the 2008 tax levy; a 2010 bar shows the difference between the 2009 tax levy and the corresponding 2008 tax levy plus the difference between the 2010 tax levy and the 2008 tax levy, expressed as a percent of the 2008 tax levy. Another way to describe this chart is to say that it illustrates the effect over time of deviating from a strategy of holding the tax levy flat at the 2008 level.  Because all changes are normalized relative to each District's 2008 tax levy, this chart makes it possible to directly compare each of the Big Three fire districts with each other. 

Strategies of the Big Three — Tax Levy Viewpoint

The LaGrange Fire District has taken the moderate strategy of maintaining its tax levy relatively close to its 2008 level.  Thus, its bars are barely visible until 2012.  The amount of additional tax money LaGrange will have collected through 2012 is just 2.5 percent of LaGrange's 2008 tax levy, or $120,000.  That's the meaning of LaGrange's 2012 bar of 2.5 percent.

The Arlington Fire District has taken the strategy of significantly increasing the tax levy almost every year, so that the cumulative increase in Arlington's fire tax levy from 2008 until 2012 (proposed budget) is nearly 60 percent.  Thus, the amount of additional tax money Arlington will have collected through 2012 is 60 percent of Arlington's 2008 tax levy, or about $7.8 million.

Now we come to poor Fairview.  And I mean poor.  The Fairview Fire District has taken the opposite strategy from Arlington by decreasing its tax levy almost every year.  The cumulative decrease in Fairview's fire tax levy from 2008 until 2012 (proposed budget) is 26.5 percent.  This means that the amount of tax money Fairview has failed to collect through 2012 is 26.5 percent of Fairview's 2008 tax levy, or about $800,000.

Strategies of the Big Three — Tax Rate Viewpoint

Taxable market values in the big three fire districts have fallen every year since 2008.  For the period 2008 to 2012, they will have fallen a total of about 22 percent in LaGrange and Arlington, but only 15 percent in Fairview.  Fairview's shallower decline means that Fairview's tax rate has taken less of a hit than LaGrange and Arlington have incurred.  Nevertheless, the differing strategies of the Big Three are starkly evident in this chart of cumulative tax rate increase since 2008:

The above chart is easier to explain than the previous one.  Each bar is simply the percent increase in the true value tax rate for the year, compared with the corresponding 2008 tax rate (rather than compared with the previous year's tax rate).  Because all tax rates are normalized relative to each District's 2008 tax rate, this chart makes it possible to directly compare the strategies of each of the Big Three fire districts.

The true value tax rate is a good measure of how steeply taxpayers' wealth — measured by the market value of their properties — is taxed.  Therefore, the above chart shows, for each fire district, how much more steeply taxpayers are being taxed compared with the meltdown year of 2008.  Looking at the proposed 2012 budgets, Arlington will tax 52 percent more steeply; LaGrange will tax 31 percent more steeply; poor Fairview will only tax 11.5 percent more steeply.

The Proposed 2012 Budgets Continue These Divergent Strategies

The proposed 2012 budgets for all three fire districts are not isolated decisions, but are continuations of strategies that have been followed by each district since the economic meltdown of 2008.  I plan to say more about Fairview's proposed 2012 budget in a subsequent post.

Tuesday, October 4, 2011

Fairview Fire District Commissioners Approve Flawed Budget Document

I considered an alternate title for this post: “Fairview Fire District Treasurer Presents Flawed Budget Document”  Both titles are accurate.  But the commissioners actions indicate they wish to take some of the blame for embarrassing the Fairview Fire District.

On September 26, 2011, Fairview Fire District Treasurer James Passikoff presented a proposed budget document to the board of fire commissioners at a budget workshop meeting, and it was approved unanimously by the commissioners with little comment.  This budget document contains so many flaws, it's hard to know where to start.  If this is sounding like yet another rant against Passikoff, well, that's really only half true.  When it comes to the fiscal aspects of the Fairview Fire District, when it comes to following Fairview's budgetary money, when it comes to understanding the financial facts of Fairview, my view is that Passikoff is the smartest guy in the room.  To some extent, that's as it should be.  The problem is that the standard for smartness that is acceptable to Fairview's board of fire commissioners is so low that Passikoff can present just about anything, it seems, and the board will uncritically accept it. 

Officials Don't Understand Fairview Fire Tax Issues

As I see it, Passikoff has a great depth of knowledge concerning many fire district fiscal issues.  Unfortunately, when it comes to property tax issues, Passikoff has repeatedly demonstrated that he does not grasp some essential facts about assessed value and equalization rate.  See here.  More unfortunately, he has not shown an interest in correcting this weakness.  Even more unfortunately, Fairview's board has shown itself indifferent to whether the budget numbers presented to the public — or to themselves — make any sense.

Garbage in Budget Document

To find flaws, one need look no further than the first line of numbers on the first page of the proposed budget document.  This line, purporting to show a change in Fairview's “assessed property valuation” is all meaningless garbage.  Similar garbage is shown on the “Total Assessed Valuation” line on the next to last page.  This garbage is an exact repeat from the budget projections spreadsheet presented at the May 26 public workshop meeting. The reason this is garbage is explained in detail here.  I sent essentially the same explanation to Passikoff, Commissioner Bob Gephard, and Commissioner Joe Petito on May 24.  I received no effective response from any of them, despite months of making myself annoying.  Apparently they are all indifferent at best about understanding, correcting, or even repeating this blunder.

Contradictions in Budget Document

The last two pages of the budget document contain data about 2012 assessed value and 2012 proposed tax rate.  Each page contains numbers for both assessed value and tax rate, but the numbers do not agree with each other.  So which is right?  I wrote here that the first set is right.  Silly me!  It turns out that both sets are wrong!  (For details, see my 9/29/2011 comment appended to that blog post.)  It's not just a couple of misprints.  All the numbers derived from the wrong numbers are wrong too.  That's right, the Treasurer presented, and the commissioners passed, a budget with two contradictory tax rates — and both are wrong.

The treasurer didn't look at this beforehand?  None of the commissioners looked at this beforehand?  Or is it that the tax rate — the rate at which property owners' wealth is taxed — doesn't really matter?  One thing is obvious:  The commissioners had no idea what the proposed 2012 tax rate really was when they approved the budget.  This is more than a little disturbing.  It shows a board that has no hand on the wheel.  The board doesn't even know there is a wheel.