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July  31,  2007

Financial panel seeks to
rein in county spending

Future pay raises for county employees would be tied to increases in the cost of living and the growth of county government's revenue if one of the new recommendations likely to be put forth by the Financial Future Taskforce is accepted by County Executive Christopher Coons, County Council and, perhaps more significantly, the labor unions which represent an overwhelming majority of the workers.

The taskforce also is preparing to recommend coupling a change in the proportion of the budget that must be set aside in a 'rainy day' fund to meet unanticipated emergencies with a limit on how much of anticipated revenue can be appropriated in a given year. County government already is required by law to operate within a balanced budget.

A third recommendation would limit budgeted spending of revenue from the volatile real estate transfer tax to the amount actually generated from that source during the previous year. If a higher amount is realized, the excess could be spent only on a one-time basis for extraordinary purposes.

While those recommendations, presented to the taskforce by the Coons administration, are still being put into final form before being adopted, the panel did agree at its meeting on July 30 to recommend that the county establish a standing numbers-crunching committee of government officials and volunteer public members to objectively determine on a long-range basis the parameters within which the budget may be crafted. It would parallel the unique and highly successful Delaware Economic & Financial Advisory Council.

Chief financial officer Michael Strine said he will revise the draft recommendations he presented to the taskforce to incorporate points raised at the meeting and circulate the revision via e.mail to taskforce members for their comments. A final version will then be circulated in the same way for their approval. Strine told Delaforum that the public will not have access to that electronic discussion. Taskforce meetings have been publicly noticed and open to public attendance.

When the recommendations are made, that will wrap up the taskforce's assignment. It previously issued an interim report, but held off completing its work until receiving a consultant's study of employment practices. Strine said he waited until after the fiscal 2008 budget was crafted and enacted by County Council before reconvening the panel. He said many of the earlier recommendations were built into the executive's budget proposal, which Council enacted without any significant changes, or are in the process of being implemented.

Brian McGlinchey, legislative chairman of the state A.F.L.-C.I.O., told the other members of the taskforce at the meeting that he could "accept from a labor perspective" a generalized statement in the draft recommendation to index pay raises. For that to work, it would have to be accepted -- at least in principle -- by union negotiators in bargaining sessions leading up to new contracts to succeed those which expire in April, 2008.

Taskforce members were split on whether to include in the recommendations a specific percentage for an acceptable annual growth rate for wages and fringe benefits. Five-year projections of general- and sewer-fund spending developed monthly by the finance department and based on current policies have been using a 6% growth rate. Some members seemed to favor recommending one in the range of about 4%.

According to data Strine presented to the taskforce, that would be a significant comedown from what has happened in the recent past.

County workers' average compensation increased at an annual rate of 7.77% between fiscal 2001 and 2006. That compares to 4.13% in state and local governments nationally and 3.61% in private industry as calculated by the U.S. Bureau of Labor Statistics. New Castle County salaries and wages grew by 5.79% and benefits by 14.58%. Comparable rates for state and local governments were 2.98% and 6.95%, respectively, and for private industry 2.96% and 5.40%, respectively. The consumer price index, the generally accepted measure of inflation, increased nationally at an annual rate of 3.32%.

"We're in the top 10 of U.S. counties in employee compensation growth rate," Strine told the taskforce.

Moreover, growth in the size of the county's workforce has acerbated the situation in that the averages are applied to a significantly larger number of people. Total spending for salaries and benefits in fiscal 2006 was $130.5 million, up more than 50% from $67.3 million in fiscal 2001. Average salary during that time increased 28.96% from $43,933 to $56,658. The value of benefits went up 72.92% from $12,774 to $22,089.

Personnel costs represent about three-fourths of the county government budget.

The draft recommendation proposes that future changes in automatic annual 'step' increases, merit increases and escalations in the cost of health care, pensions and other fringe benefits be brought into line with those of other government and private industry.

Strine cautioned, however, that "competitive factors" will have to be taken into consideration. The county police department, for instance, competes with the state and other forces in attracting and retaining officers.

Strine, Council president Paul Clark and Councilman George Smiley agreed that county employees' pay and pay raises were not voiced as a crucial issue in civic and other public meetings during the weeks leading up to approval of the current budget, which included a 17% increase in the county's property-tax rate.

The public "didn't begrudge them what they were making," Smiley said.

Strine said that objections at gatherings he attended were selective both geographically and by relative affluence. "You heard Astra Zeneca and Du Pont folks saying they don't get raises like that. ... You heard it mostly in Brandywine Hundred and Hockessin and below the canal; you didn't hear it so much in Wilmington or the Route 7 and 40 area," he said.

Smiley attributed that to a large extent to the attitudes of Council members. "Some made wages the sole focus in their district," he said without specifically identifying to whom he had reference.

Clark said that opposition to the tax increase from south of the Chesapeake & Delaware Canal probably was not so much conditioned by employees' pay as by "a strong belief that they don't get their share of county services."

Strine said that when it comes to obtaining favorable bond ratings, the size of the 'rainy day' fund was not as important as the existence of such a fund and the government's willingness to keep spending in line. "There is nothing magic about 20% or 15% or any other figure. ... They're looking at your ability to pay back what you borrow," he said. New Castle County bonds have for several years been rated triple-A, the highest level, by all three major bond-rating agencies.

That is significant not only because it favorably impacts debt-service spending but also because it serves as a sort of general credit rating for county government and its fiscal responsiblity.

The county's fund is pegged at 20% of budgeted spending; the state's is 5%. Since providing that reserve is mandatory and it necessarily requires consideration when setting tax rates, some people have questioned the size of that difference and advocated lowering the county's requirement. Its size has been further questioned in light of the fact that neither county nor state government has ever had to tap into their funds.

"When people hear of a budget crisis, they think it's raining," McGlinchey said. If the fund is not used at such a time or during other occasions that might be considered 'routine emergencies', "they think you're hoarding money."

Strine has frequently said that that the county's 20% reserve is justified by the fact that its sources of revenue are virtually limited to real estate and that makes it far more vulnerable to the vicissitudes in the economy than the state, which has a variety of income sources.

Coupling the size of the reserve with a mandated spending limit, however, would significantly reduce the danger and most likely satisfy the bond raters. The draft recommendations he presented suggest either a 15% reserve and a 95% appropriations limit or a 98% limit with a reserve equal to about two months worth of spending. State government has a 98% appropriations limit.

Pete Ross, who formerly was a state budget director, strongly endorsed a spending limit, saying that "it forces government to correct itself every year" and continually adapt spending to income. Adhering to a limit provides a safety net to deal with an economic recession.

Strine said that even with the tax increase and significant cost-containment, the county is expected to spend $8.3 million more than it takes in during this fiscal year. The gap will be financed by drawing down part of the $78 million reserve with witch it began the year on July 1.

Existence of the reserve also would complicate implementation of an appropriations limit, requiring that it be phased in over the five years that the reserve is expected to last.

Ross said the reason the state's limit has worked well is the complete acceptance the financial advisory council has received. "We no longer argue about the numbers. [Spending] policy is what to do with the numbers. Most states spend a lot of time making up numbers," he said.

The advisory council is a nonpartisan panel consisting of representatives of the executive and legislative branches of government and private citizens with recognized financial acumen. A Delaware innovation more than a generation ago, it  meets periodically to develop a revenue projection. Although its projections do not have the force of law, the General Assembly has never deviated from them when enacting the state budget.

Albeit with frequent revisions, the council has amassed a good track record for the accuracy of its projections. Even while several other states have had major fiscal problems in the past couple of years, Delaware has not had a genuine state budget crisis since the 1970s.

The New Castle taskforce agreed unanimously that Ross's proposal that the county establish a comparable arrangement be included in its recommendations.

With a view toward enforcing fiscal restraint those recommendations also will propose that no more than 90% of the yield from the transfer tax during the previous year be applied to the revenue side of the county budget. If more than that is actually received, the excess could be used only for such extraordinary things as debt reduction, a tax rebate or reducing the real estate tax rate.

A sharp falloff in transfer tax receipts -- 12.6% on fiscal 2007 and an anticipated 7% this year -- was deemed largely responsible for what the Coons administration has called a looming budget crisis.

That tax is a state levy established in 1970. Since 1991 New Castle and the other counties have received half of the proceeds. In 1999 the initial 2% rate was raised to 3%. With the real estate boom, which began in 2001 and peaked in 2003, the tax proved to be a bonanza. New Castle County's take in fiscal 2006 was $40.6 million. The projection for this year is $33 million.

Strine told the taskforce that the property-tax increase staved off the budget crisis but didn't end it. "The anticipated deficit [by 2012] was cut in half but not eliminated," he said. "Our rate of revenue growth is still half of our spending growth."

Clark questioned whether the county and its taxpayers are better served by delaying tax increases or imposing them on a regular basis. "If we wait until 2011, we're looking at 10 or 12 percent. ... Are we better off doing minor course corrections [in the interim]?" he said. "For X-number of years we've been living on borrowed time."

Taskforce members agreed that property reassessment -- now being discussed in some circles --  is not a likely rescuer waiting in the wings. Ross said flatly that the current level of discussion falls well short of what would be required to secure the political will in Dover to agree to a state-financed reassessment.

Nevertheless, Strine said, county government has taken a small step toward possibly going it alone and reassessing. It has asked an assessment firm, which he did not identify, for a cost estimate.

A political problem that would arise if the county were to conduct even a revenue-neutral reassessment is that adjusting values would open some property owners to significant increases in their taxes while others could see actual reductions. Condominiums, for instance, are currently 'overassessed' relative to their market values, Strine said.

So-called 'rolling' reassessment -- where properties are valued on a rotating basis every few years -- would, on the other hand, produce the equivalent of tax increases without the administration or Council having to raise the tax rate.

Clark cited the recently enacted ordinance requiring every firm and individual engaged in any aspect of construction to be licensed is a significant step in the direction of permanent enhancement of county revenue.

On the other side of the ledger, Strine said the county has begun negotiating with Wilmington city government to deal with a proposed 20% increase in its charge for processing sewage. The county's position is that the city must justify the increase. "We've told them 'prove to us that you need the increase; don't just send us a bill'," he said.

Strine did not comment on a previous proposal by Councilman Timothy Sheldon that the county seek to buy the city's sewage-treatment plant as a less-expensive alternative. New Castle County accounts for about 70% of the flow going through the plant.

Nor did Strine talk about the county's apparent failure to obtain authorization from the General Assembly to impose a 2% tax on hotel and motel bills and enactment of other unspecified revenue-diversification measures before it adjourned in June.

Get more information about this topic

Read previous Delaforum article: County government workers not overpaid

Read previous Delaforum article: Panel prepares package of ideas to deal with county budget crisis

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