Money Problems: How much, an alternative plan, and challenges

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by Jessee Perry of RVA Dirt 

Since Mayor Stoney introduced his proposed meals tax, I have heard a lot of opinions… talked to a lot of people… and read a lot of documents. I am afraid that as a city, we are deadlocked and our inability to find a common agreement is going to be at the cost of children who continue to go to school in atrocious facilities. I hope that we can come together and instead of this two sided disagreement, we can find a middle ground to move forward instead of resting on stonewall arguments. This is a lengthy piece; however, I hope that adding some information and perspective alongside an opinion and proposal will help move the conversation past the current state. My opinion may not be right and my proposal may not be the best; however, it is something to start a different conversation that will hopefully inspire some action long after the meals tax debate concludes.


MEALS TAX

In my opinion, to say that the city voted on a referendum for the mayor to fund schools without a tax increase is disingenuous because the referendum just directs the mayor to present a plan without using tax increases or publicly declare it impossible. The referendum does not guarantee a plan will be presented at all much less one without tax increases. This means on January 1, 2019, Mayor Stoney could stand up with no plan at all and simply say “it is impossible without tax increases” and move on. In reality, we could just all assume that Mayor Stoney making a tax-based proposal is him saying this is not possible without a tax increase.

I believe that the state of school facilities is an absolute emergency that need a plan enacted immediately to begin addressing the circumstances that past administrations have allowed to continue for far too long. I am in support of the meals tax proposed by Mayor Stoney. That said, it is not enough. I don’t think we can wait to have counted every penny of our schools need before we begin but there needs to be some sense that our elected officials will continue pursuing additional funding in short order. For as much as people want to cry out that Mayor Stoney has not acted in a year and this is an unoriginal solution and there should be cuts… we could (AND SHOULD) all say the same thing about our City Council members. I believe City Council should pass some kind of revenue increase in the next couple of weeks so we can start building ASAP. Right now it just happens that the only proposal on the table is Mayor Stoney’s meals tax increase. If there was a competing proposal that had the same, if not better, options for schools… I would also support that. Bottom line is schools need to start being built immediately since yesterday is not an option.

I have seen a lot of confusion about what we need and what the alternatives are so I threw together a quick summary of what the actual situation is with some back of the napkin math (using numbers from previous City Council meetings and the CAFR) alternatives. What I hope to come from this whole discussion is that people see there is a bigger issue than Mayor Stoney proposing a one pillar meals tax plan to fund schools… and it is the political will of City Council. If we want our city to move forward, we as a collective Richmond need to come together and demand better from our City Council members.


HOW MUCH MONEY DO WE REALLY NEED?

Former Interim Superintendent Tommy Kranz presented a facilities report to School Board that identified the need for 11 schools to be completely renovated/replaced, 11 schools for major renovation, 5 schools for renovation, 7 schools for minor renovation, and 8 schools with no renovation work today. Then, the board was presented with two recommended options known as Plan A and Plan B. Both plans were a 20 year flight plan of how to address the facilities needs broken down into four phases. Plan A had a total price tag of $795,984,631 and Plan B had a total price tag of $741,023,929. Phase 1 of both plans was identical. The difference was in Plan B, phases 2-4 involved school consolidation (read: closures) while Plan A did not. The board didn’t want to vote on something that would impact 20 years when their tenure is only 4 years and let’s be real, needs change over time. So what school board voted on was JUST phase 1. Which, if you recall, was exactly the same in both plans. The difference really was that if the school board voted on plan B, it would set the intention that they wanted to pursue school consolidation.

School board passed Plan A, Phase 1 with a projected cost of $224,816,178. Phase 1 calls for the construction of five new schools (Greene Elementary, George Mason Elementary, Woodville Elementary, Elkhard Thompson Middle School, and George Wythe High School) and the renovation of two schools (Fairfield Elementary and Francis Elementary).

Quick Recap: the total price tag of Plan A is ~$800M; however, phase 1 is ~$225M. 


SHOW ME THE MONEY!

Mayor Stoney’s proposal of a 1.5% meals tax would generate $9M in additional revenue. This additional revenue would yield the city’s ability to take on ~$150M in new debt to finance the facilities being built. We can go back and forth on the pros and cons of a meals tax; however, the biggest problem with this plan is it will only fund a portion of phase 1. In addition, the restaurant industry feels targeted and like they should not have to carry the sole burden of funding schools. I have concerns that our City Council members will not pass other taxes based on the discussions last year; however, I went into the CAFR to pull some numbers and sketch out two proposed alternatives.

 

PROPOSAL 1: FULLY FUND PHASE 1

  • Increase the real estate tax 1.5 cents from $1.20 to $1.215 = +$2.9M
  • Increase meals tax 1.5 cents from 6% to 7.5% = +$9M
  • Implement Cigarette Tax of $0.40/pack = +$2.5M
  • TOTAL ADDITIONAL REVENUE = $14.4M 

Based on the same ratio (1 : 16.67) of additional revenue to additional debt capacity in the Mayor’s plan, the $14.4M would open the door for ~$240M that would fully fund phase 1 of the facilities plan. With the cost of Phase 1 being $224M, the overage on revenue could mean a cushion, positioning for phase 2, or maintenance costs of other schools.

 

PROPOSAL 2: SPREAD THE BURDEN

  • Increase the real estate tax 1 cents from $1.20 to $1.21 = +$1.9M
  • Increase meals tax 1 cents from 6% to 7% = +6M
  • Implement Cigarette Tax of $0.20/pack = +$1.25M
  • TOTAL ADDITIONAL REVENUE = $9.18M

Based on the same ratio (1 : 16.67) of additional revenue to additional debt capacity in the Mayor’s plan, the $9.18M would open the door for ~$153M. While this falls short of fully funding phase 1, it spreads the burden across multiple industries.

 

PRACTICAL MATH

Real Estate Tax: My house is currently assessed at $175,000 and my property tax this year is $2,100. If the tax was raised by 1 cent to $1.21, my tax would increase to $2,117.50 (+$17.50). If the tax was raised by 1.5 cents to $1.215, my tax would increase to $2,126.25 (+$26.25). Obviously this increase is proportionate to people’s home assessments and there are places in the city that have far higher assessed home values than mine. One objection to the real estate tax is that it will harm the elderly and lower income homeowners who are on more of a fixed budget especially in areas of rapid gentrification. If we go in this direction, I would encourage City Council to look into their current tax exemption and tax freeze policies and programs to find a way to help protect people on very fixed incomes as to not damage home ownership.

Meals Tax: Let’s say eating at an average priced restaurant in Richmond costs a family of 4 ~$60 if they don’t have alcoholic beverages. Today, the city tax on a $60 meal would be $3.60. A 1 cent increase would raise the city tax to $4.20 (aka $0.60) and a 1.5 cent increase would raise the city tax by $0.90 to $4.50. If we look at a fast food combo of $8, the current city meals tax is $0.48. A 1 cent increase would make it $0.56 (+$0.08) and a 1.5 cent increase would make it $0.60 (+$0.12).

Cigarette Tax: Google told me that the average price of a pack of Marlboro cigarettes is $4.69 so a $0.20 tax would increase the cost to $4.89 and a $0.40 tax would increase it to $5.09. The cost is a little more daunting if you look at it in terms of carton (10 packs) as it would equate to $2.00-$4.00 increase per carton.


BUT WHAT ABOUT THE CUTS THOUGH?

You are right and I agree… there are efficiencies to be had and cuts need to happen; however, there are other needs (public housing) in the city so either we will need new revenue here or another time to make everything happen. We absolutely should not be looking at JUST additional revenue. That said, I would rather pull the new revenue lever for schools as an emergency situation because I do not trust that City Council will be able to make enough cuts. I do not want to leave the future of when we can start building new schools to be left at the hands of 5 city council members agreeing on where to cut money out of the budget.

One of those efficiencies we could look at has been the year over year budget surplus revealed in financial reports. In late 2017, the city financial report showed a $16.9M surplus of which, $9M went to an unassigned fund balance. For City Council to touch that money, Mayor Stoney would need to certify the funds so until that happens, it is not “real” money. During 2017 budget deliberations, Mayor Stoney did not certify the $13M budget surplus so I am not sure we can count on it being certified this year. One of Mayor Stoney’s priorities is for Richmond city to become a AAA rated city and the financial advice was rating agencies do not look favorably at spending fund balances to balance the budget. In the event the money is certified for use, a surplus is not a reoccurring revenue source so I would think the city could not use it to increase the debt capacity to build new schools. In the event the money is certified for use, we need to watch how City Council decides to use the money and use our voices as much as possible to get the money to address emergency priorities such as school facilities or public housing facilities.

 

DEBT CAPACITY SITUATION

On Monday January 29th, at the joint quarterly meeting of CC/SB/Mayor there was a finance presentation that tried to explain why we need new revenue. I think the presentation went over most people’s head if only because I had to go back and watch the Facebook live stream twice to get where he was going.

Basically there is this thing called the Capital Improvement Program (CIP) that is approved annually by City Council. It serves as a directional flight plan (with real numbers and projects) for the city’s next five years of projects that will be financed. Per the document “to be included in the CIP, the project should cost more than $25,000 and must have an expected useful life greater than the life-span of any debt used to fund the project. Projects include construction and major renovations of buildings; economic development activities; acquisition of property; improvements to roadways, bikeways, and sidewalks; and the efficient operation of the water, sewage and gas systems. Other costs associated with the capital budget include, but are not limited to, architectural and engineering fees and site development.” The finance presentation was saying that the already approved CIP increases our debt service over the amount of our 2018 budget level. The height of exceeding the 2018 budget occurs in 2023 where the debt service is projected to be $19M over our current revenues. This means, we are not able to use our existing 2018 budget to get someone to give us even more debt to fund the school facilities plan.

While the city’s projected revenue growth should naturally overcome the existing amount of debt service, there is not enough revenue to fund schools immediately. Without raising revenue, we can’t begin taking on more debt to fund schools until 2023 when the existing debt service begins to drop.

So, all that being said, I think it is a valid question to ask how building an expiration into the proposed taxes would impact the city’s ability to get the needed debt issued today. If building can start by 2019, phase 1 should be completed by 2023. Looking at the chart above, that is where we start to see the drop off of our existing debt service. Is the debt service after 2023 enough that it will allow the city to take on funding phase 2 ($208M) in years 6-10? What about phase 3 ($188M) in years 11-15? Of course, with that question we should keep in mind that cost of construction will continue to rise so there is no guarantee that we will have the same, or similar, figures for those phases. Also, there is no guarantee that our existing debt service will continue to decline as projects are approved in the future. But that is also part of where we can be involved as informed citizens and scrutinize the CIP and development projects, giving push back to our City Council members on their priorities and what is approved. For example, out of the ~200 pages of projects in the CIP, there is one page on the School Bus Lease and one page for School Capital Maintenance. If School Capital Maintenance can be in the CIP as a priority for debt service, let’s get funding for all phases of the facilities plan into the CIP.

 

2017 BUDGET DISCUSSIONS

I mentioned that I do not trust City Council to make big cuts in short order. There are several examples where I could cite City Council deadlock and dissent and inaction over the past year; however, the most relevant is probably with the budget. During last year’s budget discussions, Council agreed to increase police and firefighter pay that would cost $2.7M and then they sought to cut Stoney’s proposed budget to make it balanced. After a late night of deliberation on April 26th, council was only able to cut ~$2.6M which left them short $100,000 of cuts. Around the same time, the late 2016 financial report revealed the city had a $13M surplus and reports came out about RPS’s $8.3M surplus that would revert back to city control. Council asked for Stoney to certify the fund balance to be able to balance the budget; however, based on financial advice, Stoney would not certify the $13M fund balance. Budget deliberations all came to a head with an 18 hour budget work session with Reva getting snappy after 1AM calling for Stoney to wake up and certify the fund balance.

As luck would have it, Stoney was already awake and he sent a letter to council that certified a revised real estate tax estimate that added $2.28M to play with. In addition, Stoney certified the $8.3M schools surplus as long as it stayed with schools which went to paying for teacher laptops ($2.3M), school building maintenance ($1.8M), and paying off a school bus lease ($4.2M). By paying off a school bus lease, $1M was freed up in the operating budget. With the additional $3M+ in money, council was able to go back and un-cut previously cut budget items which then put them $1.16M over budget again. At the 18-hour mark, council finally got the mayor’s administration to agree to propose recommended budget cuts to balance the budget. Council President Chris Hilbert said, “I’m asking that this not be left to council to figure out. This is a tiny amount of money that we are asking you to come back with… I’ve been here 13 years. This is the closest council has gotten to balancing the budget and I’m asking for the administration’s help.” The meeting adjourned around 5 A.M.

So, lets re-cap. Council spent hours deliberating and was ultimately deadlocked over $100,000 deficit to be able to cover the $2.7M police and firefighter increase. After tons of public hearing and discussion, they nixed the tax increases they put on the table and asked Stoney for more money. Stoney obliged. Council got excited and overspent the additional budget prompting them to ask the Mayor’s administration to make recommended budget cuts. I am not going to hold my breath in hopes that our current City Council is able to cut and move as many funds around as they would need to.

By the way, this is a great moment to bring up that in March, Mayor Stoney will present his budget to City Council. In May, City Council will have a public hearing on the budget before they approve it. We need to hold our elected officials accountable and for as easy as it is to point our finger at the Mayor, City Council is the one who holds the purse strings. We need all levels of our government working together to the same end.

 

CITY COUNCIL ALTERNATIVE TAX ARGUMENTS

I also have a concern that City Council will not be able to come to a consensus that will result in increased revenue for funding schools regardless of what tax we look at. In April 2017, our current City Council discussed and rejected the possibility of a 3% admissions tax increase, a 1% meals tax increase, and an $0.80 cigarette tax increase so we have an idea of how these discussions are likely to play out. I think it is important to also note, the 2017 budget cycle was also not the first time some of these taxes have been discussed and rejected. At the same meeting, council agreed to request a payment in lieu of taxes from the Virginia Housing Development Authority, the Virginia Public Building Authority, and the Virginia Biotechnology Research Park; however, the city attorney said the city can impose the tax but can not force the state agencies to pay so the proposed $1.1M in revenue could not be guaranteed.

ADMISSIONS TAX– Initially Council President Hilbert, Councilwoman Ellen Robertson, and Councilwoman Cynthia Newbille were co-patrons on the admissions tax that would yield $1.3M in additional revenue. However, Robertson and Newbille withdrew their support because after they spoke with art groups and venues, they were convinced that the tax would be harmful. Ultimately, Hilbert was the only council person who supported the admission tax arguing that an additional $3 on a $100 ticket would not dissuade people from going to see Elton John. Venue owners spoke at public comment against the admissions tax because it would harm artists and discourage them from performing in Richmond in favor of other cities who do not have the same tax. The logic here is that at many venues, most tickets are sold at the door which do not put the tax on top of the ticket sale and instead it is a cost taken out of the artist’s bottom line. While the price of tickets is agreed to by the artist and venue, that price is set based on what consumers are willing to pay in a given market to maximize sales and attendance.

MEALS TAX- The proposed 1% increase on the city’s meal tax proposed by Robertson and Newbille was projected to increase city revenue by $6.1M. Despite no one speaking out against the meals tax during public comment, the proposal fell short of passing. Trammel was concerned with people going to Chesterfield and Henrico to eat. Hilbert said he didn’t believe a tax would impact dining decisions and Robertson took it a step further saying if people knew it was going to schools, they would continue to support restaurants. Regardless, the tax did not pass.

CIGARETTE TAX- Councilman Parker Agelasto proposed the $0.80 cigarette tax that would have generated an additional $5M in revenue; however, only Hilbert was in support. While many people came out to support raising the cigarette tax for health reasons, there was a strong contingent of convenience store owners who opposed the tax due to crime and impact to their business. The convenience store owners said that their stores are being robbed for cigarettes and employees are caught stealing packs of cigarettes, not money. In addition, since counties do not have the authority to levy a cigarette tax, they fear people crossing to Chesterfield and Henrico to purchase cigarettes which would hurt their businesses. Councilwoman Reva Trammel contributed the additional objection that Philip Morris’s corporate offices and manufacturing facility make them a large tax payer ($17M) and employer (3,800 jobs) in the city.


WHAT IS YOUR POINT?

I guess my point is… schools need to start being built and to do that, I think a revenue increase is the only option. The revenue increase could be from the meals tax proposal or a council member could submit an alternative proposal to leverage a different revenue stream. If they can all come to an agreement and pass something, let’s start breaking ground.

The secondary point to all of this is we can direct our outrage at Mayor Stoney or School Board; however, City Council has a lot of the power needed to fix the facilities situation for RPS students. Some of the council people ran on a platform that was to fund schools and they have yet to submit their own proposal. I outlined one here… let’s see what you’ve got RVA Council.

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2 thoughts on “Money Problems: How much, an alternative plan, and challenges

  • February 4, 2018 at 2:56 pm
    Permalink

    Fantastic write up. Do you happen to know what revenue we get from vcu real estate. Do they pay a fee in lieu of taxes? I feel like that is source that should be examined. If vcu is already paying a fair amount then I think property tax should be the main lever.

    Reply
    • February 4, 2018 at 10:10 pm
      Permalink

      I’m glad you liked the write up. My understanding is VCU is considered to have tax exempt status. I am not positive if there is some other type of compensation the city receives instead. In addition to real estate taxes, VCU dining facilities (yes, there is the actual dining hall but also various fast food restaurants in the student center) do not have to pay the city meal tax. I believe in both cases it would be up to the General Assembly to make changes to allow them to be taxed. I have asked the question before of why we don’t pursue it, and basically, if state institutions were subject to taxes, then they would need more money from the state or students to be able to operate when a big plus of state higher education institutions is the affordability to in-state residents.

      http://www.richmondgov.com/Auditor/documents/2017/2017-07_RealEstateAssessments.pdf

      Reply

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