Economic Decline Sets Stage for Decrease in Government Services

When it comes to the country’s economic slowdown, everyone – homeowners, investors, job seekers and families – seems to be feeling the pinch. And local government may be next.Most Colorado municipalities lean heavily on sales tax to fund city services, but when consumer confidence takes a dive, residents shop less and city coffers suffer.

“We have 271 cities and towns, and generally on average somewhere in the neighborhood of at least half and sometimes as much as 70 percent of municipal general fund revenue comes from the sales tax locally,” said Sam Mamet, executive director of the Colorado Municipal League.

Increases in costs, such as fuel for snow plows or a need for more code enforcement to address the rising number of foreclosures, can tip a city budget into the red even as sales tax revenue remains flat.

Cities throughout the state are starting to assemble their operating budgets for next year with a close eye on national, state and especially their local economies.

While many finance officials don’t want to say next year could involve budget cuts, the common description of Colorado cities’ main funding source is “volatile,” especially in economically bad years.

“Sales tax is extremely volatile, and that’s the one we have to keep an eye on,” said Bob Eichem, Boulder’s finance director.

Although Boulder may be in a better situation than other cities, because 20 percent of the city’s day-to-day operating funds come from property taxes, which are more stable in the city than they are in other areas of the state.

If sales tax revenue drops in Boulder, it could hurt the city’s open space fund, which is almost entirely paid for through sales tax, Eichem said. 

Some cities aren’t worried about the economy yet.

Larry Dorr, finance director for the City of Lakewood, said he isn’t making changes to the city’s operating budget of $89.2 million, with $48.9 million coming from sales tax, because the city takes a long-term view of economic conditions.

If the economic slowdown continues for months, or years, Lakewood would have to make cuts to its budget, but that hasn’t happened yet, Dorr said.

Cities have a few alternatives when it comes to reducing budgets: they can operate on reserve funds – eating away at city savings; delay any additional spending, such as leaving unfilled positions vacant; contract out work such as code inspection to save money; or resort to unpopular cuts to city services.

“It always comes down to those same questions, those core services versus the thing communities really prefer to have on top of those core services,” said Eichem, who has worked in local government finance for 29 years and seen his share of economic downturns.

Public safety services such as fire and police are usually the last service local government scales back. Instead, smaller and often beloved services take a hit. 

Residents of struggling cities could see reduced hours at city libraries, swimming pools and rec centers or fewer city employees to answer the phones or process permits.

Although it is too early to make precise projections, Aurora will likely need to cut back its spending by $5 million next year because of a slowing economy, according to city officials.

“What do bad economic times do for local government? Well, pretty much the same as everybody else. It feels pretty constricted. It’s the vision thing, you start looking at things you cannot do in the short term,” said Molly Markert, an Aurora city councilwoman who has seen budget cuts before and expects them to be necessary again.

“It’s not a vibrant time,” Markert added.

But that’s not entirely unexpected in Aurora.

A 2006 study of the city’s revenue structure warned that Aurora’s dependence on fluctuating sales tax for the majority of its cash flow would contribute to future budget shortfalls.

Mamet said more and more local governments are asking residents for an increase in property, rather than sales tax, to fund city services.

“The property tax is less volatile, and I think that is one of the reasons why,” he said.

Of course, not everyone thinks turning to tax payers is the right solution.

Jon Caldara, president of the Independence Institute, said any economic crunch is an opportunity for government to increase efficiency by contracting out more services and making personnel changes.

“The cowardly way is to raise more taxes, and my guess is they’re going to take the coward’s way,” Caldara said.

Mamet said residents are more likely to approve a tax increase at the municipal level when the additional money will be used to fund specific services for a set number of years.

While some city officials expect to make tough choices, other local governments are running smoothly because of increases in sales tax revenue.

“The economy has been improving here in northwest Colorado,” said Craig City Manager Jim Ferree.

Ferree said Craig is very dependent on sales tax revenue, and the city keeps $2 million to $3 million, about enough to operate on for three months, in its budget as a cushion against any local economic turn for the worst.

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