CITY ON THE BRINK: Revenues shrink, cities scramble

When the state government and voters imposed permanent limits on property taxes, the cities’ main fiscal artery narrowed. The municipalities’ yearly revenue shrank, by as much as 30 percent for some, after the Indiana General Assembly enacted property tax caps in 2008 and Hoosiers overwhelmingly voted to etch those caps into the state constitution two years later. Communities' reactions varied.

Muncie’s former mayor closed two firehouses and laid off dozens of firefighters and police officers, all of which have since been restored. Fort Wayne formed a task force and adopted a package of its recommendations, such as local-option income taxes to pay for police and fire services, a fee on fire hydrants and restructuring city employee benefits. Kokomo annexed some unincorporated neighborhoods already receiving city services, removed a third of the city’s traffic signals, streamlined trash pickup to a single side of most roads, and removed paid lunch hours from city workers’ eight-hour days.

“We had to adapt to today’s reality,” said Kokomo Mayor Greg Goodnight.

Call it Indiana’s new normal. The cities’ old reality disappeared when the property tax caps hit. “You lose 30 percent of your general fund, and something’s got to give,” said Charles Taylor of the Bowen Center for Public Affairs at Ball State University. In heart-attack survivor lingo, an Indiana town’s healthy, post-caps existence means more than ingesting a baby aspirin daily. Substantial changes in the delivery of public services and municipal financing joined the remedy list.

“We came out of [the property tax cap implementation] and had to think, ‘Are we going back to our old lifestyle, or are we going to diet, start eating healthy and exercising?’” Goodnight said.

“We had to,” he added, “take our medicine.”

Since 2008, when Goodnight took office and the Legislature approved the caps, Kokomo’s property tax revenue is $28 million less than it would’ve been without those caps. That includes a $7.2 million loss in 2014 and another $8.8 million this year. In that same span, Kokomo trimmed its roster of full-time city employees, through some layoffs and attrition, to 402 currently from 521 in 2008. “Every single department is operating on less, and it’s been mid-level, the management and hourly workers, as well,” Goodnight said. His salary (listed as $79,752 on the Indiana Gateway Report) and city council members’ pay hasn’t increased since 2008 and won’t go up next year, either, according to the proposed 2016 budget, Goodnight explained.

Kokomo rebuilt cash reserves, paid off early a new $9 million parking garage, constructed a baseball stadium with economic development income tax (or EDIT) funds, and supported a new downtown YMCA, Goodnight said. While Kokomo’s economy benefited from the federal government bailout of the auto industry, expanding local plants, the city’s commitment to quality-of-life projects stands out, said Matt Greller, executive director of the Indiana Association of Cities and Towns.

“If you go to Kokomo today, you might just sort of turn around and look at yourself and say, ‘Where the heck am I?’” Greller said of the revival.

That said, Kokomo still deals with a smaller infusion of state revenue.

Terre Haute, Muncie hit hard

Of course, the diminishment of the funds received by Kokomo, Muncie, Fort Wayne, Terre Haute and other Indiana municipalities also means a savings for taxpayers, totaling $750 million annually, according to Larry DeBoer, an agriculture economics professor at Purdue University and a property tax expert. In Terre Haute, taxpayers will save slightly more than $10 million this year, while those same tax-cap credits reduce the city’s revenues by just under 32 percent.

“That is very high. That is up there,” DeBoer said of Terre Haute’s revenue cut. “There aren’t very many units of government that are higher than that.”

Terre Haute has a sister city, in terms of property tax cap impact, demographics and history. Just as Terre Haute (population 61,000) is home to a major public university (Indiana State) and an economy built on manufacturing, Muncie (population 70,300) includes Ball State University and a legacy of factory-based employment. When industries closed, their contributions in property taxes left, too, the communities’ assessed property values fell or stagnated, and tax rates went up as the need for services to a larger number of struggling residents rose. Tax caps then limited the revenues to be collected, and the cities’ general funds sharply dwindled.

“Now, that’s a cut for taxpayers, remember. So, they’re paying less,” DeBoer emphasized. “But it means that the city’s budget now has this hole in it that hadn’t been there just a few years before.”

While Terre Haute’s revenues decrease by $10 million in 2015, Muncie loses $14.8 million, according to Muncie Mayor Dennis Tyler.

“I would say Muncie and Terre Haute are the two hardest-hit communities, probably without question, that we’ve seen,” said Greller of Cities and Towns.

As the property tax caps phased in, Muncie experienced those drastic cuts by former Mayor Sharon McShurley in 2009. Those steps were, Greller said, “100 percent property tax driven.”

Tyler, a retired firefighter and former state representative, won the mayor’s seat over McShurley two years later. The closed firehouses reopened, and fire and police jobs returned, a move helped by a federal SAFER grant for firefighter funding, which is expiring. Tyler said the full level of those public safety services is necessary for a city that houses a major university such as Ball State. “We have to provide those services,” Tyler said by phone.

Some restraints remain, though. Muncie city employees received no raises this year, the Muncie Star Press reported last fall, and Tyler’s salary stayed at $70,294. “My employees have only had one 2-percent pay raise in eight years,” the mayor told the Tribune-Star.

Muncie entered 2015 with an $8.5 million cash balance in its general fund, according to the Indiana Gateway for Governmental Units Report. While Tyler said, “We’ve kept [the budget] as tight as we can,” he thinks the city must continue to commit funds toward quality-of-life amenities. “I’ve got to figure out ways for Muncie to invest in ourselves, because if we don’t, nobody else is going to.”

The cities’ precarious fiscal existence is not what Tyler expected as a state legislator, when he supported a referendum that let voters enshrine the property tax caps in the constitution. Preliminary studies, Tyler said, had indicated that municipal budget problems would level out by 2011 or ‘12. “Just speaking from Muncie’s point, that hasn’t happened,” he said.

Cities can try income taxes

Cities possess one alternative. The Legislature allowed municipalities to adopt new local option income taxes (or LOITs) as property tax relief. The LOIT revenue can help offset property tax cap losses, and can fund public safety services, such as police and fire. New LOITs have not been adopted to boost funds in Muncie and Terre Haute. Tyler doesn’t anticipate that happening in Muncie, but said, “If we get to a critical time, we may look at a lot of options.”

As for Terre Haute, where its general fund carried an $8.62 million deficit at the end of July, one reason for that status “is because you actually don’t have any of the property tax relief local income taxes,” DeBoer said, glancing at the budget on a computer screen in his campus office at Purdue. “Relative to other counties, [Vigo is] still a little heavier on the property tax and a little lighter on the income tax, in terms of tax mix.”

Vigo County has a county adjusted gross income tax (or CAGIT) of 0.75 percent per $100 assessed value, and an economic development income tax (or EDIT) of 0.50 percent, for a cumulative total of 1.25 percent. The median rate for Indiana’s 92 counties is 1.4 percent, DeBoer explained, putting Vigo among the lowest half.

Also, under the state taxing structure, because Vigo County operates a CAGIT tax, only the Vigo County Council has the authority to impose any new local option income taxes. Such a set-up for an urban county is rare, DeBoer said; in most urban counties, city councils — rather than county councils — hold the power to adopt local option income taxes. The Vigo County Council chose the CAGIT option in 2003. Days later, the Terre Haute City Council declined to replace CAGIT with the more common urban tax format.

Some cities have pursued local option income taxes to keep local services functioning, said Greller, the cities and towns association leader. If well-informed in advance, residents generally understand, he added.

“You probably have never seen a mayor lose an election over a sewer and water rate increase,” Greller said, sitting in a conference room in the IACT office on West Market Street in downtown Indianapolis. “[Mayors] do a very good job of explaining to citizens why the fee is in place, what it pays for, how it’s utilized. They do the same thing with taxes. I think that, generally, citizenry is OK with paying for services, as long as they understand what it’s being used for, what they get in return.”

Task force helped Fort Wayne

Fort Wayne handled that process in 2013.

With property tax revenue shrinking in 2011 and ‘12, “the city was starting to use an unsustainable amount of cash balance to make things work,” explained John Stafford, the former director of strategic planning for the City of Fort Wayne and a former director of the Community Research Institute at IPFW, the local university. “But [the city] had such a high level of cash balance that they could do that for several years, and knew that,” Stafford said, but that’s when the city controller said that trend had to change.

Mayor Tom Henry, a Democrat, and the Republican-majority city council acknowledged the budget problem, and assembled a task force, the “Fiscal Policy Group,” empowering it to develop solutions through policies. That panel included city administrators and employees, at-large city council members, and statewide academic experts such as DeBoer and Stafford. Their starting point was to accept that business-as-usual could not continue.

“And when they agreed to do that, to some degree, they recognized they were buying into a process that ultimately was going to come up with some recommendations that were going to be painful,” Stafford said. “But they all recognized something had to be done, so they were willing to do that.”

The group worked for more than a year. “We looked at all the obvious solutions,” Stafford said.

The remedies the panel found included having Fort Wayne accept its maximum allowable property tax levy, and create a cumulative capital development fund — two steps most Indiana communities, including Terre Haute, already have in place. But that wasn’t all. The group approved a new fire hydrant rental fee and cuts in “pretty generous” city employee benefits, as Stafford put it.

Still, that wasn’t all.

The task force backed two new local option income taxes for property tax relief and to fund public safety, such as police and fire protection. That step required extra negotiation. The mayor supported a property tax relief LOIT and a public safety LOIT, both at 0.25 percent. Two Republican city council members on the panel created their own package of budget remedies with no new local option income taxes. But the two council members’ no-tax plan “didn’t meet all of the objectives that the Fiscal Policy Group had established, the things we wanted to get done, particularly [to] create a long-term solution for dealing with a shortfall in capital needs,” Stafford said.

Compromise settled the impasse.

John Crawford, another conservative Republican council member on the panel, “regarded by all the council members as financially the most astute of all,” Stafford said, recommended adopting the public safety local option income tax, but at a lower, 0.11 percent level. “The mayor almost immediately said, ‘I can live with that.’”

The result? The general fund is slowly rising again, Stafford said. It increased to $7.54 million on Dec. 31, 2014, from $5.25 million when the year began, according to the Gateway Report. New classes of police officers and firefighters were hired, after a couple years hiring hiatus. The parks capital budget has added $2.5 million per year, while another $6 million to $8 million per year has been added for ongoing street and sidewalk capital improvements, he said.

What if the task force members hadn’t arrived at a package of solutions, and if the city hadn’t enacted those remedies?

“They were going to have to start slashing budgets,” Stafford said. “They knew that.”

Hard choices for cities, residents

Downsizing and frugality only go so far, though, Greller said.

That’s especially true for cities such as Muncie and Terre Haute that have “maxed out” their property tax revenue, with most taxpayers already at their cap limits, leaving little possibility for extra funds through higher tax rates. That leaves only new taxes and fees to pay for services and workers.

“There’s always this notion that, ‘Government can get leaner and more efficient. It needs to be run more like a business,’” Greller said. “How many times have you heard that? My response to that is, if the services that government provided could be run like a business, a business would be doing them for profit. Of course, there are [ideas] we can take from the business community, but if you have to start with that premise, the idea of having a fire department is not exactly [as] a profit center.”

So, places such as Muncie, Terre Haute, Kokomo, Logansport and similar towns are left with making difficult decisions, Greller said, “between new firefighters or mowing the city parks on a regular basis; new police officers or repaving city sidewalks.”

The effect of such decisions sometimes isn’t immediately felt. “My experience has been that the [average] community doesn’t really notice until it impacts them,” Greller said. “You really don’t care that [the city] just had to mothball three garbage trucks until your trash doesn’t get picked up until every other week, instead of every week. You really don’t care that the fire stations necessarily close, until your house catches on fire and what was the station down the road [is closed and] now there are fire trucks being dispatched from across town and it takes an extra 10 minutes, which results in the loss of your home, instead of repairable damage. Those types of things.”

Sue Loughlin contributed to this story.