Case Discussion

City of Opportunity Budget Proposal

Opportunity is a city of 9,200 near a declining industrial/corporate center in the mid-Atlantic region, but

located next to one of the most affluent communities in the country. The city is predominantly singlefamily

homes, but also contains a 600-acre regional research and industrial park, and a regional shopping

mall. Opportunity has a low poverty level. The city has a council-manager form of government, with a

seven-member city council. The city council, with three new members, has a 4-3 Republican/Democrat

split.

The city has 34 full-time and 5 part-time employees. Services include police protection, public works,

recreation, zoning, planning and development, and general administration. Opportunity also provides

some support to 3 volunteer fire departments, an ambulance service, and a library/community center.

Budget Background

The city has been financial stable in recent years. Primary revenue sources are property and sales tax. The

last tax increase was seven years ago. The property tax rate is currently $0.22, which is just half of the

maximum allowed rate of $ 0.45. The sales tax rate is 1%. Additional taxes are from real estate transfer

and occupation taxes. The city generally does not borrow for capital projects.

Budget Issues

The table below includes the expenditure requests for next years budget, as well as the revenues that can

be expected with no increases in taxes or fees. There are a number of issues to be addressed in this budget:

The city has been using the available fund balances over the past four years. The amount

included in this proposal will completely eliminate the citys fund balance, with no balance

remaining for emergencies or future years budgets.

Funding has been included for a new technician ($25,000) in community development, to assist

the engineer with preparing plans and performing inspections for capital projects

The sewer system was poorly designed, and requires approximately $ 1.1 million in

improvements in the near future. $ 113,000 has been included in the proposal for this purpose.

Major improvements are also needed in the water system, which has not been properly

maintained. Leakage results in about 25% water loss each year (which the city pays because it

purchases water), and a large number of customers have ruined laundry and do not drink the city

water. The total improvement cost is estimated at $327,000, of which $ 46,280 is included for

next year.

Due to inconsistence in payment records and lack of a delinquency shut-off policy, 20-25% of

sewer and water fees are unpaid each year. The current value of uncollected fees is $ 250,000.

The Current fees do not cover the costs of the water and sewer systems. City council has been

Reluctant to raise fees in the pa Preliminary Budget

Requests/Estimates

Revenue

Property tax $895,000

Sales tax 959,000

Other taxes (real estate transfer and occupation 105,000

Licenses, fees, permits 73,000

Sewer fees 309,000

Water fees 87,000

Intergovernmental grants 178,000

Interest earnings 62,000

Charges for service 46,000

Miscellaneous 19,000

Use of fund balance 278,000

TOTAL REVENUE $3,011,000

Expenditures

General government $377,000

Public Safety 758,000

Engineering /code enforcement 155,000

Sanitation 177,000

Public Works 542,000

Water service 158,000

Sewer service 331,000

Parks/recreation 108,000

Debt service 168,000

Capital program ( see table below) 538,000

TOTAL EXPENDITURES $3,312,000st, so these activities are subsidized by general taxes.

Capital Items Request

Road Improvements $253,000

Sanitary sewer 113,000

Water system 46,000

Municipal buildings 32,000

Public works equipment/vehicles 54,000

Comprehensive plan 10,000

Fire department subsidy 30,000

TOTAL $ 538,000

Options

A number of possible options have been identified to deal with the $301,000 budget gap:

Property or sales tax increase

Do not fund the requested technician position

Delay funding of a vacant policy officer position ($30,000). The police force normally operates

with 12 positions, but one officer has retired, and another is on long-term leave with a back injury.

This has required a substantial use of overtime.

Increase water fees. A 37.5% water rate increase for the 700 customers would add $ 30,000 in

revenues. With the increase, 2/3 of the annual operating costs would be recovered, but none of the

capital expenses.

Increase sewer fees. A 20% sewer rate increase for 3,000 customers would generate an additional

$ 60,000 for the year.

Reduce operating expense. Discretionary spending for materials, supplies, and small equipment

could be reduced by 5-10 % across departments, to save $20,000-40,000.

Reduce capital spending. The sewer reconstruction is the only project that is mandated to be done

next year (due to health and environmental concerns about one area where raw sewage is being

discharged directly into a local stream). Road improvements needed for the 47 miles of road in

the city are estimated to cost $ 5-6 million over the next 10 years. Improvements to city hall are

needed to comply with handicapped-accessibility laws, and will cost $ 250,000 in total.

Borrow for capital projects. Debt service currently represents only 5.0% of the budget. The

current debt will be repaid completely in the next five years.

Discussion Question

2. In this case, if you are the finance director of the City of Opportunity, what will you recommend to the mayor and city council to balance the budget (making budgetary expenditure being equal to revenues)?