There is no drama in local government that rivals the drama of a tough budget year, but this year is the Towering Inferno of city budgeting.
City of Memphis budget hearings have been emotional and combative for a number of years, which is no surprise as city departments and elected officials fight to divide up the crumbs left on the table as property values decline, consumer-based taxes remain fragile, and the system of costly benefits implodes.
It’s been a regular feature of these budget debates for some time that it was tantamount to the Administration and City Council selecting the best option from a list of poor ones. And yet, compared to this year, those were the good old days as the options this year were between bad and worse.
The forces that have made city budgeting increasingly difficult since the Great Recession converged to make this a watershed year for city government, and that was before the unfunded pension liability was added to it.
Stresses and Strains
More than anything, City of Memphis has more and more felt the stresses that stems from declining property values, and 2014 real estate appraisals by the Shelby County Assessor of Property were down a troubling $821 million (from $30.47 billion in 2013 to $29.65 billion in 2014). Total assessments in 2014 were $8,960,241,078, which in only one year was a drop of almost $300 million in the primary source of revenue for city government.
Trend lines for the last three to four years suggested clearly that City of Memphis budgets were going to hit a wall, but no one was prepared for how high that wall would be as the demand for $78 million more each year to address the unfunded liabilities in the city pension plan was added in. That reality moved this year’s budgeting from extremely difficult to nearly impossible, because there were no accounting devices, no stopgap ideas, and no budget tricks that could serve city budgeters this year.
It wasn’t as if City of Memphis was flush with money to begin with. Except for police and fire services, every City of Memphis direct service to the public is underfunded, and despite conventional wisdom to the contrary, City of Memphis is much more economical than the other larger governments in this county. Meanwhile, City of Memphis has serious capital needs if the city is to compete with comparable cities in producing the quality of life that attracts talent, jobs, and investments.
That’s why the place where city budgets now find themselves for the foreseeable future is disturbing, if not frightening. Essentially, city government has to find a way for its pension payments to climb to the $78 million level and stay there or even go higher for years to come, because the pressure about pensions won’t ease until fewer people are in the existing system and with present life expectancies what they are today, that will be decades from now.
It’s almost comical to realize it was only three years ago that finance officials were touting the strength of the pension plan and its returns on investment. Then again, so much that was said about budgets in those days now seems wishful thinking.
Cognitive Dissonance
Once again, in this year’s budget debate, the reliably overheated rhetoric of union leaders was an exercise in cognitive dissonance. All of the city’s services have suffered as police and fire services soaked up more and more of the city budget – 60% of the expenditures and 70% of the people – and with no correlation between size of a police force and crime rate, it would be refreshing if the city’s police officers could offer more than comments like “Memphis is a ticking time bomb.”
Once again, it was lost on police union officials that if Memphis is as unsafe as they say it is, it’s a striking commentary on their effectiveness, or lack thereof. After all, if Memphis is this unsafe with 60 percent of its budget devoted to public safety, maybe it’s time to fight crime smarter rather than more expensively.
Here are a few pertinent facts: between 2006-2012, the number of sworn officers in MPD increased by 526, and while MPD responds to about one million calls a year, only about 50,000 are Uniform Crime Report crimes. That’s why the so-called “full service police department” description is misleading. MPD isn’t delivering full service; in truth, it’s providing services that belong to other divisions or to civilian workers, and as a result, many of today’s make no sense budgetarily or are the smartest investment in personnel.
Suggestions for reducing the number of sworn officers and increasing the number of civilians in MPD are included in the city’s current five-year plan by PFM (but they mirror similar recommendations by Deloitte in the 2007 City of Memphis Efficiency Study). Since that earlier plan, Memphis in fact did the exact opposite, increasing the number of officers and cutting the number of civilians.
Public Support for Change
It’s been said by some union leaders that the public does not support changes, but that’s not what the poll taken in connection with Five-Year Strategic Fiscal Plan shows. Slightly more citizens (49%) support the possibility of closing some fire stations or shifting to ambulance only than oppose (40%) the idea, and 50% would support increasing crime prevention and intervention programs even if that meant a reduction in the number of police officers working for the Memphis Police Department.
Meanwhile, the City Council action on the budget is in line with public polling as well. A majority of citizens (64%) support making salaries of City of Memphis employees similar to those in private sector jobs. Sixty-five percent support changes to pension plans to contain future pension costs (the support actually goes down slightly to 58% when it is was asked if they would support changes if they were negotiated with labor unions); and in order to meet its pension obligations to employees, citizens were clear that they did not want a property tax.
But confusing rhetoric can’t be laid to union officials alone. Memphis Director of Police Services Toney Armstrong, in speaking out against the actions on benefits recommended by the administration of which he is a part, seems to have a decision before him: whether to become a full member of the Wharton Administration or to file for his own retirement.
Once again, Mr. Armstrong chose the news media to communicate his difference of opinion with his own administration. It would be strange behavior for any city director, but for the director who works in an organization that is all about chain of command, it is nothing short of mystifying.
Memphis’s Math Problem
Memphis has a math problem, which seems lost on many of those who spoke on all sides at Tuesday’s Council meeting. People regularly compared Memphis’ property tax rates to the lower rates in Nashville, but they neglect a key fact: if Nashville had the same house prices as Memphis – rather than its $165,000 – its tax rate would be about the same as the $7.80 cumulative city-county tax rate here. Or put conversely, if Memphis had the same house values as Nashville, its property tax rate would be just over half of what it is today.
The difference in home prices means that although Memphis has 28,000 more homes than Nashville, Nashville residential property produces $141 million more in property taxes.
There is a heavy dose of nostalgia that comes into play in these tax rate discussions, as evidenced by some of the comments made at Tuesday’s Council meeting. Businesspeople and industry spokespeople said that Memphis’ tax rate of $3.40 must not go higher, but most are likely unaware that its current rate is in line with the city’s traditional tax rate. In fact, in 1980 when Wyeth Chandler was mayor, the tax rate was $3.74, and if that tax rate had kept pace with inflation, it would be $10.26 today.
There’s a strange double standard that characterizes discussions about high taxes in Memphis. Few people show up at Shelby County Board of Commissioners’ budget meetings to rail about the evils of tax increases. And just last year, county government increased its tax rate by 36 cents.
There’s also an equally strange double standard about why the city-county tax rate is the highest in Tennessee. Without the more than $1 billion cost of sprawl (which created significant for developers and homebuilders now concerned about the tax rate) and without the almost $100 million in tax freezes, the city-county tax rate would be about $6 rather than $7.80.
But then again, political positions are nothing if not about whose ox is being gored.
Excellent analysis as usual, Tom.
Thanks for the helpful analysis. I’m curious how historically we got to this place. Was the pension ever “funded?” Is it solely due to dropping property values plus the burden of the pilot programs? Partially due to my own lack of knowledge and research and little or no media reporting as to the long range causes of this, I’d like to understand how this shortfall has arrived with little notice on the public radar.
Thanks!
Memphisj:
The year before the Great Recession, the amount of city funding for the pension plan was $5 million a year and the unfunded pension liability was $0.
By 2013, the amount of city funded needed to cover the unfunded liability was about $90 million and the unfunded liability itself was $640 million, according to PwC, the city’s pension adviser, who said the gap was caused by the decline in the plan’s value as a result of the recession.
The problem was exacerbated by the fact that in 2010 and 2011, Memphis’s funding for the ARC (Annual Required Contribution needed each year to maintain the accrual at zero) was 24% and 25% respectively. From 2007 to 2011, the pension funded ratio fell from 103% to 75%.
The funding for the pension payments comes from the same place as other city services – sales taxes, property taxes, and fees. So with falling property values and fragile consumer-based taxes, city services and pensions are competing for the same pot of money.
Let us know if this doesn’t answer your questions.
Thanks, that helps. I’m not as good with the terms. I see comments from friends who are retired about losing their health insurance etc. and am trying to understand all the causes.
I don’t think there’s been much good reporting on this in the local media but then again I don’t watch or read it often (although I try with the CA, I really do, worst website evah) since there’s not much there there.
The information we provided was about the liabilities of the city pension plan that are not funded, according to PwC. The Wharton Administration reduced health benefits for retirees and is using the savings to pay the pension liability. Health benefits are OPEB benefits and those unfunded liabilities total about $1.3 billion because that is the projected cost of health costs in the future for everyone who has retired from city government. If you want more about OPEB, let us know.