Beware mayors bearing special tax
There is no question that New London needs to get serious about rebuilding its fund balance, the unencumbered money set aside as a cushion to address unexpected expenses or a downturn in revenue. Cities also need, as Finance Director Jeffrey Smith put it, a little money in the bank to provide the flexibility necessary to pay bills and meet the payroll of an $80 million operation. The fund balance provides that.
Yet Mayor Daryl Justin Finizio's proposed solution should be greeted by the City Council with a high degree of skepticism. Mayor Finizio is suggesting the council impose a one-time supplemental tax, the proceeds earmarked to begin to rebuild or, if large enough, entirely restore the fund balance.
Deficit spending during the final couple of years of the city manager-council form of government was largely responsible for depleting the fund balance. After some initial missteps, Mayor Finizio, working with the council, did a good job of getting city finances back in balance during the first two years of his term, both with service cuts and tax increases.
Rebuilding the fund balance, however, remains a major challenge. It stands at $1.2 million. According to a policy adopted by the council in the early 1990s, it should be equal to about 8.3 percent of city spending, or about $6.6 million. Recent reports by the two credit agencies that evaluate city finances both pointed to the small fund balance as reason for concern.
According to the finance director, a 1-mill tax assessment would produce about $1.6 million, boosting the fund balance to $2.8 million and giving the city, said the mayor, a viable platform to begin rebuilding the fund through the regular budget process and with any surplus revenues. For the median-assessed single-family home, about $165,000, it would mean a $166 one-time tax payment.
A 3-mill tax assessment would raise $4.7 million and come close to restoring the fund balance, but would require sending a $498 tax bill to the owner of that same median-assessed home.
It is hard to imagine the council even considering a special tax assessment beyond 1 mill. Any special assessment that is larger would be politically untenable and place a major financial burden on already heavily taxed New Londoners.
The argument for the single-mill special tax is more defensible. Given the tight margins New London is operating on, it will be difficult to find surplus money to begin rebuilding the fund balance, the mayor noted. The one-time tax increasing it by $1.6 million would at least start to restore this vital financial cushion.
Still, the better solution is dealing with this challenge through the normal budget process, by including money for restoration of the fund balance as a line-item expense and by working that much harder to produce surpluses.
We also again urge the mayor to explore contributions toward meeting city expenses from some of its large, non-profit and so non-taxable institutions, something he said his administration will explore.
While we are not prepared to entirely rule out the idea of the supplemental tax, the precedent of hitting up property owners for more money when the city faces unpleasant fiscal challenges would not be a healthy one.
In any event, it is hard to see it as politically viable. The special tax would pass as an ordinance, subject to petitioning to a referendum vote. It is difficult to envision New London voters approving that.
It would take a mayor with substantial credibility with voters to get broad support for such an idea and, frankly, the mayor does not have it, due largely to controversies outside the budget process.
At least this proposal will raise the issue to the level it deserves and force a discussion. Mayor Finizio may yet make the case for his special-tax idea. Right now, however, it is looking rather far-fetched.
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