SPECIA L BOSTON PUBIXUBRARY™ GOVERNMENTDOCUMENTS DEPARTMENT pcr*cn BOSTON MUNICIPAL RESEARCH BUREAU 24ProvinceStreet,Boston,Massachusetts02108 (617)227-1900 April 4, 1991 NO. 91-2 BOSTON’S BUDGET PROBLEM IN FISCAL 1992 The CityofBoston will need to reduce its departmental spendingfor city, hospital, countyand school services by$50-$60 A million in fiscal 1992. cut of $60 million represents 5.4% of this year’s departmental appropriations. The City’s operational revenues will drop by$40-$50 million and the fixed costs ofpensions, debt service and state assessments will increase by approximately $14 million. The real cut in spending is actually much greater because within the overall reduction, budget increases for such items as health insurance, workers’ compensation, execution of courts, the Penal Department and special education tuitions must be absorbed. The reduction in revenues is due to the cut in state aid, reliance on one-time revenues this year and a drop in departmental receipts, in part reflecting the downturn in the economy. Boston has not been in this position of having less operational revenues than the GENERAL FUND REVENUES AND EXPENDITURES prior year since fiscal 1982, the FIGURES IN OOO'S first full year of Proposition 2‘/2. FISCAL 1991* FISCAL 1992 CHANGE The revenue loss will require all WHERE THE MONEY COMES FROM TAX RATE ESTIMATE FY91-FY92 PERCENT departmental budgets tobe cut to varying degrees with employee GROSS PROPERTY TAXES $555,069 $581,900 $26,831 4.8% reductionsbeinga primarymeans ONEVTERLPARYOPERTY TAXES $5(2286,,643327) $5(5229,,809055) $2(42,,166638) 140.16%% of reducing spending. . DEPARTMENTAL REVENUES 181,898 163,056 (18,842) -10.4% This report reflects the Bureau’s HEALTH & HOSPITALS 172,000 172,000 0 0.0% STATE REVENUES 393,115 369,107 (24,008) -6.1% estimates and those numbers that ALL OTHER REVENUES 98,283 68,330 (29,953) -30.5% are known at this time. No assumption is made of the TOTAL REVENUE $1,373,933 $1,325,298 ($48,635) -3.5% possible use of any one-time WHERE THE MONEY GOES revenues in this analysis. On April 10, 1991, the Mayor will DEPARTMENTAL EXPENDITURES present to the City Council his CITY DEPARTMENTS $500,555 $469,553 ($31,002) -6.2% fiscal 1992 budget HEALTH AND HOSPITALS 193,578 181,699 (11,879) -6.1% SCHOOL DEPARTMENT 389,000 374,000 (15,000) -3.9% recommendations. That budget SUFFOLK COUNTY 34,018 34,018 0 0.0% will provide a detailed assessment of the revenue loss and the cuts TOTAL DEPARTMENTAL EXPEND $1,117,151 $1,059,270 ($57,881) -5.2% recommended for each FIXED COSTS department. The Mayor’s budget DEBT REQUIREMENTS $86,379 $88,880 $2,501 2.9% will be delicately balanced but RETIREMENT CONTRIBUTIONS 113,076 124,083 11,007 9 7% that status could be jeopardized STATE ASSESSMENTS 51,771 53,065 1,294 2..5% by factors such as School TOTAL FIXED COSTS $251,226 $266,028 $14,802 5.9% Department spending, final state aid estimates, collective TOTAL OPERATIONS EXPENDITURES $1,368,377 $1,325,298 ($43,079) -3.1% bargainingand PenalDepartment SURPLUS/(DEFICIT) $5,556 ($0) expenditures. * Includes $9.6 million in free cash expected to be appropriated by the REVENUE LOSS end of the fiscal year. Boston s non-property tax revenues could decrease by over $70 million next year compared to this year’s budget. With the estimated increase in the property tax levy, the overall revenue loss could be as much as $50 million. STATE AID The state Cherry Sheet revenues for Boston are estimated to be cut by $24.0 million based on the Weld Administration’s budget recommendations for fiscal 1992. The Governor recommended that "Resolution Aid" be cut by $270.6 million, which would reduce Boston’s receipts by $36.7 million. To help mitigate this revenue loss, the Governor recommended an increase of$75 million in lotteryfunds for cities and towns and an increase of$78.8 million in highway funds. Boston’s share ofboth would be $6.9 million and $1.5 million respectively. No highway funds were provided this year so the Governor recommend two year’s worth ofhighway money for next year. Boston receives a small percentage of this fund because its distribution formula favors rural and suburban communities. Teacher pension reimbursements for Boston are expected to increase by $2.8 million. This estimate of total state aid loss is based on the Governor’s budget. Any changes in the amount and allocation of the cut by the Legislature would affect this estimate. DEPARTMENTAL REVENUES Departmental receipts are estimated to decline by $18.8 million next year. Parking fines show the largest estimated loss of $8.4 million. As a result of increasing the parking fines and plans to SELECTED DEPARTMENTAL REVENUES FIGURES IN OOO’S aggressively ticket the Back Bay and other neighborhood areas, the City FISCAL 1991 FISCAL 1992 estimated that it would collect $61.9 BUDGET ESTIMATES CHANGE PERCENT million this year. That estimate was too PARKING FINES 61,900 53,500 (8,400) -13.6% optimistic and the Citywill collect closer CH. 121A SIO 30,252 32,300 2,048 6.8% to $53.5 million, which is the amount MOTOR VEHICLE TAX 20,315 19,500 (815) -4.0% projected here for next year. The street, INVESTMENT INTEREST 17,800 15,500 (2,300) -12.9% & HOTEL/MOTEL TAX 14,000 15,000 1,000 7.1% sidewalk curb repair decrease of $5.8 JET FUEL TAX 13,400 13,400 0 0 0% million is due to the use ofaccumulated FREE CASH 38,568 10,907 (27,661) -71..7% one-time revenues this year. Reflecting BUILDING PERMITS 8,400 8,000 (400) -4.8% the decline in interest rates, interest on STREET. SIDEWALK & 8,300 2,500 (5,800) -69.9% CURB REPAIR investments is projected to decrease by REIMBURSEMENTS 3,400 1,800 (1,500) -47.1% $2.3 million. The decrease ofprior year reimbursements is attributable to the winding down of the alternative school construction program. FREE CASH The largest revenue decrease for Boston next year, outside of state aid, is projected for the budgetary fund balance. This revenue, more commonly referred to as "free cash", is certified by the Massachusetts Department of Revenue and consists primarily of prior year property taxes collected and operating surpluses. This year the City will appropriate about $38.6 million of free cash. That is $18.6 million more than used in any recent prior year and $27.7 million more than FREECASHREVENUE will be available when the Mayor presents his budget next week. This figure assumes that the remaining $9.6 million in available free cash will be appropriated this year. The $4.0 million supplementarybudget for theSchool Department nowbefore the CityCouncil will be funded from free cash. The Flynn Administration used this extraordinary amount of free cash this year to offset the local aid cut rather then reduce expenditures further and to provide additional funds to the School Department. The use of$38.6 million in free cash helped solve this year’s budget problems, but because much of that total was in »00 $100 120.0 $30.0 $400 $60.0 excess of the normal amount available, it is contributing to the City’s Million* revenue problems next year. OTHER Other revenues next year are expected to remain about the same as this year. Hospital receipts, budgeted at $172.0 million this year,willactuallygenerate about $178-$180 million due toreceipt ofreimbursementsfrom prioryears. However, in fiscal 1992, hospital revenues are anticipated to come back to the $172.0 million level or slightly less. PROPERTY TAX INCREASE The property tax levy is the one major local revenue that will increase next year. However, the increase will be less than in past years, due principally to the fact that new growth will beless. Boston’s taxlevymayincreaseby$26.8 million PROPERTY TAX LEVY LIMIT or 4.8% next year. That compares with an increase of FIGURES IN OOO'S $33.5 million or 6.4% this year. The difference is new ESTIMATED growth, which increased by $20.5 million this year but is FISCAL 1991 FISCAL 1992 estimated to increasebyonlyabout $13.0 million nextyear. Some new growth anticipated for next year was actually PRIOR YEAR LEVY LIMIT $521.6 $555.1 captured thisyear as the slowdown in development enabled 2 1/2% LEVY GROWTH 13.0 13.8 NEW GROWTH 20.5 13.0 construction on existing projects to be accelerated. Next year, a revaluation year, the assessed values will decrease TOTAL $555.1 $581.9 substantially and the tax rates will increase to provide the 2'/2% increase in the levy, which is $13.8 million. The tax INCREASE OVER PRIOR YEAR $33.5 $26.8 PERCENT 6.4% 4.8% rate increase could push the market value of buildings down in subsequent years and force Boston to reconsider its policyoffull classificationwith the maximum taxburden placed on business property. Boston will continue to keep its propertytax levy at the maximum levylimit, which can not be increased further except through an override approved by the voters. FIXED COSTS Boston’s fixed costs of pension payments, debt service and state assessments will increase, in aggregate, by about $14.8 million next year. This follows several years when these costs have remained fairly stable. The pension cost for Boston is calculated by the Commonwealth’s Division of Public Employment Retirement Administration (PERA). The City believes that this figure should be lower and is presently discussing this issue with PERA. The debt service estimate assumes that the Citywill issue $80 million ingeneral obligationbondsinJulyandthat one interest payment willbe made next year. It also assumes that the City will issue tax anticipation notes for the first time since fiscal 1987. State assessments, which consists primarily of the MBTA assessment, is increased by 2.5%, the maximum allowed under Proposition 2‘/2. DEPARTMENTAL BUDGETS A decrease of $40-$50 million in operating revenues and an increase in fixed costs of over $14 million will require departmental spending, in aggregate, to be cut by $50-$60 million or over 5.0%. The Mayor has informed the School Department that its appropriation will be $374.0 million, which represents a decrease of $15.0 million or 3.9%. The Suffolk Countybudget is assumed tobe level-funded with the Penal Department increase offsetting the cuts in the other departments. The balance of the cuts would have to be absorbed by the Hospital and city departments, which would require a cut of over 6%. This year 77.3% ofall departmental appropriations is allocated to five major departments: School, Health and Hospitals, Police, Fire and Public Works. Budget cuts of $50-$60 million next year mean that despite the priority of the services provided bythese five departments, their budgets will have to be reduced. It also means that a much higher share ofthe cuts will have to be born by the remaining departments. With sedaries representing 65.1% of all departmental appropriations, the City will be required to reduce its work force in practically every department, affecting the delivery A ofa wide range ofservices. detailed accounting ofthe departmental cuts and reduction ofpositions will be presented next week in the Mayor’s budget. FISCAL WARNINGS The Mayor will present a very fragile financial plan to the City Council on April 10th. That budget will be balanced contingent upon large cuts in departmental spendingbeing implemented on time, state aid for Boston not being reduced lower them Governor Weld proposed and departmental receiptsbeing conservatively estimated. However, thebalancing of this financial plan could be jeopardized depending on the outcome of the following four key areas. 1. School Committee Spending The biggest threat to maintaining balanced operations in fiscal 1992 is school spending. The Mayor has indicated that the City can support a school appropriation of$374.0 million. The School Committee has submitted a fiscal 1992 budget requesting an appropriation of $398.0 million, a difference of$24.0 million. Based on the School Committee’s past budget history and the public statements of several members regarding next year’s budget, it now seems unlikely that the Committeewill reduceitsbudgetby$24.0million. Instead,theSchool Committeewill probablyapprove spending at a higher level in hopes that City Hall will provide more funds at a later time. The Bureau is very concerned about the consequences of a $374.0 million school appropriation on the educational program offered the students in Boston. However, that does not lessen the damger to the City’s fiscal stability if the School Committee intentionally spends in excess of its authorized appropriation. M 2. State Aid The local aid estimates are based on a 2U"ch 6th bulletin from the Massachusetts Department ofRevenue which was issued only as a guide in lieu ofearly Cherry Sheet estimates. The figures in the bulletin are based on the key aspects of the Governor’s budget proposals. However, no estimates were provided for accounts which equal 22.5% of this year’s Cherry Sheet aid. Recommendations concerning the amount and distribution of local aid cuts and increases could be modified by the Legislature. Any changes that would further reduce Boston’s local aid estimate or increase its state assessments would negatively affect the budget plan. 3. PenalDepartment The increasing inmate population and the opening of the new prison facility in South Baycould exert pressure on the Penal Depau'tment to spend beyond its fiscal 1992 appropriation. The Penal Department may receive a small increase in its appropriation for fiscal 1992, but it will be movinginto its newfacility in October. That raises questions as to whether next year’sbudget will allow for full utilization of the new prison. 4. Collective Bargaining No funds are included in the fiscal 1992 budget for collective bargaining increases and most city employees have been working without a contract since last June. The City is not in a fiscal position to negotiate increases in salaries or benefits this year. The collective bargaining contract of 13 city employee unions representing 23 bargaining units have been expired since June 30, 1990. These unions represent most city employees including police officers and firefighters. Negotiations have been ongoing with the unions, but recently the Flynn Administration pulled salary increases off the table. The contracts of three other unions, including SENA, which represents management employees, will expire on June 30, 1991. A salary increase of 2.5% this year would cost the City approximately $11.3 million. The contracts for most school unions, including the Boston Teachers Union, expire on August 31, 1992. Other expensessuch ashealth insurance, workerscompensation and police overtime are also ofconcern next year. CONCLUSION The estimate of departmental cuts of $50-$60 million is fluid and will continually change. The City may be able to identifyone-time revenue sources that canbe used. On the other hand, the Legislature mayapprove a fiscal 1992budget that requires a larger local aid cut. Based on the extent of cuts in basic city and school services, the Mayor and City Council may consider an override of Proposition 2V2. Other options that are being discussed by the Legislature include exempting the overlayreserve from the levy limit or allowing the levy limit to change based on a measurable index. The Flynn Administration may also propose the enactment of optional special excise taxes for cities and towns such as a parking excise tax. Whether there is a need to adopt one or more of these options will be better understood once the Mayor presents his fiscal 1992 budget next week.