The City of Virginia Beach Budget

The City of Virginia Beach Budget:An Analysis for FY 2012-2013

By

Matthew Monahan

Regent University

Robertson School of Government

GOV-634 Public Budgeting & Taxation Policy

Dr. Robert Dyer

Introduction Across America, most states, as well as thousands of cities and municipalities, are struggling with the challenges that our current recession has presented. Many blame this recession on a variety of factors such as the housing boom and bust of 2006-2007 which witnessed a sharp downward spiral in economic prosperity and a sharp upward trend in unemployment. Several analysts and political pundits have blamed the current presidential administration for the continued downturn, while others claim that the problems were simply carried over from a previous administration. Still others blame failed subsequent stimulus measures as a means of overcorrecting and thus prolonging fiscal pain associated with such a crash. Whatever the reason or reasons might be, it has no doubt affected every level of society, business, and government throughout the United States. As the largest city population-wise in Virginia, Virginia Beach is no different, as it too has become a victim of the recessions adverse economical effects. Much like every other municipality in the United States over the past few years, Virginia Beach has attempted to analyze, assess, and put into practice balancing realistic revenue proposals while making necessary yet painful cuts to programs and services that many citizens would rather keep. City budget reports are generally extremely thorough, detailing every bit of fiscal minutiae within a few hundred page format. For the purpose of this particular assignment, this report will provide an overall analysis of the city budget for Virginia Beach utilizing the most recent 2012-2013 fiscal year data available. It will examine budgetary revenues, expenditures, capital improvement programs, and changes to services to City employees and the public alike. Virginia Beach Employment and Housing Overview

According to the Virginia Beach City Proposed Operating Budget handout for fiscal year 2012-2013, it states, In all the previous national recessions, save the 1990-91 during which an unusually large number of local military personnel were deployed for the Golf War, the Citys economy remained relatively unscathed by the national fall out. This recession was different, however. Because loss of individual income, decreased business profitability, high foreclosure rates and high unemployment rates can have a detrimental effect on municipal revenue streams, it is helpful to look at historical trends in order to put the severity of the current recession into perspective. Like many cities, Virginia Beach receives the largest share (26.4%) of revenue from real estate related taxation, therefore lost revenues due to lowered property values and foreclosures directly effect city provided services and public payrolls. Foreclosure rates steadily rose to unprecedented levels beginning in 2008 and continuing until 2010 at the peak. In 2011, foreclosed units totaled 1164 down from 1688 units in 2010. Although the Citys unemployment rate scored below national averages, the overall increase of unemployment from its traditional baseline rose at a faster rate than national averages. According to City statistics, Virginia Beach has an unemployment rate of 6.1%, which is slightly higher than the State of Virginia, yet lower than the overall unemployment rate in the Hampton Roads region. As of this writing, the national unemployment average is at 8.3. The percentage increase in the Citys unemployment rate exceeded that of the national increase, (156% vs. 115%), however not as bad as other areas. Overall Revenue Sources

As depicted in the above chart, the vast majority of Virginia Beachs total revenue comes from local sources (68%), followed by state (25%) and lastly, federal (7%). Within the scope of what is considered local revenue, taxation includes (but is not limited to, as with other); real estate taxes (26.4%), personal property taxes (autos, etc) (7.5%), general sales taxes (3.1%), utility taxes (2.6%), business license taxes (2.4%), restaurant taxes (3.1%), hotel, amusement and cigarette taxes (2.5%), miscellaneous charges for services rendered (13.8%), permit fees, fines, use of money and property (1.2%) and other non-category revenue at 2.5%.Breakdown of Individual Revenue Sources

As seen by the accompanying chart, the City of Virginia Beach receives the majority of its operating income via real estate tax revenue at 26.4%. Four major elements have presented a problem to the City, which, even in more economically prosperous times might be a challenge to address. They are, 1) Loss of real estate revenue 2) Loss of Federal stimulus funding, 3) Increasing health insurance and retirement/pension expenses, and lastly, 4) the need for staffing at new facilities. The challenge for the City of Virginia Beach, (as well as any other city), is to balance maintaining City services without introducing painful austerity measures and/or severely cutting needed services. Unfortunately, according to the 2012-2013 FY information, real estate assessments have decreased a staggering total of 14.9%, which has translated to a loss of $8 billion in property value over the last four years. In addition, unlike other sources of revenue that have seen somewhat modest increases, projections from the Assessors Office do not show any type of positive change in the real estate market until FY 2015. Because public educational programs depend heavily on property tax revenue, schools will have to either dip into fund balances to maintain services, or be forced to cut back on programs and extracurricular activities. Local school boards are considered to be fiscally dependant entities and as such, are dependant on the City Council to not only appropriate funds, but also approve the total budget. According to the 2012-2013 City Proposed Operating Budget guide, revenue for school funding is expected to drop 2.9% over last years estimate, mainly due to the elimination of federal stimulus funding. To help offset the federal shortage and attempt to keep educational standards high, the City of Virginia Beach has increased City revenue by 1.2%.This will be accomplished by allocating two cents of a proposed four cent sales tax increase ($.89 to $.93) to education. The second highest revenue stream is that of state funding (primarily for education support) which accounts for 25%. Another victim of the current recessionary trends, the State of Virginia has had to decrease overall funds distribution to its cities. For fiscal year 2012-2013, Virginia Beach is expecting approximately $90 million deposited into the general fund from the State. Conversely, Federal general fund contributions are expected to take somewhat of a downward turn as well. In all, State and Federal revenues into the general fund are expected to be a combined $108,696,950, which reflects a 2.5% decrease from last years estimate. The federal figure, of course, only refers to the general fund and not other government mandated allocations to the city such as housing, etc. The third highest revenue source is classified as charges for services at 13.8%. These service charges are collected in the form of various fees assessed for public utility usage (water, sewer and solid waste), library card fines, recreation center memberships, and building permits among others. As mentioned previously, personal disposable income (or the lack thereof) can also have a detrimental effect on revenue. Fortunately, (and perhaps surprisingly), Virginia Beachs tourism has been rather robust given the circumstances of the times. Because of Virginia Beachs locale and reputation as a desirable resort and sightseeing destination, income generated from hotel taxes, restaurant taxes, and general sales is extremely important to its economic viability. According to the City 2012-2013 FY report, general sales tax revenue has seen a 2.9% increase while hotel tax revenue has increased 21 out of the past 24 months. This shows a 6.3% increase over the past fiscal cycle. In addition, restaurant tax revenue has grown 4.3% over and above where it had been in FY 2010-2011, also showing a positive trend for 23 of the past 24 months. Referring to the chart above, general sales, restaurant, and hotel revenue (including cigarette taxes and various amusement taxes) combined accounts for 8.7%; greater than personal property or federal revenue at 7.5% and 6.8%, respectively. Of great concern is the sustained viability of the regions military presence. Federal cutbacks to military bases and installations could have an effect on the vitality of Virginia Beach. According to the Citys Executive Summary for FY 2012-2013, Virginia Beach had the second highest number of residents employed in the military as of 2008, dropping to third in 2009. Therefore, it is reasonable to assume that any federal cutbacks to personnel, base closures, or cutbacks to regional shipbuilding would have a detrimental effect on overall City revenues. Needless to say, sustained income from tourism, entertainment and recreation has been, and will continue to be an important staple of Virginia Beachs revenue stream. The numbers show an increased, albeit somewhat anemic upward trend, but a welcome trend nonetheless.Expenditures

Virginia Beach is projected to operate with a $1.759 billion budget for fiscal year 2012-2013, and as seen in the above chart, educational expenditures comprise of nearly half the projected spending at 47%. The second highest element of expenditures is planning, public works, and public utilities at 14%, and public safety (police, fire, first responders, etc.) at 12%. Following the top three to round out the total City expenditures are city/capital projects at 3%, convention and visitor economic development at 3%, city general fund debt service at 3%, financial and general government expenditures at 6%, city health/housing, and human services at 8%, and finally, parks / recreation / libraries / museums / cultural affairs and events at 4%. Because education expenditures take up such a large portion of the budget, it is important to break down exactly what elements are within it. As of FY 2012-2013, Virginia Beach City schools are being allocated an $834 million operating budget which is still $212 million above the minimum set by the State Standards of Quality (SSQ).

Within the school Personnel total shown above, retirement benefits, health insurance, various fringe benefit costs (including a 5% increase to offset the new Virginia State Retirement/Pension System VRS costs), and State mandated salary raises have increased by $39.1 million in school expenditure spending for projected FY 2012-2013. The increases are referred to by the City as drivers. Conversely, drivers are also included in the City employee entitlement totals, although compared to the $39.1 million for school workers; the City employee total is $19.9 million. The individual figures are as follows:

School Virginia Retirement System and Life Insurance $ 28,700,000 School Health Insurance $ 6,400,000 Fringe benefit costs + 5% salary increases $ 4,000,000

Total School Cost Drivers $39,100,000

By way of comparison, similar City cost drivers break down to:

City Virginia Retirement System and Life Insurance $11,402,000

City Health Insurance $ 4,733,636 Fringe benefit costs + 5% salary increases $3,752,225Total City Cost Drivers $19,887,861

According to the City FY 2012-2013 proposal, the School Board requested $36.4 million in additional funding to restore reduced programs and to fund a 3% employee pay raise. The City Manager was able to provide $18.2 million from real estate tax increases plus $9.2 million from the general fund. This left a balance of $17.2 million unfunded, however the funding that the School Board did receive enabled them to restore many, but not all programs. In FY 2011-2012, City employees received the first pay increase in three years, and School employees received a .5% + 2.5% increases for base salaries and bonuses, respectively. Capital Investment Projects (CIPs) The final elements of Virginia Beachs budget to examine are proposed Capital Investment Projects, or CIPs. Capital Investment Projects, as defined, are long-term investments for infrastructure projects which require large sums of funding, usually not immediately available to the municipality. Unfortunately, due to the recessionary state of the economy and the trickle down effect it has had on the City of Virginia Beach, there has been a fundamental shift in how the CIP is currently funded. Much of the traditional pay-as-you-go funding has had to be reallocated to City and School budgets to continue vital operations. According to the proposed FY 2012-2013 summary, schools, often the largest recipient of CIP funding, have been suffering the most because of three factors. First, the loss of State lottery funds for construction, second, the loss of State funds for school construction funding and third, the re-allocation of Pay-As-You-Go funding to provide for critical School services. The first chart will show the areas in which CIP investments are proposed to be allocated, while the second presents a list of project estimates for FY 2012-2013, (For the purposes of this report, only year one funding will be displayed, in millions): As one can see, Bonds and Lease purchases are the chief source of CIP funding.

Comparing the figures between the adopted FY 2011-2012 year 1 funding and the proposed 2012-2013 year 1 funding, investments in most sectors has decreased substantially. Pay-As-You-Go and Other Fund earnings have seen slight increases ($4.2 million and $3.3 million, respectively); however, the others have seen significant decreases totaling ($36,831,723).

To the City Councils credit, the majority of CIP proposals have been geared towards utilizing existing infrastructure assets for improvement rather than funding new facilities. According to project type, proposed FY 2012-2013 funding for site acquisition equals 9%, design study is at 2%, new facility development is at 11%, and the majority of funding for replacement, expansion, maintenance, renovation, and equipment is at 78%. At a time when funding is scarce and costs for replacing assets is at a premium, the decision to revitalize first and replace second is not only financially prudent, but politically smart. Recessionary Induced Cutbacks to City and School Services The current economic climate over the past four years has necessitated the elimination of various entitlement programs, educational programs, and other public services. Per the 2012-2013 FY Executive Summary, these services have included:

One position in the Consumer Affairs office in 2010. The entire program was eventually cancelled altogether, and cases were then referred to by the State.

33 City Human Resource positions. By doing so, several services effected experienced longer wait times and/or shortages of services available. These services included: Case Management, Respite Care, Rehabilitation Services, Resource Development Programs, Weekend Residential Programs at Pendleton Child Center, the SkillQuest program, summer camp subsidies in the Family Support Program, Adult Day Treatment Programs, Supportive Living Homes Programs, Employment Services Programs, Child/Youth Mental Health Programs, HIV Prevention and Outreach Program, Supportive Living Program, and the Juvenile Detention Center. Elimination of the Year-Round School Program. Employee cutbacks at the Schools Central Office. Elimination of 48 teaching position, resulting in class size adjustments in grades K-12. All Citywide departments reduced travel and training budgets by 10% across the board.

All new City employees (new hires after July 1, 2010) required tocontribute 5% towards their retirement fund.

Cutback of citywide library operating hours by 2. (except central library)

Extension of divided highway mowing cycles from every 18 to every 23 days. Funding for roadway pavement maintenance has been delayed due to the rising cost of petroleum used. Delay has been changed from 19 years to 25 years.

Police and Fire services have experienced cutbacks as well. In FY 2010-2011, Virginia Beach police eliminated 10 Police Officer positions related to the Detective and Special Investigations Bureaus, Motorcycle Traffic Safety Unit, and Public Information Unit. The Virginia Beach Fire Department has eliminated one Civilian Fire Inspector position, which thus reduces annual fire inspections citywide by approximately 700. (8,700 inspections down to 8,000)

Naturally, tough decisions pertaining to service cutbacks are not without their detractors. According to two citywide surveys pertaining to the Overall Appearance of Your Neighborhood and City Trash Collection & Recycling Services, there has been a relatively slight, yet noticeable decline in approval. When asked about overall satisfaction with the City, maintenance of roads and bridges, satisfaction of police and fire services, recreation centers, city parks, trash and recycling, and courtesy of city employees, respondents gave a 2-3% lower rating across the board than in 2007. Given the sizeable reduction of revenue to the City over the past 5 years, the 2-3% drop in satisfaction, although always troublesome, is not severe. http://www.vbgov.com/government/departments/budget-office-management-services/budget-archives/Documents/fy13-adopted-budget/proposed-operating-budget-fy2012-13.pdf