Finance Director Spells Out Steps to Avoid 5-Year, $8 Million Gap

Pointing out first that any detailed projections he might make would be wrong, Tosa Finance Director John Ruggini told the Common Council on Tuesday night that his crystal ball saw an $8 million fund gap developing over five years in the wake of the state budget.

"We're going to see our revenues pretty much flat line ... and in some cases they may decline," Ruggini said.

Driving the gap between costs and revenue, Ruggini said, is that revenue in the next five years is expected to grow at a rate of 1.4 percent, while expenditures will grow at more than triple that rate – 4.4 percent.

But Ruggini called that gap "manageable" – if the city takes steps starting now to reduce expenditures, primarily by cutting costs and, to a lesser degree, by increasing revenues.

Most dire was Ruggini's warning that if the city tried to take a short-term approach and make up the deficit year-to-year by dipping into its healthy general fund, that fund would dry up as soon as 2014.

Naturally, he counseled a longer range plan, and along with City Administrator Jim Archambo presented a number of areas where the city could make up the difference.

The largest target — and this is no surprise — is in health care costs. Personnel costs, including salaries, benefits and pensions, make up nearly three-quarters of the entire city budget, Ruggini said. Adjusting health care costs, presumably meaning higher costs to city employees, could make up more than 50 percent of the projected deficit.

The five-year financial forecast is based on a series of assumptions, Ruggini said, including that city services and staffing levels remain the same and the national economic recovery remains slow through 2012. But those assumptions can change or may not play out, and the forecast won't hold.

"I can only guarantee the forecast will be wrong," Ruggini said. "It is based on assumptions, and I am confident about the trends ... not specific numbers."

Based on the asssumptions outlined in the forecast, Ruggini projects a $2.3 million 2012 revenue gap will swell to nearly $8 million in 2016, with annual increases in that gap of $890,000 in 2013, $1.5 million in 2014, $1.7 million in 2015 and $1.6 million in 2016.

Budget woes aside, Ruggini said, the city is in a strong financial condition. Its general fund – or "rainy day fund" – balance is 38.6 percent of revenues, which is slightly above the 34.7 percent average for cities with similar a Aaa bond rating. The city's unreserved general fund balance is 15.7 percent of revenues, or just below the 17.5 percent national median for Aaa cities like Tosa.

Still, the budget woes loom large, Ruggini said, due to the financial constraints imposed on the city under Gov. Scott Walker’s state budget, which allows for no more than a 1.5 percent annual increase in property taxes to offset the cost of government.

The significant budget challenges can be managed primarily through budget cuts, with some increase in user fees, according to the strategies outlined at the council's committee of the whole meeting Tuesday.

Ruggini's recommended long-term approach to manage the gap and balance the city budget calls for making “sustainable changes” to curb costs and grow revenue. He and Arachambo outlined eight areas to cut costs and increase revenue to cut the gap by as much as 94 percent of the $8 million shortfall projected by 2016.

Although cutting employee health insurance and wellness benefits costs could reduce the gap by up to 53 percent, Ruggini said, the city cannot overlook opportunities reduce the gap by even 1 percent, which is possible by converting existing city street lights to LED street lighting.

Other areas targeted for reducing the gap include garbage and recycling collection, creating a two-tier pay system, restructuring city government and increasing city collections and user fees.

Spending cuts or revenue increases in these other areas each could reduce the gap from 1 percent up to 8 percent. If the upper range is hit, when combined with up to a 53 percent cut in health benefits, the projected $8 million gap in five years is reduced by 94 percent – to less than $500,000.

“We certainly face some budgetary challenges, and we require sustainable initiatives and a multi-year strategy” to deliver annual balanced budgets as mandated by state law, Ruggini said. "We start with a strong financial base, and we need to be proactive to protect that position."