Like most cities, Arvada is feeling the pinch from the current economic downturn. Yearly sales tax receipts appear likely to be down single digits, perhaps around 5%. This is a large drop in historic terms, but it is happily better than what many other communities are experiencing. Even so, the City is facing the prospect of layoffs and service reductions. I am concerned and believe there are several initial actions to be taken.
1. In light of current circumstances, especially given the possibility that changes in the fiscal reality faced by local governments are systemic or at least enduring, the City should undertake an immediate, thoughtful review of its financial policies, meaning the policies it holds to for planning, revenues, and expenditures.
2. At a minimum, I believe the City should elevate its target reserve (or minimum cushion) for the General Fund from 8% to at least 11%, based on annual expenditures. This had been the policy previously. Also, surrounding cities are at 10% or more, and some are as high as 15% or 20%.
3. The City prudently uses a five-year financial model as a tool for fiscal policy. This model and all budgeting should incorporate realistic, yet still conservative, assumptions as parameters, and thenthe City should hold to the results. By 'hold' I mean making changes as and if needed a) to bring expenditures in line with the revenues as shown by the model, and b) to maintain the new target reserve.
We are fortunate to have extensive experience and expertise informing Arvada's financial policies and management. Nonetheless, these are my views; their implementation would lead to a more conservative posture for the city; and I think that is sound practice especially given the current economic climate.
For those inclined to detail, here is a bit of supporting information and opinion.
• Sales taxes are the largest source of income for local government in Colorado, and they with other revenues such as property taxes are used to provide general government services — things like police protection, parks, planning and development, streets , traffic control, etc. Other services such as water and sewer are supported by user fees, which are less impacted by changes in the economy.
• Arvada is in better shape than many cities in part because the city does not have large shopping malls. In other communities big shopping centers often generate a substantial portion of total revenues collected. Now, it is certainly a negative for residents not to have places to shop. What's more, when folks venture outside of the city to buy things like clothing, Arvada loses the sales taxes they pay with those purchases. So -- the City needs to continue to try to attract a fuller complement of retailers.
• But the silver lining comes in times like these. Arvada's revenues tend to remain fairly stable, despite swings in the economy, because tax collections derive less from discretionary purchases and more from things like groceries, which people have to have, good times or bad.
• Another factor contributing to Arvada's fiscal wherewithal is the currently large undesignated fund balance -- the amount that is left over after annual expenditures. This probably owes in major part to the termination of the old urban renewal area near I-70 and Wadsworth, and the end of the tax increment collections that were used to make the bond payments for that project. Now the bonds are paid off, and the underlying governments including Arvada can keep the taxes generated in that area. Thus, the City has a cushion, but it isn't a cushion you'd want to rely on for very long.
In general, the holy grail of municipal finance is to match ongoing expenditures to ongoing revenues. It's common sense, just the thing families do to stay solvent. And given the importance of city services, the fixed nature of the sales tax rate, and the fact that changing financial course is like turning around a big ship, this matching of 'in' and 'out' is especially critical in local government. But unlike personal finances which are more straightforward, it is no simple thing in municipal finance to know whether you're ahead or behind, on an ongoing basis. That is where the five year financial model comes in, and why it is so important for the City to manage the model in a way that produces the clearest picture possible of the City's financial condition.