FORT WAYNE – Fort Waynes financial picture was laid bare last week: Action must be taken in the next year to avoid a crisis.
While the citys finances are in much better shape than those in many other Indiana communities – see story on Page 6A – Fort Wayne burned through about a quarter of its general fund cash reserves last year. The city projects it will have a deficit between $3 million and $6 million in 2013.
Controller Pat Roller said such spending and revenue patterns wont cripple the city next year thanks to healthy cash reserves, but something has to change before 2014.
The good news for the city is that it has numerous options to change its financial future. Most of the options will hurt some taxpayers while helping others.
Because of property tax caps, any decision to help Fort Wayne affects numerous other local governments, from Allen County to the library to school districts.
Now everything you do affects everybody else, Purdue University professor Larry DeBoer told the council last week. DeBoer is on the fiscal policy team created by Roller and is considered one of the states top experts on property taxes.
Property tax caps limit the amount of taxes people pay on their property based on that propertys tax value – 1 percent of the tax value for homes, 2 percent for rental property and 3 percent for businesses. The caps save local property owners but will cost Fort Wayne more than $13 million this year.
Here is a look at several of the options available to the city and how they would affect different entities:
Raise income taxes to lower property taxes
How: City Council vote needed.
What: State law allows local governments to raise income tax rates to subsidize local property tax bills. Under this scenario, any money raised by the higher income taxes would be directly spent to reduce property taxes. The benefit can be given just to homeowners, to homeowners and rental property owners or to all property owners.
Effect on taxpayers: Everyone would pay more in income taxes, but not everyone would see a reduction in property tax bills because of property tax caps. Residents below the tax caps – generally people in smaller homes or those in rural areas – would see their bills drop. Residents whose bills have already hit the caps – those with larger homes and in municipalities – are unlikely to see any change in their annual bill. Some residents right at the cap amount might see lowered property taxes, depending on several factors.
Effect on government: The move would reduce the revenues lost to tax caps for many local governments and school districts. For example, a 0.5 percent income tax increase would generate nearly $35 million in property tax relief. This scenario would net about $6.3 million in additional annual revenue for Fort Wayne and $3 million for Allen County.
Raise income taxes for public safety
How: City Council vote needed, and previous or simultaneous vote needed to raise income taxes to lower property taxes.
What: State law allows local governments to implement a 0.25 percent public safety income tax as long as it has implemented at least a 0.25 percent income tax to reduce property taxes. This would be a straight tax increase for new revenues.
Effect on taxpayers: Workers who pay income taxes would pay more.
Effect on government: Fort Wayne, Allen County and area towns would get more money. A 0.25 percent income tax would generate about $17 million, of which the city would get roughly half. While the money must be used for public safety, it can replace money already going to that effort, effectively creating new revenue for whatever is most pressing.
Eliminate local homestead credit
How: City Council vote needed.
What: More than $10 million in local income tax revenues annually are used to reduce local property tax bills for homeowners. It reduces tax rates by supplementing property tax revenues with income taxes. The council could decide such a benefit is no longer needed with property tax caps in place.
Effect on taxpayers: The opposite of creating a new income tax to lower property tax bills. Homeowners under the cap – which are generally people in smaller homes or rural areas – would pay higher property tax bills. Homeowners whose bills have hit the caps – those with larger homes – would not see any change in their bills.
Effect on government: It would generate more income tax revenue for local governments, but it would increase the property tax losses caused by tax caps. Fort Wayne would get about $4.4 million in new income tax revenue but lose $2.3 million in property taxes in 2013. Governments with no income tax revenue, such as school districts, would simply see a loss of tax revenue.
How: Mayor could not spend his budget or City Council could cut future budgets.
What: Fort Wayne officials could reduce their spending to meet the projected revenue gap, although they said such drops would likely mean eliminating or significantly reducing some services.
Effect on taxpayers: No change to taxes, but residents could notice a change in service levels.
Effect on government: Reduced money for streets, building maintenance and possibly government service. Controller Pat Roller said dramatic cuts would require the city to determine what services are needed and which could be discontinued or drastically reduced. Government salaries would likely remain flat.
To put a cut of $3 million to $6 million in perspective, the mayors office budget is $1.4 million; the citys community development department has a total budget of $4.3 million; and city parks budgeted $8.8 million for staff this year.
Spend cash reserves
How: Mayor could propose budgets using cash reserves, City Council also would approve them.
What: Fort Wayne has about $18 million in cash reserves, plus a $3 million rainy day fund, plus nearly $75 million to be received from the lease and sale of its electric utility. The electric money wont be fully realized for more than a decade, however.
Effect on taxpayers: No change to taxes or services, at least for the short term.
Effect on government: Cash reserves would dwindle. Money from the utility sale would no longer be available for bold legacy projects as desired by Mayor Tom Henry. City Councilman John Crawford, R-at large, supports this effort as a way to ride out a difficult economy – one he thinks is only going to get worse – without increasing taxes.
Increase the wheel/surtax
How: Allen County Council vote needed.
What: In 2009, the County Council narrowly approved raising the base surtax on license plate fees from $7.50 to $20 and the wheel tax on heavy trucks from $15 to $30 to generate more revenue for bridge and road repairs. The base surtax could be raised to a maximum of $25, and the base wheel tax could be raised to a maximum of $40.
Effect on taxpayers: Anyone who owns a vehicle would pay more to register it with the state.
Effect on government: Maximizing the two taxes would generate an additional $1.4 million in surtaxes and less than $100,000 in wheel taxes, according to Auditor Tera Klutz. Fort Waynes share of the two increases would be nearly $1 million, with the remainder being shared by Allen County and other municipalities. The money must be used to pay for road improvements but could then divert other revenues to other purposes.
Increase fees and fines
How: Proposal by the mayor approved by the City Council.
What: The city charges a variety of fees and fines such as $5 parking tickets and costs for permits. Controller Roller said she is preparing a comprehensive package of fee updates to present to the council before the 2013 budget discussion in October. The city could even change its cost-sharing policies on neighborhood improvements, such as sidewalks, to make residents pay for more of the total price.
Effect on taxpayers: People who do business with the city – or who park illegally – would be forced to pay more. Fees that are raised too high could deter investment in the city or compliance with city rules.
Effect on government: The government would see increased revenues directly tied to the services provided. Some examples of existing revenues: In 2010, the city earned nearly $400,000 in animal control licenses and fees, $268,961 for right-of-way permits and $286,534 for cutting tall weeds. Raising the fees would allow users of those services to pay more of their costs, allowing the city to divert tax revenues elsewhere.
Create a capital development fund
How: City Council vote needed, likely with mayoral support.
What: Many governments, ranging from Allen County to Woodburn to South Bend, have a separate, additional property tax rate to raise money for infrastructure projects. Fort Wayne has to this point chosen not to use this mechanism.
Effect on taxpayers: This would increase property tax rates but only affect those property owners not at their tax cap. This would include owners of smaller homes, rural residents and several businesses. Property owners already at the tax cap, including owners of larger homes and rental properties, would not see an increase in their bill because of this.
Effect on government: Such a fund could raise up to $4 million annually for Fort Wayne, but the city would lose about half of that to tax caps. The money would be designated for infrastructure but could divert other revenue going to streets, buildings, etc. The move would also reduce property tax revenues for all other local governments – the county, schools, etc. – because Fort Wayne would take a greater percentage of a limited property tax pie.
Property tax referendum
How: Tax increase would be approved by voters in a citywide election.
What: State law allows local governments to raise additional property tax money outside the tax caps if voters approve such a plan in a referendum. The extra revenue essentially allows the government to borrow money to finance infrastructure. Fort Wayne Community Schools this spring convinced voters to support a $119 million plan to repair numerous schools.
Effect on taxpayers: Property owners, regardless of their status with tax caps, would see an increase in their tax bills. Under the FWCS plan, owners of homes worth about $90,000 will see their tax bills rise by $27 annually.
Effect on government: The referendum would provide an immediate infusion of cash for capital expenses. The money could not be used for operating expenses – the city couldnt use it to hire police officers – but it could be used to finance numerous neighborhood street projects, for example. Because the money is outside the tax caps, it would not affect other local governments.
How: Proposal by the mayor approved by the City Council.
What: Fort Wayne grew its boundaries dramatically during the 1990s and continuing until 2006 with the annexation of much of Aboite Township. State law has made it more difficult to forcefully annex land, but the city has numerous properties outside its borders that signed annexation waivers in order to connect to City Utilities. The city has not aggressively pursued annexing these areas in recent years.
Effect on taxpayers: Property owners being annexed would see an increase in their tax bills if they are not yet at the tax caps. Residents already at the tax caps – which would likely only be massive homes – would not see an increase in their bills but would receive city services.
Effect on government: Tax caps make annexations not nearly as advantageous as in the past. Fort Wayne would receive more money from the annexed lands – as all property owners would now be paying a portion of their total tax bills to the city even if the total amount doesnt change. It would also face increased expenses to service those newly annexed lands.
Other governments would lose money because annexations would put more people at the tax caps, reducing property tax revenues for them. No financial numbers were available as to how much land was currently under an annexation waiver.