More is Less?

Why the city's "new math" could mean even higher taxes for us all.



It looks ominous in April when Arkansas is underwater as far as the eye can see, but the Mississippi River is not going to flood downtown Memphis. And it looks ominous when the recession hits Memphis and prices soar, but city government is not going to go broke.

There is comfort, of all places, in the city's most recent annual report that came out earlier this year. It shows a healthy general fund surplus of $76.5 million, a utility company that takes in more than it spends, and a growing portfolio of city assets worth over $2 billion.

The 2007 annual report is worth a look when the gloom-and-doom talk starts during City Council budget talks this spring. Memphians pay the highest property tax rate in the state of Tennessee — $3.43 city plus $4.04 county, per $100 of assessed valuation. The Davidson County (Nashville) rate is a third less. When the city administration presents its 2008-2009 budget, it is expected to include a request for a property tax increase. If so, City Council members should ask a series of "what happened" questions based on the rosy outlook in the 2007 report.

Specifically, the annual report says, "The fund balance for the general fund was $83,318,000, an increase of $44,581,000 from prior year's restated balance. The positive increase [sic] results from strong tax revenue collections, higher investment earnings, and continued emphasis on spending control."

What happened to collections, earnings, and controls?

Roland McElrath, director of the Division of Finance, says the city should end the 2007-2008 fiscal year in June with an operating surplus of $2.5 million, bringing the total surplus to $79 million (some of the $83.3 million fund balance is designated for specific expenses). The three main sources of revenue are local sales taxes (20 percent), property taxes (40 percent), and shared state taxes (15 percent).

"We are seeing a falloff in local sales tax collections," says McElrath. "The slowdown in the national economy is being felt here. The turmoil in the housing market and spike in foreclosures, at this point, have not had a significant negative impact on property tax collections but we don't know how we will be impacted going forward."

He expects investment earnings to be about the same in 2009 as they are in 2008, with "possibly a slight drop" because of lower interest rates.

Again, from the 2007 annual report: City government's net assets – buildings, buses, machinery, property, etc. – increased 15.3 percent. "Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the city is improving or deteriorating."

McElrath says net assets are not liquid assets that can easily be converted to cash, but they are a good long-term indicator and "there is no reason to think they have fallen off."

The 2007 annual report says MLGW's Electric Division enjoyed an increase of $70.4 million in net assets due to "continued growth in operating revenue over operating expenses." Charges for services increased 4 percent.

Mayor Herenton should be sharply questioned about MLGW when he goes before the council. Passing the buck won't do. The mayor, after all, pushed for more control over MLGW, installing ill-fated former president Joseph Lee and a majority of board members. The winter of 2007-2008 was mild. What happened to that $70 million increase in net assets and why don't ratepayers get a rebate or a rate cut?

Finally, one of the last things the authors of the annual report always do is take a look into the future. In this case, the forecast for FY 2008 was rosy: "The FY 2008 revenue collections are expected to continue to improve, yet are still budgeted very conservatively."

If the budget projections were conservative, and tax collections have held up reasonably well despite the recession, and MLGW and the city both have a surplus, then why is a tax increase necessary?

That's the question council members and their constituents should ask. 

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