May 27, 2009

MEMORANDUM

To: Hon. Mayor and Town Council

From: F.M.Bell

Town Manager

Subject: Financial Planning - Some Things to Think About

Summary - The town continues to suffer from extreme budget problems and will continue to do so for years to come. A quick rebound in the real estate market seems unlikely, sales tax revenues are likely to remain depressed pending signs of an economic recovery in discretionary spending, and development related revenue is likely to remain low until the credit and financing markets improve. The town must thus consider changes to its budgeting strategy - we either need to get some things out of our budget, or find new ways to fund certain portions of our budget that are critical to support our community infrastructure.

While further reductions in services and programs are always an option, doing so has consequences to our residents and visitors, and depreciates investments already made in our infrastructure. This memo addresses some new revenue generation strategies.

Background - The town has come to a point where the realities of the current and future economy conflict with how the town creates and manages its budget. The unwritten principle of the town's finances has focused on revenue collected through sales and real estate transfer taxes, development revenue, and fees - what I call "other people's money" or OPM. That strategy is fine so long as other people have money and are willing to spend it here.

The current economic climate of high unemployment, reduced income and reduced discretionary and recreational spending, low consumer confidence, tight credit and mortgage markets, and stagnant if not deflationary consumer prices work directly against our historic budget philosophy and major revenue sources. The principles of OPM are no longer working to the town's advantage.

As a result of the current recession, the town no longer has a capital improvement budget, has reduced staff, services and programs, and has cut grants and contributions. Some of our major budget funds (General Fund, Open Space Fund and Affordable Housing Fund) are dangerously close to operating in the red, and the town's reserves are in jeopardy.

Compounding the problem is the 20% for Open Space formula. While undeniably a great tool for open space acquisition in positive economic times, the 20% earmark further restricts the town's ability to direct revenue where needed in difficult financial circumstances. Because the 20% formula is based on OPM, the Open Space Fund will be increasingly hard pressed to pay the Valley Floor bond costs while discretionary funds for open space management will be scarce at best.

I don't see this situation changing for several years. As the town government reduces staff, programs and services there will be a resulting decline in the quality of our maintenance and infrastructure. The town government's role as an economic engine of the community will also be substantially reduced. We will employ fewer people, let fewer construction contracts to local employers, reduce maintenance and upkeep, purchase fewer items from local businesses, and create fewer opportunities and programs for local residents.

Over time, and without economic stimulus of our own, town is likely to become shabby. We will provide fewer services and amenities than other resort communities and our economy could incur more damage. Although the scenery may be great in Telluride, the decline in infrastructure, services and amenities will eventually erode our visitor and second home base. While some may think the resulting "retro-funk" is a good thing, I can assure you that people who make choices in their vacation and recreational spending habits are not likely to agree.

The town has several worsening budget dilemmas:

• Budget decisions have historically been made under the on-going assumption that the real estate market would manifest consistently higher prices and higher numbers of sales. The town's capital fund reliance on ever increasing RETT revenue never envisioned a comatose real estate market.

• The town has a development fee structure that is a significant revenue source in the General Fund. However, there is a vocal and politically effective no growth sentiment in the community which may curtail planning, development and redevelopment activity and thus reduce revenue opportunities.

• The non profit community relies heavily on public subsidies that the town can no longer afford without damaging public services and programs.

• Retail/Sales Tax tend to decline in recessionary times. However, even in a positive economy, the town's sales tax revenues may have maxed out absent new commercial development or re-development within existing commercial and transient business zones.

• Things that are typically funded by stable property taxes (street maintenance, capital construction, infrastructure support) in other communities are funded by less reliable OPM. Voters seem inclined to support tax measures for "fun stuff' while generally declining to invest in community infrastructure.

• Events and Festivals - Decaying infrastructure in our parks (Town Park and Elks Park) and lack of investment in community amenities will eventually threaten the lucrative event and festival market. They may choose to re-locate to communities where infrastructure and services are of better quality.

This is the long way of saying that our town needs to better understand the importance of community investment and re-investment. We have to be more willing to financially support things that are not necessarily pretty or fun. Taking care of your community is like taking care of your body - while a spa treatment may make you look and feel better, you still have to have a periodic colonoscopy. We need to think about ways to broaden our revenue sources, develop dedicated revenues for specific programs, and/or get some ancillary things out of the town's budget in order to continue pay our bills, provide basic services as well as nice-to-have amenities, while meeting the challenges of the future. Perhaps some of the following strategies are worth consideration.

1) Dedicated Revenue Source for CCAASE - The allocation (about $325,000) for Community Support and Events grants through CCAASE are contained in the General Fund. While it is unlikely that the town can get out of the business of such grants, CCAASE lends itself well to the idea of creating a dedicated revenue source.

Some places in Utah have voted into place a small sales tax increment to support parks, recreation and the arts. Salt Lake City calls theirs the "Zap Tax" in support for their Zoo, Arts, and Parks, while Summit County calls theirs a "RAP Tax" dedicated to Recreation, Arts, and Parks.

The proposal here might be a CARE Tax - Community support, Arts, Recreation and Events - whereby a half-cent sales tax increment (about $550,000) could be placed on the ballot that would essentially fund CCAASE (about $325,000 per year) while the balance could help fund capital improvements to the town's parks. Town Park needs several capital improvement projects around the major event stage area, and Elks Park is badly in need of renovation. Such improvements are now five years away at a minimum and probably much longer.

Such a tax might have support in the non-profit and recreational communities as it provides dedicated revenue for CCAASE which likely to be cut significantly in 2010 due to on-going budget concerns. It would further reduce pressure on the General Fund and the Capital Fund transfer by increasing revenue or creating a separate fund within the budget to manage CCAASE and certain parks and recreation improvements.

2) Ticket Tax Increase - Currently the town assesses a $2.50 tax (it is actually a surcharge) on ticket sales for major events. The intent was to cover the town's cost in providing public safety services and the remainder was earmarked for improvements in Town Park. The tax has never been increased. Over the years an increasingly larger share has gone to security while the parks improvement funding has eroded away.

The "tax" currently generates about $145,000 per year in General Fund revenue. Doubling the charge would again allow the town to begin some desired improvements to the amphitheater area. Increasing the charge would allow for a portion to go to the General Fund as it does now to cover security costs, while the new portion could be directed to the Capital Fund. This increase, plus the portion of the above described CARE Tax, could provide a meaningful and reliable source of capital funding for parks and recreation improvements thus relieving some of the pressure on the Capital Fund where such improvements have to compete against town-wide capital projects. The downside of this proposal will be the loud screams from the event promoters who will threaten to take their events elsewhere. That seems hard to believe with a new dedicated source of funding for local venue improvements. Promoters will also complain about the high cost of doing business here, but it is (or should be) a pass through charge to ticket purchasers. It also seems hard to believe that people will stop purchasing tickets to the Bluegrass festival if ticket prices are raised by $2.50. Although called a tax, the ticket tax is not a TABOR controlled revenue and is thus not subject to election. An increase could be accomplished through the ordinance /public hearing process.

3) Street and Alley Fund - The notion of a Street and Alley Fund was contained in the failed 2008 Spur reconstruction bond election. Though the election failed, the creation of a Street and Alley Fund within the budget with a dedicated source of revenue is still worth considering. Carving street/alley/sidewalk maintenance, snow removal, and associated contracts out of the Capital Budget and into a dedicated fund allows the town to better isolate short and long term management of our public rights of way. Under the current budget cutting scenario, these important maintenance projects have been lumped into all of our other budget cuts. As a result, the town will be providing a reduced level of maintenance and snow removal during the remainder of 2009 and into 2010. Reductions in maintenance tend to be both cumulative and unpopular. While people haven't noticed much yet, there will soon come a time where there could be considerable public dissatisfaction in the town's street maintenance and snow removal services. Having a dedicated source of revenue for street maintenance essentially stabilizes the services we are able to provide from year to year.

Street maintenance is the type of service that is typically funded through property taxes for two reasons. There is a clear nexus between streets, alleys and sidewalks to the properties they serve, and property taxes are the most stable source of tax revenue thus providing certainty and predictability to the revenue source.

An adequately funded program would need about $750,000 per year which would include sufficient funds to set aside for street replacement projects (excluding the Spur) as they become necessary. Locally, one mill of property tax generates about $250,000 per year, thus the voters would need to approve a three mill property tax for such purposes. By way of example, Crested Butte has an 11 mill assessment for their Street and Alley Fund. Another option would be a sales tax (it would need to be about .75 of one cent) or some combination of sales and property taxes. One advantage of a sales tax increment is that it encompasses non-property tax paying users to contribute.

Other Revenue Options - Other options for additional revenue include identifying new things for which fees could be charged. For example, a "Master Parking Pass" could be created whereby a fee (perhaps $3,000 per year) could be charged for a parking pass which would allow the user unlimited parking anywhere in the commercial core, (including the center lane on Colorado Avenue) except handicapped spots or fire lanes. There could be a meaningful market for such passes among the real estate community and business owners. The sale of 30 passes would generate $90,000 that could be directed wherever the council wished - for example your General Fund grant to TNCC. The benefit of such a fee is that participation is entirely voluntary and no election or ordinance is required. The downside is that it would allow some vehicles such as those belonging to employees to stay in the paid parking zone all day which tends to defeat the purpose of the metered parking.

The council may be aware of other fee possibilities as well. However, some fees tend to be more trouble than they are worth. New fee programs need to generate meaningful revenue with a minimum hassle factor.

Disposal of Property - A couple of people have asked about the possibility of selling town assets for the purpose of generating one-time revenue. Staff has had this conversation with council before with the appropriate caution that disposing of assets is a one time event that can generate substantial, but one-time revenue. The town still gets periodic inquiries regarding specific properties, but selling in a down market may not be the best strategy.

General Tax Increase - Although I hate to bring it up, the council always has the option of placing a general tax increase on the ballot. Despite what you may hear, property taxes in Telluride are quite low and there is room for a limited tax increase without causing hardship to most home owners or businesses. The issue of the inequality of property taxes between residential and commercial property is an issue that cannot be resolved at the local level. It is a state constitutional matter that will probably take many years to rectify.

Conclusion - One of the reasons cities and towns exist is the implied agreement among members of the community that they will "pitch to the kitty" to support services and programs provided to everyone. Historically that was barter and labor, but now it is generally money raised through taxation and other charges. While OPM has been and will continue to be a huge benefit to this community, it appears that OPM isn't sufficient and is too volatile to meet our long term service needs. Either this councilor some future council will have to take the courageous step of addressing the financial needs of the town and the associated taxation issue. As with all tax measures in Colorado, the final decision rests with the voters, but the leadership on these issues will come from you and your successors.

As staff looks to the 2010 budget and beyond, it will be important to hear from the council what is on the table and what is not in terms of possible revenue enhancement strategies. I have offered some options here, and I am sure that there are many more that we could discuss as we work toward our 2010 budget discussions.

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