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Atlanta’s Budget Crunch

By Kamille D. Whittaker

IT’S NEARING NOON, and the Atlanta City Council has just adjourned for a 20-minute recess in name only. The question prompting the huddled discussion before the 15 members of council returned to adopt the fiscal year 2009 $583.9 million budget was whether the city council should stick to a rigid, across-the-board 2.5 percent cut in every government department or if they should give Mayor Shirley Franklin the leeway to make the cuts where she saw fit to recoup the $140 million budget deficit. The strategy, according to Councilman Ceasar Mitchell, was to skirt an almost inevitable veto by giving the mayor broader discretion in what she chose to cut. The latitude served as a proverbial peace offering for taking her proposed $40 million tax increase — which would raise the current 9.82 millage rate by 0.43 mills — off the negotiation table. The property tax increase was a fraction of a multi-pronged plan that the mayor proposed to combat the deficit, in conjunction with reducing expenditures by creating work efficiencies and improved business practices, adopting budget policies that will allow for higher revenue anticipations, and increasing revenue through adjustments in existing fees.

There was only a single caveat: An amendment introduced by Councilwoman Felicia Moore stipulated that in order to find the 2.5 percent — or $14.57 million — in general fund cuts, the mayor would have to exhaust all the possibilities before resorting to personnel cuts. “To date, 441 government workers had already seen their fate as a direct result of the budget deficit. Her cuts would have to be substantiated and we would have to go through with her line-by-line to determine her rationale for why certain services or departments were more important than, say, a worker,” explains Mitchell.

The amendment highlighted two high-in-fat areas that could stand to be siphoned with little effect on the government’s day-to-day functions. For starters, there are currently $13 million worth of vacancies that could possibly be eliminated and $81 million reserved for supplies and consulting fees. When added to the $28 million in fee increases, including higher fines for traffic violations and another $15 million in anticipated growth in the tax value of commercial property, the close in the budget gap without further personnel cuts seemed plausible.

It was a direct challenge to the mayor’s widely publicized quandary: Either the council approve a property tax increase, or she would have “no choice” but to cut city personnel — 205 police officers, 90 fire fighters and shutter six fire stations, to be exact. The notion that the City Council was willing to place public safety in a vulnerable position with the proposed general fund cuts as an alternative to the modest property tax increase was dubbed by Mayor Franklin as the “worst public policy” that she has seen in her 20 years of public service, to which the City Council unanimously replied: Get creative.

 

IN FEBRUARY 2008, Atlanta Chief Financial Officer Janice Davis took to the airwaves to announce that the city’s projected budget for the 2008 fiscal year had fallen short by $64 million and that the city was looking at a $140 million budget deficit for fiscal year 2009. Then, in the first week of June, she abruptly resigned.

Her untimely resignation ignited a firestorm of media speculation and public outcry as to the path that landed the city in the red.

Many, who cited gross mismanagement as the reason for the shortfall, honed in on a particular $25 million. Eight million dollars that the city pays yearly to subsidize Underground Atlanta was a mainstay line item that was never put into the budget projections. In another instance, a $17 million discrepancy was the result of a single miscalculation by a city finance official. According to Davis, the worker mistakenly inserted a number that was not the natural sum of the expense column. Another large portion of the gap can be chalked up to $5 million that represents outstanding invoices which are more than 90 days past due. The mayor has since proposed a hiring freeze and an audit of the finance department’s accounting, reporting and budgeting processes in keeping with the spirit of transparency that the Administration has espoused since day one.

“Do we make mistakes? Yes. The city’s financial systems were antiquated and that is not something that I created or promote. We have since installed a state-of-the-art financial system which is a financing tool that allows us [capabilities] to analyze reports that we didn’t have before January 2008. If one wanted to do a very long study for every year for the last 50 years they would see a [budgetary] discrepancy,” explains Mayor Franklin. “This time, we had the worst economic downturn in decades, and we didn’t have the latitude to address the millions of dollars needed to run the government, and the financial systems had not been updated to the level of accuracy that we needed in order to do so.”

In a briefing before the Atlanta Committee for Progress, Chief Operating Officer Greg Giornelli expounded on the mayor’s reasoning, explaining that another reason for the budget gap was the city’s underfunded pension program.

Like many governments, Atlanta had shortchanged its pension program for decades, until 2005, when new accounting regulations mandated that it be fully funded on the front end. Catching up on funding the pension program has fundamentally changed the city’s cost structure. In just three years, the city’s health care costs rose by 36 percent and pension costs rose by a staggering 166 percent. These two costs now consume more than a quarter, 26 percent, of the city’s entire general fund budget each year.

Given the huge costs, many corporations and local governments have ended their traditional pension — or “defined benefit” — plans. Fulton County stopped in 1999. Employees hired by Fulton County today participate in a “defined contribution” or deferred compensation plan, a 401(a) — similar to the 401(k) but for public employees. The county makes a contribution, but the employee is expected to contribute more. That way, county taxpayers are not stuck with the tab for retirement when new accounting regulations require the governing body to make room in the budget by paying up front.

Such a move would make the city less susceptible to national economic volatility.

Instead, Atlanta’s budget shortfall has deep roots in the national economic slowdown which has manifested itself in two ways: The City underestimated the now debilitating rise in fuel costs over the last fiscal year, and nearly 20 percent of the city’s $584 million budget comes from sales taxes which always decline when the economy tanks. However, it’s not the first time that the city’s finances have suffered as a result of the national economy.

 

IN JULY OF 2002, DURING THE ECONOMIC AFTERMATH OF 9/11, the consulting firm Bain & Company issued a turnaround plan for the City of Atlanta, commissioned by Mayor Franklin, who had just recently taken office. Atlanta was in a budget crunch. One of the 29 objectives that the firm proposed included marketization and outsourcing of government functions, which allows private firms and existing government agencies to bid on providing services.

For example, marketizing/outsourcing garbage collection would save Atlanta taxpayers $15-$20 million annually. Other Atlanta services mentioned in the turnaround plan included: airport management and operations, recreation facilities, park landscaping and maintenance, and road maintenance.

Just three years before the plan was released, in 1999, Atlanta experienced a near disastrous foray into the world of outsourcing. Atlanta turned over its water and sewer operations to United Water Services only to return those functions to the city after privatization failed to realize expected savings and prompted complaints of poor service.

Still with an estimated 68 percent of city governments moving to privatize many of its functions, many are wondering when the City of Atlanta plans on keeping with the times.

“Personnel costs, including benefits, comprise 70 percent of the general fund, so we are considering all of our options, including a reduction in staff and services, outsourcing and consolidating services,” says Franklin. “There is a misconception for those who are suggesting the City of Atlanta is not already doing public/private partnerships. Our entire airport is a prime example. There are approximately 800 public employees and thousands of private employees. In the Campbell Administration, the City attempted to privatize the water system. That did not work very well, because it is a very large and complicated system and the entire arrangement was not good for the City or for the contractor. So, when we started to think of more ways that we could privatize services we were looking for smaller, less complex systems like private management of public vending. In fact, there is a proposal before the city council to privatize the parking meter system. The end goal is always to seek a more effective and efficient way of providing a service.”

Still there is room for more privatization. In his assessment of Atlanta’s budget situation, Leonard C. Gilroy of the Reason Foundation offered up managed competition as the sure-fire way for Atlanta to navigate its way through the budget crisis.

“Like most cities, Atlanta’s government has expanded into a range of activities from vehicle fleet maintenance to IT to payroll services that are commercial in nature. Many of these are support functions that service the bureaucracy, however, most of these functions are not inherent or unique to the government,” he writes in an article entitled “Competition Can Solve Atlanta’s Budget Crunch,” suggesting that the mayor should request a city-wide inventory of government activities to determine whether each is “inherently governmental” or “commercial.”

In 1998, Congress did something similar by passing the Federal Activities Inventory Reform Act which requires federal agencies to perform such inventories annually. As a result, agencies have identified more than 800,000 federal employees engaged in activities that could be provided by the private sector.

“Armed with the results of an activity inventory,” Gilroy continues, “the City could then undertake a comprehensive review of service delivery and apply ‘managed competition’ to lower costs and improve service quality. Managed competition is different from simply outsourcing, or contracting out services. It encourages public employees to submit bids and compete with private bidders to provide services, bring private-sector competitive pressures and incentives to bear on the public sector. Under managed competition, it doesn’t really matter whether public employees or private providers earn the contract; the simple introduction of competition means that taxpayers win either way.”

 

IT WAS PRECISELY THE TAXPAYER THAT THE CITY COUNCIL HAD IN mind when they decided collectively to reject the mayor’s $40 million tax increase.

“After we decided to eliminate the proposed property tax increase, we decided what our objectives and alternatives were,” reveals Mitchell. “Our first objective was to identify additional revenue that we could include in the budget anticipated revenue column, and the second objective was to look for cuts in the budget. We thought ‘let’s take some time as a council and see if we can come up with ways other than a property tax increase.’”

The increase was even more unacceptable considering that residents were already up for four water rate increases scheduled over the next four years with the rate spiking 27 percent in the first year alone, followed by two years of 12 percent increases and then another 26 percent increase in the fourth year.

“Citizens have been very clear: ‘do not raise taxes when we could look into the coffer; do not make us pay more in taxes when we can look at the budget and see that there are certain departments that are overspending.’ The injury was in having to raise the water rates, but the insult would be to raise property taxes as well. Why would we propose a property tax increase when we could simply tighten our belts in government,” posits Mitchell.

Thus, the Council ended up rolling back the millage rate which actually saves citizens in property taxes for the coming year.

In the final moments before adopting the budget, new proposals were on the table while still more of the mayor’s original initiatives were being ousted, including her plan to fold the solicitor’s office into the law department and cut the public defender’s staff from 28 to 11 employees. Instead, the Council decided to keep the judicial agency as is and fully fund the public defender’s office; and to carry $2 million from the Council’s present budget to the new budget to offset the proposed tax increase. Also, in addition to the 2.5 percent departmental cuts, Mitchell recommended having most city workers take six days off without pay during the next 12 months, which he says will save the city $7.5 million. Police union leaders criticized the idea of furloughs, explaining that fewer officers would patrol Atlanta. In lieu of that proposal, which Mitchell deemed a “last resort,” Councilman C.T. Martin suggested selling an additional 45 licenses required to operate a taxi or limousine in the city. The city believes it can collect $2 million by selling the licenses — an idea which Franklin supports.

Oversight over the mayor’s discretionary spending was an underlying area of contention. The Council voted to delay previously approved changes that would give Franklin greater authority over city spending in light of the budget shortfall. The mayor’s staff can award any contract worth less than $100,000 without Council approval, and that amount was set to increase to $300,000 in October, before the vote to delay the change. Although the mayor promptly vetoed the measure, the Council overrode her veto. It was the second veto that had been overridden in regard to restricting the mayor’s fiscal authority. The other was a bill requesting the city’s auditor to review Atlanta’s water and sewer funds before any changes to customers’ rates.

“I love the City Council, but in this particular circumstance they are wrong,” asserts Franklin. “Every major city has spending authority most times, for an upwards of $1 million dollars. So while I understand why they did it, they are wrong on the best practice side.”

“Oversight is never a bad thing,” counters Mitchell. “I’ve been on the Council for seven years and I appreciate the checks and balances that our system of government provides. We have enjoyed executive harmony with nearly all of the mayor’s initiatives and have given her a tremendous amount of leeway — that’s the confidence we have in the mayor. However, when we hear that there has been overspending in certain departments, we have no choice but to reinstitute some of our oversight ability until the matter is resolved.”

“[The Council’s decision] had minimal impact on what they were trying to do on a grand scale. But it’s understandable because the politics of the place changes, and it actually changes in the fifth year [as] there are people who take action for political reasons, because they don’t want to appear to be a rubber stamp for my administration,” speculates Franklin. “There is a sense that I am a sitting duck. I am a target for personal hits. However, I define myself, not by this position, but by my character and integrity, and I’m going to work until my last day. I am committed to public service.”

According to Franklin, whose second term ends in January of 2010, the budget that she presented to the City Council was the most thoughtful, consistent and appropriate budget that she’s recommended since taking office. “You think that the 2009 budget is hard … imagine how hard it will be during election time in this city, and for that, I will simply give them my blessing.”AT

 

Published in Atlanta Tribune: The Magazine, August 2008

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