Tag: budget

The budget problem and the proposal

For important background about the history of tax rates and property value reassessments, read this first. And also please read my May 11 post about this year’s budget. The central premise of that post was that the “Metro government botched the…resetting of property tax rates last year.”

The proposed budget for the upcoming Fiscal Year 2019 has been called a “status quo” budget. But it is alarmingly thin — especially when you consider that the budget crunch is expected to be worse a year from now. The proposed budget has these problems:

  • It funds our schools a full 5% less (about $39 million) than they have requested to educate the children of Davidson County.
  • It requires repealing the employee pay plan legislation passed a year ago in June 2017 because Metro can’t afford to provide the cost of living increases promised in that legislation.
  • It requires using rainy day funds to make ends meet.
  • It requires a one-time sale of $23 million of prime real estate to make ends meet.
  • It requires a one-time sale of $15 million in parking meter enforcement rights to make ends meet.

The fact that Metro is entering a multi-year budget crunch during boom times is making people mad — really mad. The citizens of Davidson County don’t feel right now like Metro’s spending matches its values. We have been told that downtown tourism is the economic engine that we need to pay for everything. But here we are having record tourism and a budget crunch, and not able to honor our obligations to our schools and our employees.

The situation calls for immediate action and long-term action.

On the long-term front, I am confident that the Metro Council is going to reassess how economic incentives are judged and awarded. Most citizens believe that downtown has enough momentum to be self-sustaining and they would like to see more tax dollars spent in communities outside of downtown. Unfortunately, any reassessment and realignment like this won’t happen overnight or in a single year.

In the short-term then, we must look at revenue and expenses and how to make ends meet while also honoring obligations to schools and employees.

On the expense side, I expect that the Council will be proposing many cuts to many items in the upcoming budget. We are too early in the process for me to have an idea of what those cuts will be. However, I am certain that there is not enough fat in the budget to cut that would allow Metro to honor its school and employee obligations. We have to look at the revenue also. This has been true historically, and it is true now.

On the revenue side, I along with other Council members are proposing a $0.50 property tax rate correction. This should have been done last year by the Mayor and/or the Council when the regularly-scheduled property value reassessment dropped the rate by $1.361. Adjusting the rate by $0.50 now would allow Metro to fund:

  • The school system’s requested budget (FY19)
  • Employee cost of living increases (FY19, 20)
  • Replenish Metro’s rainy day “5% funds” (FY19)
  • Pay known, already existing new debt obligations (FY20, 21)
  • Make up for the one-time sales of real estate and parking meter enforcement to cover budget this year (FY20, 21)
  • Cover minimal 1.5% growth in expenses (FY20, 21)
    • Remember, inflation is running at 2.5% — so planning for 1.5% growth leaves no room for error

This rate adjustment would only cover basic existing government operations until the next property value reassessment. It would not leave any room for funding for additional police or firefighters, and would not leave any room to provide additional funding for important programs like affordable housing.

To help show the numbers involved, here is a worksheet. Metro Finance provided the numbers for me. In four columns, it shows what “Status Quo” looks like until the next reassessment, then what funding the employee pay plan and adequately funding FY19 would look like, and then the last two columns add enough funds to cover minimal inflation of 1.5% and 2.0% respectively. Hopefully, the worksheet is self-explanatory.

In addition to correcting the property tax rate, it would be smart to ask Metro department heads to proactively find a way to operate 1-3% under budget in the upcoming year. This would further replenish Metro’s cash reserves.

Finally, here’s a link to some frequently asked questions that I am hearing about the $0.50 rate correction proposal.

 

 

Correction, May 21, 2018: Metro Finance says that the one-time sale of real estate is expected to bring in $23 million. This post and the linked worksheet previously said $38 million.

 

FAQs about $0.50 rate correction

Please read this and the posts linked there first.

These are some of the questions I am hearing about the proposed $0.50 property tax rate adjustment:

What is the proposal?

Adjusting the rate by $0.50 now would allow Metro to fund:

  • The school system’s requested budget (FY19)
  • Employee cost of living increases (FY19, 20)
  • Replenish Metro’s rainy day “5% funds” (FY19)
  • Pay known, already existing new debt obligations (FY20, 21)
  • Make up for the one-time sales of real estate and parking meter enforcement to cover budget this year (FY20, 21)
  • Cover minimal 1.5% growth in expenses (FY20, 21)
    • Remember, inflation is running at 2.5% — so planning for 1.5% growth leaves no room for error

This rate adjustment would only cover basic existing government operations until the next property value reassessment in 2021. It would not leave any room for funding for additional police or firefighters, and would not leave any room to provide additional funding for important programs like affordable housing.

A $0.50 rate adjustment is the minimum necessary for Metro to honor basic obligations to our schools and employees. More information is here.

Why is a property tax rate correction necessary?

As I have said in other posts, the “Metro government botched the…resetting of property tax rates last year.” In 2017, the Metro Property Assessor’s office ran its typically good property value reassessment process, but then Metro skipped making a simultaneous rate adjustment. This was out of step with historic practice in Metro and must be corrected. More info here.

Don’t we need a referendum to raise property taxes?

No. Under the Charter, we would need a referendum to raise the total property tax rate above $4.69. The proposal is for $3.655, substantially less than that cap.

Why propose this now?

The Mayor proposed a budget on May 1, and the Metro Council must approve a budget before the end of June. The budget process is the only opportunity to correct the property tax rate. The $0.50 adjustment is being proposed now to allow enough time for consideration before the budget is passed next month.

Why don’t we make corporations pay their fair share?

First, commercial properties pay approximately 62% of property taxes in Davidson County. Any rate adjustment will be paid primarily by businesses.

Second, I am confident that the Metro Council is going to reassess how economic incentives are judged and awarded in Nashville. Most citizens believe that downtown has enough momentum to be self-sustaining and they would like to see more tax dollars spent in communities outside of downtown. Unfortunately, any reassessment and realignment like this won’t happen overnight or in a single year. This rate adjustment is necessary for Metro to honor its immediate obligations while we address any inequity in economic incentives, which will take longer.

Does this impact the current election for Mayor?

I certainly hope not. While everyone should be sure to vote and not take anything for granted, I assume David Briley will be elected to serve out the last year in Megan Barry’s term. My sense is that the timing for suggesting a rate correction would be criticized by somebody no matter when the suggestion was made. Rather than trying to read the tea leaves on that, the timing is motivated to give the community as much time as possible to digest and analyze the situation before the Council votes on a budget in June.

I may supplement this list over time.

um…about the budget…

The proposed FY19 Metro budget has been out for ten days now…and it’s not good…and this is just the first year of a multi-year problem.

The quick top line summary is that the proposed budget would renege on legislation passed last June for employee cost of living increases and gives our schools only $5 million of the approximately $45 million that MNPS asked for. And in order to fund this bare bones, mostly status quo budget, the budget proposes selling $23 million of “surplus” Metro property and getting a $15 million one-time payment for outsourcing parking meter enforcement. Finally, there is consensus that the FY20 budget will be worse and require budget cuts, probably across the board.

Why this is happening? There are many contributing factors, but the single biggest is that the Metro government botched the reassessment and resetting of property tax rates last year. I don’t want to get too wonky, but nearly every time in the past when Metro has done a property value reassessment (which is required by state law to be revenue neutral), Metro has also changed the property tax rate (which can increase revenue). These are usually done at the same time because the revenue neutral property value reassessment already changes everyone’s tax bill. When revenue is needed for a growing city, it makes sense to change the rate when everyone’s payment amount is already changing due to the reassessment.

But last year, Metro only did the reassessment. The reassessment caused the property tax rate in Metro to drop from $4.516 per $100 of assessed value (which was pretty low historically) down to $3.155 (which is an all-time historic low rate). In almost every other reassessment in the history of Metro, the city would have reset the rate somewhere between these two numbers, which would have increased revenue. The failure to do this last year is the biggest reason why funds are short this year. And because property tax reassessments are on a four year cycle, this is also why Metro will be squeezed for cash at least into FY20.

Of course, there were other factors. For example, there were a high number of assessment appeals from large commercial properties last year. Since a majority of property taxes are paid by commercial properties, this impact is real. Also, the State of Tennessee continues to underfund Metro’s school system. There is ongoing litigation by MNPS to try to fix this, but the budget impact on Metro continues.

Will tightening Metro’s belt on spending correct this revenue problem? I don’t think so, not completely. I mean — Metro definitely should cut any fat that it can. But the proposed budget is already getting into the seed corn just to make ends meet this year. Is Metro going to find another $23 million of real estate to sell in FY20 to make ends meet then? Even if Metro could cut enough expenses to fund promised employee raises and education this year, is there enough fat to do it again in FY20? It’s hard for me to make the math work on Metro cutting its way to a fully-funded budget.

What can be done to correct this problem? The Metro Council is only one week into our budget meetings. I am hearing lots of ideas about where to cut expenses. I think we will cut expenses, perhaps aggressively. There are going to be tough conversations about how far we can cut back without eroding important government services, hurting Metro employees, or shortchanging our kids’ education.

I will update you all as the budget process unfolds.

FUN FACT: The previous all-time low property tax rate was in 1984-85. The rate that year was $3.17. That lasted only one year. It was quickly corrected by 75 cents, up to $3.92 for the rest of that reassessment cycle.

 

Correction, May 21, 2018: Metro Finance says that the one-time sale of real estate is expected to bring in $23 million. This post previously said $38 million.

TIF step-by-step

With the budget crunch this year, many people are asking legitimate questions about when and how tax increment financing (TIF) is used. Some of those conversations are getting bogged down in trying to understand exactly how TIF dollars flow. This post is not about the important questions of how and when to use TIF. This is a technical description of the flow of money in an effort to relieve some of the side questions about how it works.

What happens when MDHA provides tax increment financing? There are two key starting points to know. First, a baseline amount of property tax is established. If a property pays $10,000 per year in property taxes before the new development, that $10,000 is the baseline. When the new building is done, it will generate more taxes — say, $30,000 per year. The difference between the post-development tax bill and the pre-development bill is the “tax increment.” In my example, the tax increment would be $20,000 per year. Second, with TIF, it is MDHA that borrows money from a bank. MDHA then provides the loan proceeds to the developer. The developer will typically use the MDHA loan proceeds as part of its equity in financing a project.

Next, the project is built. The new building then gets its new, final property tax assessment. And then the owner pays the full amount of those property taxes to Metro just like everyone else. However, Metro and MDHA will have made a note of the baseline tax ($10,000) and knows to think about the baseline ($10,000) and the tax increment ($20,000) differently. More about that in a second.

Whenever Metro receives any property tax revenue, it automatically allocates the money to its several Funds — including the General Fund, the School Fund, and the School Debt Service Fund. This bears repeating — every dollar received including the tax increment dollars gets automatically allocated in certain fixed percentages to Metro’s various accounting Funds. When you pay your property taxes, about 41% gets allocated to the School Fund and the School Debt Service Fund, for example. And a TIF project works the same way — about 41% of its property tax payments get allocated to those same two of Metro’s Funds.

Then each year in the budget, each of the Funds has an expense line item where its share of the tax increment from TIF properties is deducted out and given to MDHA. Then MDHA uses this money to pay back the TIF loans.

This technical accounting flow of money among Metro and MDHA does not match up with the conventional perception of TIF loans. The common understanding is that Metro has decided to keep property taxes for TIF properties artificially low and that Metro never sees the money. While the end result that the tax increment is not available for typical government services is the same, the actual mechanism is different. Metro does collect the full property taxes on each TIF property, allocates the tax increment to its various Funds just like all other property tax revenue, then debits the tax increment money out of the Funds and over to MDHA, and then MDHA pays the loans.

As we wade into a budget season where people are looking for money, I know that some are seeing the budget line items for payments to MDHA and asking about it. Again, the sole goal here is to explain the mechanism.  The more important long term question is about how and when to use TIF.

Previous posts related to TIF herehere, and here.

Storm has been brewing for a while…

People in Nashville are understandably angry about having a tight budget in boom times. But this storm has been brewing for a while.

During the 2015 election season, one of the things that voters all around the county wanted to talk about most was “how come I’ve got problems in my part of town and we spend all that money downtown?” Voters have been ahead of the government on this. This budget season is making people wonder how they knew there was a problem and their leaders didn’t.

My comments in 2015 were centered around the ideas that: (1) economic development spending is not all “good” or all “bad”; and (2)  there simply isn’t enough information available for even well-informed people to have any idea whether particular projects are a good use of funds or not. My argument then was that more information and more transparency would lead to better decisions.

I know I wasn’t alone in this. One mayoral candidate talked about these issues as his central platform, and another two had a heavy dose of these issues.

I also know I wasn’t the only Council member to hear these issues from the community. I’ve tried to make progress on this. My first legislation in office — along with 24 co-sponsors — was tax increment financing reform. The ordinance requires annual property-by-property detailed reporting about TIF projects by MDHA. This legislation also stopped the practice of using property tax dollars from one redevelopment district for projects outside the district. The fact that I had 24 co-sponsors sign onto this shows how much we heard about TIF from the community.

Last summer, I also passed legislation requiring Metro to have a more detailed “debt management policy.” Before this, Metro did have a written policy about how to decide the right amount of long term debt. But, paraphrasing, the previous policy was basically a few sentences that said “Metro considers many appropriate factors in deciding how much debt is appropriate.” The new beefed up written policy — starting at page 5/21 in this PDF — outlines specific factors to be considered and also for the first time acknowledges that Metro’s unfunded retiree benefits obligations should be considered when making decisions about long term debt. (More about the $3 billion unfunded retiree benefits obligations here.)

As a Council, we have also stood in the way of the downtown flood wall for these same reasons. I have felt and continue to feel that there is not popular support around the county for a $125 million downtown flood wall. This project might well be technically sound and perhaps needed to protect Nashville’s lucrative downtown business and entertainment district. But by the time of the 2015 campaign season, and continuing through today, voters have had it with what feels like opaque insider development decisions that mostly impact downtown. We shouldn’t spend that much money on a flood wall without addressing the underlying distrust issues that have been brewing for a while now.

During each of the previous two budget cycles, I have also raised questions about how the percent of the budget that Nashville spends on long term debt could be increasing while we have been in boom times. If your get a raise from $50,000 to $55,000 per year, you’d like to see the part of your paycheck that goes to debt decrease, not go up!! Voters maybe haven’t known the exact numbers…but they have known that something wasn’t quite right.

Back in 2015, these issues concerned me and I told voters that they raised a yellow flag, not a red one, for me. I often said that there was plenty of time to address these issues and make a course correction. The efforts I am describing with legislation, and in encouraging dialogue and consensus on the flood wall before pulling the trigger on a $125 million project, and in talking about Metro’s $3 billion unfunded retiree benefits obligations have all been to nudge the city toward the course correction that we need.

Now it is nearly three years later. The transparency added with the new legislation has been a critical first step. But now we need the data to drive decisions. While nobody wishes for a budget crunch or the other chaos of the last few months, maybe there is a silver lining. Nashville is fundamentally very strong. The current storm give us an opportunity to start the hard work and hard conversations we need to strike a new, better balance in how we deal with debt, development, and funding our retiree benefits.

BL -983 about economic incentives

Bill -983 is sponsored by 22 Council members and is set for 2nd reading in the Council tonight. The bill would create new reporting and enforcement mechanisms for economic incentives. I think the motivation behind the bill is great. I think big parts of it are great. But I voted against it in our Budget & Finance Committee last night.

Since the bill has 22 sponsors and passed Budget & Finance last night by a 10-2 vote, I wanted to explain my position against the bill.

The bills has four main components — it requires an incentive recipient to predict in advance of its project the number of jobs that will be filled by Davidson County residents and the wages that will be paid, it requires the predictions to be incorporated into the formal incentives agreement each recipient has with Metro, it requires quarterly reporting after the incentive starts, and it empowers the Council to cancel the incentive if the recipient fails to comply with the predictions.

As things stand today, every incentives recipient has a formal agreement with Metro, and there are different degrees of enforcement or claw backs built into each contract.  Importantly, the Metro Council has to approve every incentives agreement before Metro can enter the agreement.

I am all in favor of standardizing the information we receive before an agreement is signed. I am in favor of continuing to strengthen the enforcement mechanisms in our incentive agreements. However, I don’t think it makes sense to shift enforcement from the executive branch to the legislative branch of Metro government. I don’t think it makes sense to have 40 Council members reviewing quarterly reports and also then deciding whether to pull the plug on the incentive agreement. I think it is much better policy for the Council to focus on our existing power to review and approve all of these contracts before they go into effect.

Unfunded OPEB liability to cross $3B mark this year

I have written before about Metro’s pension and OPEB (Other Post-Employment Benefits — e.g. health insurance) liability. This is brief update.

Metro’s Finance Director gave the Council an update about these liabilities today.

The pension fund is in good shape with more than 98% of the pension liability funded.

Metro’s future OPEB liability is not funded at all. Instead Metro pays its annual costs out-of-pocket each year. However, the unfunded accrued future liability has been growing faster than the annual budget for some time. The latest data out today shows that the combined accrued OPEB liability for Metro and Metro Schools is approximately $2.9 billion. We can expect this to cross over $3 billion during the current fiscal year.

Unfunded OPEB Obligation Going Over $3B in 2018?

Between now and the end of June, the Metro Council will approve our budget for the 2018 fiscal year. Before we get too deep into that process, it is worth remembering where Metro stands on its financial obligations to Metro retirees.

The financial obligations to retirees have two components – pension obligations and what is called “Other Post-Employment Benefits” or “OPEB.” The OPEB component is the health insurance coverage that Metro retirees have.

Metro has never set aside any money for the OPEB obligation. Instead, each year, Metro pays for the post-retirement healthcare obligations out of operating funds for that year. At the end of FY16, actuaries calculated Metro’s total unfunded OPEB obligation at $2.79 billion. There are several points to make about the unfunded OPEB obligation.

First, it is an enormous number. In fact, it was 1.4 times the entire Metro budget for 2016.

Second, this number has been growing rapidly. Back in FY12, the unfunded OPEB obligation was $2.23 billion. This means that, during Nashville’s historic growth from 2012 to 2016, the unfunded OPEB obligation grew by just over a half billion dollars ($560 million).

Third, there has been predictability in these numbers for the last 5 years. In both FY12 and FY16, the unfunded OPEB obligation was 1.4 times the Metro budget. The main takeaway is that, for every $100 Nashville has been able to grow its revenue/budget over the last 5 years, our unfunded OPEB obligation has grown $140. This is probably Metro’s worst financial statistic.

Here is a chart that shows Metro’s budget, unfunded OPEB obligation, and the OPEB obligation as a percent of the budget for 2012 to 2016.

I did the same analysis for the pension obligation. Here’s the chart for that. For the pension, there is money set aside already, although not enough to cover all future obligations. For the pension, the accountants calculate the “net pension obligation.” To do this, they look at how much money is set aside and then make some assumptions about inflation and how much money Metro will earn on the invested funds. Based on this data and assumptions, they calculate how much the shortfall will be over the long run. And that “net pension obligation” is how much Metro should anticipate having to pay for all current and former employees in addition to what is already set aside.

The good news is that the net pension obligation numbers are much smaller. For FY16, the net pension obligation was $401 million (or 20% of the FY16 Metro budget). That’s a big number, but manageable compared to the $2.79 billion unfunded OPEB obligation.

On the chart, you’ll see that it looks like the net pension liability quadrupled from FY13 to 14. But there was a complex accounting rules changes that went into effect that year, which forced the net pension obligation to be calculated differently. Since the rules change, the net pension obligation has ranged from 14 to 20% of the Metro budget.  So for every $100 that Nashville has grown its revenue/budget over the last 3 years, the net pension obligation increased by just under $20.

It is hard to put just the right context on numbers this large — especially the $2.79 billion unfunded OPEB obligation. I mean, panic isn’t the right response. But, Metro does need a serious plan for addressing the trend lines. The Mayor just proposed a $2.21 billion budget for FY18. If that 1.4 multiple holds true, the unfunded OPEB obligation will go over $3 billion in 2018.

Math is hard

For the 2017 fiscal year, Metro’s general obligation bond debt service was either 10.1%, 10.85%, or 11.35% of the budget — depending on what document you look at.

According to the 2017 Budget Presentation given a year ago, it was 10.85%. See page 17.

According to the 2018 Budget Presentation given a few days ago, it was 11.35%. See page 35.

According to the Council Director’s analysis for our meeting two weeks ago, it was 10.1%. See page 2.

It seems like there are different methodologies being used to calculate a single metric. These numbers really aren’t too terribly different, but there is a roughly 10% swag factor depending on which of these is correct. I’m working with the various Metro folks involved trying to understand the differences.

FY2016 Audited Financials Are Out

Metro’s Comprehensive Annual Financial Report For the Year Ended June 30, 2016, or CAFR, was accepted by the Metro Audit Committee yesterday and is posted online. It’s 320 pages of financial details about Metro. Since I’m still recovering from my rotator cuff surgery, and typing doesn’t feel great, I’ll just hit a few points of interest:

  1. The auditors provided an unqualified opinion — that’s good. See pages 19-21 of the PDF. That means that Metro’s financials fairly present its financial position in accordance with generally accepted accounting principles.
  2. The auditors did not find any material weaknesses in Metro’s financials. This is good.
  3. Metro added some information about tax abatements to the Notes this year. This was voluntary by the administration — it’s not required to be included. It is at pages 153-54 of the PDF, and describes nine current real property tax abatements.
  4. If you want to read up about Metro’s long term bond debt and commercial paper program, there’s lots of detail from pages 96-110 of the PDF.
  5. Metro’s pension plans are discussed at pages 111-131 of the PDF.
  6. Metro’s other post-employment benefits (OPEB) plans are discussed at pages 132-134 of the PDF. This shows the OPEB obligations are funded at 0%.  This will bite Metro at some point if left unaddressed.
  7. There is information about our investment in roads, streets and bridges at pages 155-56 of the PDF. There’s some interesting data about how the quality of our roads and streets took a hit with the flood in 2010, but are making a comeback over time.
  8. The fact that Metro does not have a good, accurate budget for Nashville General Hospital has an impact on the audit.  At page 20, the auditors include a “going concern” note about NGH.  At page 144 of the PDF, there is more detail.  Basically, because we continue to budget about $35 million even though the real cost is higher, the audit has to say, “The Government has budgeted and legally approved an appropriation of $35 million to the Hospital Authority for the year ended June 30, 2017. The Government has also not committed to provide additional funding to the Hospital Authority should such funding become necessary.” If Metro would budget a realistic budget and NGH met the budget, we would likely eliminate the “going concern” comment about the hospital.

Feel free to email me any questions or comments.

That next $10 million…

It costs Metro more than $35 million for Nashville General Hospital to operate. The average annual cost to Metro to operate NGH has been more than $35 million per year for more than a decade.

I understand that the Hospital Authority was created in March 1999 and had a $15 million cash deficit that year. I believe that, through fiscal year 2007 (so, before the Dean administration even), that cash deficit grew to $62 million. Even though the formally budgeted contribution from Metro was in the mid-$30 million per year range at that point, there was average additional cost of at least $5 million per year through those years due to the deficits. If you dig through the Metro audits for these years, you can find all of this.

For me, it is important to note that the public’s perception about cost focuses on the idea that “it costs Metro $35 million per year to run NGH.” I would guess that political pressures on all involved going back to the early days of the Hospital Authority contributed to a popular impression that it costs Metro $30-35 million per year to operate NGH, when really – all-in – it was more.

The fact is that, for whatever reasons, more than a decade ago, the seeds were planted that created the impression that it costs Metro about $30-35 million to operate NGH. The more precise perception would have been that the formal operating subsidy was $30-35 million per year and that Metro spent more than that on average over the years once you took deficits and unpaid payables into account.

I am more interested in having the “all-in” number be the one that gets discussed publicly. I believe the Barry administration feels the same way. I think the Hospital Authority and Dr. Webb agree too. But the long-standing political ground rule that “it costs $30-35 million” is persistent.

With that as background, let me give my answer to each of the questions raised in David Plazas’ editorial yesterday.

Question: Why do we need another bailout?

My perspective is that the use of the word “bailout” is an unfortunate downside to the perception that was created more than a decade ago about the supposed cost to Metro to operate NGH. The average cost over many years has been higher than $35 million. And much of that time was before the most recent, well-documented challenges in medical reimbursement nationally.

NGH needs more than $35 million this year because it historically costs more than $35 million from Metro to operate the hospital, and because medical reimbursements are as challenging now as they have ever been.

That doesn’t mean NGH gets (or wants) a blank check. Obviously, we have to look at how the money is being spent. But I don’t think the traditional notion of “bailout” applies.

Question: Why did Dr. Webb say early this year that the last $10 million was a one-time event?

I can’t speak for Dr. Webb. But my sense is that there were at least two things he had in mind. First, I believe that it was his goal to make it a one-time event. Second, since long before Dr. Webb took over at NGH, one of our local political ground ground rules has been that “it costs Metro $35 million to operate NGH.”

I have shared with Dr. Webb that I am more interested in knowing a realistic all-in number for what it costs Metro to operate NGH – even if the number violates a long-standing ground rule by being higher than $35 million.

Question: Why did Dr. Webb say during the budget process that $35 million would be enough for this fiscal year?

I have the same response to this one. Dr. Webb will need to answer this, but I suspect that the NGH budget for this year was what I would call aspirational.  I think it was likely built to reflect what the results would be if everything broke just the right way – especially with reimbursements for medical services provided. I suspect that Dr. Webb and his team, in an effort to meet the long-standing political expectations that it is supposed to cost $35 million for Metro to operate the hospital, set budget goals that were aggressive.

Question: Why was Metro was surprised by the request? Why were Metro officials caught unawares? Why were hospital administrators not forthcoming?

On this one, I think the Finance Director can best answer the question for Metro.  For me, there was no surprise. It cost Metro $45 million to operate the hospital last year.  And the running average over more than a decade is higher than $35 million.  And lots of hospitals are having reimbursement issues. I was sure there would be a supplemental appropriation request at some point.

I understand that Metro and NGH have had regular, frequent meetings or calls to discuss budget and cash forecasting throughout this fiscal year. I think both Metro and NGH have seen the possibility of the supplemental request coming.

I suspect that NGH, through the first quarter of the fiscal year, was fully committed to the budget I am calling aspirational. I think that, after NGH closed its books for the first quarter (which would have been late October or early November), they saw the handwriting on the wall, and let Metro and the Hospital Authority know that they would need a supplemental appropriation.

Question: Why did NGH brief the Hospital Authority before the Mayor or the Council?

Two things here.  I understand that NGH did talk to Metro Finance in the days before talking to the Hospital Authority. But also, that’s the way the governance structure works.  Dr. Webb and his team report to the Hospital Authority.  As for the Council, Metro Finance let the Council know within a week or ten days about the situation.

Put all together, the NGH management team worked their budget for the first quarter. Those results show trending that will require a supplemental appropriation.  They let Metro Finance and the Hospital Authority know.  Metro Finance let the Council know.  All of that seems to have happened in a matter of several weeks.

Let me wrap up with two final points.

First, don’t lose track of some positives.  I understand that NGH has successfully dealt with all of the Joint Commission issues raised last year. I am told that, over the last two years, NGH has dramatically decreased infection rates, and the rates are now better than national averages. I believe that the medical staff morale is in a good place. These positives matter, and I think the newly re-formulated Hospital Authority will help continue the push in a good direction.

Second, and I’ll be trying to write more about this in the coming weeks, NGH needing more money isn’t the story.  That’s consistent with historic costs. The more important issue is for us (NGH, the Hospital Authority, the Mayor, the Council) to get rid of the long-standing political ground rule that it costs $35 million for Metro to operate the hospital. It’s arbitrary…it gets in the way of proper management and governance. We all need to know the actual all-in cost to Metro, and we need to be able to know that NGH has a realistic budget and can meet that budget.

(You can see what I wrote about NGH earlier in 2016 here.)

Budget & Finance Committee Working Session on the Operating Budget

Yesterday, the Council’s Budget & Finance Committee had a working session to consider the “Wish List” items proposed by various Council members for the operating budget.  All Council members were invited, and I think the video should be available online.

Just before the meeting, we were handed a brief summary of the changes requested by different members of the Council. As I write this, I don’t think that summary document is online anywhere. You’ll have to pardon my notes, but here’s my copy of the summary.  It is worth noting that the total price tag on everything being requested by the Council for the operating budget would come to about $2,000,000.  If all of it were to be included, it would represent approximately a 0.1% increase in the Mayor’s proposed $2 billion operating budget.

The format for the meeting was for the Council member proposing a change to briefly present what they wanted to change in the operating budget and to also propose a funding source. Then other Council members could comment. There was not very much debate, and there were no votes taken.

At the meeting, we were told that Chair Pridemore and the Metro Finance Director (possibly with others from Metro Finance and the Council’s staff??) would meet between now and Friday to formulate a substitute budget, that the substitute budget would be circulated to Council members on Friday, and that any proposed amendments to the substitute budget will be due by noon next Monday in advance of the Tuesday Council meeting.

As this is my first Metro budget process, I am still learning the process. I am curious to see what, if any, changes come in the substitute budget.

 

Flood Wall Planning in CIB

This evening, the Council considered the Mayor’s Capital Improvements Budget (CIB). I proposed an amendment to delete the $110 million flood wall from the CIB. I mentioned yesterday that:

There was a significant public discussion about this last year, and there has been none this year.  I think there should be some public discussion about this project. That’s why I filed the amendment.

I’m glad I filed the amendment. I think most people didn’t realize that the nine figure flood wall was placed back in the CIB this year. For example, even the Business Journal’s coverage started with noting that “The proposal for a downtown flood wall…may not be so dead after all.” And multiple Council members commented today that they hadn’t realized the flood wall was back in the CIB this year.

At the Council’s Budget & Finance Committee meeting today, the discussion about the flood wall project lasted about 90 minutes. One very important thing we learned is that this project would be fully approved for spending if it were included in the CIB.

Unlike projects funded by General Obligation Bonds where the Council must separately authorize Metro to borrow money for the project, the flood wall (which would be built using Water Services Revenue Bonds) could be built immediately once approved to be in the CIB. You need a degree in Charter-ology to fully understand the details – but the bottom line is that approving the flood wall in the CIB would authorize the entire project without further action of the Council.

It was also clear that there were many Council members who support the project, and many Council members who feel that it has not been adequately vetted yet. My sense was that, if the Council were to vote straight up or down on including the full $110 million flood wall in the CIB, it would have been a close vote. It would have been all or nothing – either kill it again for another year, or allow it to proceed in full without any further input from the Council.

I felt that playing an all-or-nothing hand with such a large infrastructure project would not be the responsible thing to do. CM John Cooper suggested a compromise. The idea was to amend my proposed amendment to allow an incremental step in the project — to include $15 million only in the CIB for design, planning, and countywide community involvement. This compromise approach passed the full Council with 3 no votes. This will let design work and the countywide community engagement process move forward, but not allow any part of the project to be built without further approval by the Council.

I am being careful to tell everyone know that, when I brought this up, it was because I wanted a public discussion – I hadn’t made up my mind about the value of the entire project. And, after 90 minutes of debate today and us approving taking the next step, I am at that same place. I’ll participate in the countywide public engagement part of the process and decide along with the rest of the county about the merits of the proposed flood wall.

Also, Joey Garrison did a great job of summarizing the details of the Council debate today.

 

 

Capital Improvements Budget Up Tomorrow

On June 14, 2016, the Council will consider the proposed Capital Improvements Budget (CIB). The proposed CIB is here, and proposed CIB ordinance is here.

The Council’s Office just posted the amendments that have been proposed by Councilmembers. I have proposed two amendments that would delete items from the CIB. Neither is related to my suggestion last week to delete items from the Capital Spending Plan.

One of my proposed amendments to the CIB would be to remove the $110 million flood wall that was removed from last year’s CIB. I never really understood the project last year. To me, if you build a wall on part of one side of a river, if it works, it means you are flooding another part of town. There was a significant public discussion about this last year, and there has been none this year.

I think there should be some public discussion about this project. That’s why I filed the amendment.

(I pulled the vote on this from last year – for Council members who were in office a year ago, 5 voted to remove the flood wall from the CIB, 7 to keep it in, and 1 abstained.)

My other proposed amendment would remove a duplicate entry from the CIB. There are two entries in the CIB to build a new Sheriff’s Office headquarters (17GS0018 and 17SO0001). This amendment deletes one of the duplicate entries. Both Metro Finance and the Sheriff have told me that they are okay with deleting the duplicate.

 

Follow-up: Capital Spending Plan

Earlier today, I posted about my plan to try to amend the Capital Spending Plan to remove $40 million related to the Sheriff’s Office.

This afternoon, I was told that the Council hasn’t amended a Capital Spending Plan for at least 10 years. If that’s true, wow!

For background, there are two different documents – the Capital Improvements Budget (CIB) and the Capital Spending Plan (CSP).  The CIB is a huge document that has 6 years of capital projects listed in it. The document is messy. For example, a new Sheriff’s Department headquarters is listed twice in the CIB. (Look at Item 17GS0018 on page III-27 for $20,000,000, and Item 17SO0001 on page III-153 for $21,464,700.) Our new Mayor has committed to have the Planning Department clean up the CIB and its presentation. But that is expected to take a few years.

If a project is listed in the CIB, it is considered to be eligible for capital spending. But being listed in the CIB does NOT mean that any funds are actually appropriated for the project. In order for a project to actually be funded, it has to appear in the CSP and the Council has to approve Metro incurring the debt to pay for the CSP. This might make you wonder, “Well, who cares if a project is in the CIB or not??” Here’s why – if a project is in the CIB, it only takes 21 votes to approve funding for the project. If a project is not in the CIB, it takes 27 votes to approve funding for the project. So, it does matter if a project is in the CIB.

Apparently, for years and years, the Council has removed or added projects to the CIB.  Last year, for example, the flood wall and the police HQ were removed from the CIB.  I’m told that there is no recent history of removing projects from the CSP. I’m not sure this makes sense to me.

I would think that there are some projects where the Council should look at the CIB, and others where we should look at the CSP. With the flood wall last year, I was busy campaigning, but I never understood the project. With that one, it made sense that it was removed from the CIB and was therefore not eligible to be funded at all. But with the Sheriff’s headquarters, I am ok with the project being in the CIB – consolidating the Sheriff’s administrative functions somewhere makes sense to me. I just don’t want money to be appropriated for the project at this time – that’s why I think it should be removed from the CSP (even if the project remains in the CIB and eligible for funding at some point).

I’ll keep trying to share my observations about the Metro budget process as it unfolds.