WHITEFISH – City officials who previously used the building boom as a bountiful revenue source for their municipal budgets are now facing the reality of vastly diminished construction revenues.
Kalispell has grappled with low cash reserves since 2008 and now Whitefish is facing a possible negative cash balance in its general fund by the end of the fiscal year, with each city’s shortfalls blamed, at least partly, on declines in building-related revenue.
In September of 2008, then Kalispell City Manager Jim Patrick announced five job cuts. The main reason, Patrick wrote in a memo, was: “The growth dollars we have experienced in the past are not there, building permit and planning fees are down, and we all know that the cost for goods and services are higher than last year.”
Earlier that year, Gary Marks, Whitefish’s city manager at the time, told council that the city had a $357,000 deficit in its building fund due to construction-related losses. Council voted to raise building permit and plan review fees to increase revenue. The city finished 2008 with a little under $1 million in the general fund’s cash reserves. The year-end balance in 2007 was over $1 million.
But current Whitefish City Manager Chuck Stearns recently announced that the general fund’s cash balance was $295,746 at the end of 2009 and is trending lower with expected upcoming loans to the building and drug forfeiture funds. Stearns and Finance Director Rich Knapp worry that the reserves will be dried up by June 30, the end of the fiscal year, and the general fund could have a negative cash balance.
Stearns blamed the low cash balance on three primary reasons: the payment of nearly $400,000 in losses stemming from a Montana Supreme Court decision against the city; a higher number of property tax protests and delinquencies; and the continued decline in revenue from planning and building permits and fees. Property taxes, however, represent only a small part of the problem.
“Building-related revenues are very volatile,” Stearns said. “We basically dropped off a cliff.”
The city is also dealing with diminished resort tax revenues and higher street fund expenditures, as well as TIF collections through January that are $350,000 lower than anticipated. The wastewater and solid waste funds are concerning as well, according to a report by Knapp.
Stearns laid off four employees at the end of January, including three in the Planning and Building Department, an entity that’s closely tied to growth. Stearns also laid off a building inspector in early 2009 and then the department’s neighborhood resource officer resigned. The city opted not to fill her position. The layoffs, Stearns said, remedy systematic budget problems but don’t necessarily solve short-term cash concerns.
The Whitefish Planning and Building Department now has five employees, compared to 10 when Dave Taylor took over as director in late 2007. Taylor said he understands the realities of Whitefish’s economic situation, but is still concerned about his department’s ability to handle workloads with a diminished staff. Some jobs are simply no longer possible, he said. Others require the current employees to learn new roles, including Taylor.
Among Taylor’s new duties are lakeshore and floodplain responsibilities, which were previously handled by Planner Nikki Bond. Bond was one of the four employees laid off. Also, Taylor said Bond was in charge of GIS mapping.
“That whole function just disintegrated,” Taylor said.
The department’s building division now has one inspector, one building official and a permit technician. At the beginning of last year, it had three inspectors. With the official and inspector handling all of Whitefish’s building inspections, as well as Columbia Falls’ on a contract basis, Taylor worries that if construction picks up it will be hard to get everything done in a timely manner.
“If we get to the point that we’re not fulfilling our side,” Taylor said, “the state would take over building inspections and the state would get the fees.”
Despite declines in building-related revenue as far back as 2008, Stearns said he resisted layoffs earlier in the hopes that the economy would turn around and construction would increase. He has acknowledged “very aggressive and optimistic” building and planning revenue estimates during budget planning in 2009.
But after Knapp released his mid-year report, detailing the city’s finances through December 2009, Stearns wrote a memo that stated: “We cannot wait any longer.”
Stearns said there would have been consequences if construction picked up and the building department was understaffed because of layoffs. Even his recent layoffs are considered indefinite, leaving open the possibility of re-hiring those employees if future finances allow or if they’re needed.
“I’ve been through this many times – if (builders) get delayed, they’re going to be very angry,” Stearns said last week. “That’s why I tried to keep those staff to ride out this downturn. I can’t tell contractors who are hurting, ‘You know, we’ll get to that in two weeks.’”
Stearns, who has a background in finance, emphasizes that he has seen worse financial dilemmas at previous jobs. When he began working in Missoula in 1984, the city was recovering from a general fund crisis that saw the cash balance drop to negative $427,763 three years earlier, Stearns said. Building picked up and the state began allowing municipalities to collect gambling revenues, which helped turn Missoula’s financial fortunes around.
When factoring in all funds, Whitefish has more than a $5 million cash balance. But the general fund’s balance is vital because it is what the city dips into for expenditures that aren’t already budgeted, such as the $400,000 court payment and loans to other funds in need.
The tipping point for the general fund’s cash balance, Stearns said, was the litigation payment. The Montana Supreme Court upheld a district court ruling that the city unfairly denied a couple a permit to build a home on Whitefish Lake. The city had to pay $400,000. If that money were still in the coffers, the cash balance would be more than double.
“Without the Walton judgment,” Stearns wrote in his memo, “I think we could have made it to June 30th without such significant actions, but that may have also just been delaying inevitable actions.”
The city could borrow from the cash balances of other funds to stabilize the general fund, but council has expressed concern at relying on inter-fund borrowing. Another option, Stearns said, is borrowing from banks, but he isn’t too keen on that idea.
“We’d rather do it internally,” he said.
Council recently approved an economic stimulus plan proposed by Stearns in which the city will reimburse impact fees on construction projects within the tax-increment district between March 1 and August 31. The hope is that it will stimulate construction to increase planning and building revenue. Also, Stearns said the city will get money from the second round of property tax collections in May.
“Like it or not,” Stearns said, “property taxes are a fairly stable and predictable revenue source.”