Thomas K. Young: Poor fiscal stewardship

Published: Monday, January 3, 2011 at 6:01 a.m.
Last Modified: Friday, December 31, 2010 at 11:48 p.m.

Recently, the city and county government have sought to raise additional taxes. Tax receipts are said to be down as the economy is struggling to emerge from the worst economic downturn since the Great Depression.

The only way to maintain pre-recession spending is to raise taxes or add new taxes. The county proposed and then abandoned a fire assessment, but the city will be adding this new tax.

During the public hearings many taxpayers made the point that they were hurting financially and were in no position to pay more. This was ignored.

I decided to study our city's comprehensive annual financial report and pension plans, as well as those of several other cities and the state.

So how have recent commissions managed the financial affairs of the city and prepared us to face the stresses of the "great recession"?

Ocala and Tallahassee have considerable municipal and utility infrastructure in place that is "bought and paid for." Most of Gainesville's municipal and utility capital base is being paid for on the installment plan.

We are presently in an extremely low interest environment which makes debt service relatively easy, but any significant economic improvement will be accompanied by substantial interest rate increases.

Alternatively, if there is no economic upturn then credit downgrades can certainly challenge cities that carry excessive debt. For every 1 percent that interest rates rise, the city will have to pay $12 million per year. A rise of 3 percent is $36 million per year, and this would completely erase the GRU contribution to city government.

We will also have a novel biomass power plant in the future, and this could pose a very significant problem. Regardless of environmental benefits, this is a high risk-low reward financial gamble by a small and expensive utility which is smothered with debt. Taxpayers and ratepayers will certainly face pressure for higher taxes and rates, as our city and utility finances have no room for error.

Unfortunately this is the lesser of Gainesville taxpayer's problems. Pension and employee benefit obligations are the elephant in the room that public officials are loath to acknowledge.

Gainesville is not unique in this funding problem, but certainly its assumptions concerning rate of return and its investment decisions and portfolio are extraordinarily aggressive and exposes the city and its taxpayers to extraordinary risk.

The pension plan is invested almost entirely in stocks, real estate and hedge funds. The employee and city contributions have been based on an assumed 9.25 percent compounded annual return. Only the rosiest economic and investment future could justify the promised employee benefits, and we are certainly not looking at a rosy economic future.

Two percent to 3 percent returns on investment over the next 10 years could easily leave city pension obligations with more than a $500 million deficit. These pension assumption and strategies could burden future generations with unexpected and potentially ruinous expenses

The Gainesville pension funds fell behind in funding by more than $100 million earlier in this decade. One alternative would have been to increase employee and city payments, moderate benefits, reduce the expected rate of return and increase taxes. This would have been politically difficult. Alternatively, the city could borrow money, continue to assume a 9.25 percent return and hope for the best.

The second alternative, in my opinion a dereliction of fiscal responsibility, was all too predictably chosen. Thus a $100 million pension obligation bond was born; a general obligation of the city of Gainesville. And with the nerve of a riverboat gambler, the 9.25 percent compounded annual return was again predicted.

The result: Barely 5 years later city pensions and benefits are again unfunded by more than $100 million.

The city recently changed its rate of return expectations to 8.5 percent. This is still unrealistic, but will have the immediate effect of requiring higher contributions from employees and taxpayers.

I suspect the fire assessment was as much about the additional cost of pension obligations as it was a shortfall in tax revenues.

Present tax revenues of the city (in fact, any conceivable tax level) are surely inadequate to meet the extraordinary benefits that our previous elected officials have promised. The most malignant aspect of this shortfall is that it grows exponentially. The longer a reckoning is delayed the worse the crisis.

Thomas K. Young is a physician who lives in Gainesville.

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