The debate over the use of the township’s budget surplus for tax relief versus financial security is not a new idea in West Windsor, and has been frequent fodder for township political contests.##M:[more]##
This year, the centerpiece of Charles Morgan’s mayoral campaign is the idea that Mayor’s Shing-Fu Hsueh’s proposed budget uses too much surplus to maintain the township’s AAA bond rating. And that tax relief is more important than having such a high bond rating
Morgan is recommending using the surplus to reduce the tax increase for residents this year, even calling for a 12.1 percent reduction in taxes. But township administration officials — namely Business Administrator Chris Marion and Chief Financial Officer Joanne Louth — are saying his analyses don’t add up, and that following through with his proposals could bring long-term detriments to the township’s financial status.
And in 2001, Morgan actually held a similar position to Hsueh, Marion, and Louth, voting against passing the budget that year because of its lack of reserves, and even mentioned his worry over the township’s bond rating.
Morgan does not deny his opinions at the time — that he felt the surplus remaining in the budget that year would have been too risky to keep so low. What it comes down to, Morgan says is a balancing act between “the need to protect the township against surprises against the need to keep taxes down for the taxpayer.”
And a good way to do that balancing, Morgan says, is to use tools created by Standard & Poor’s to evaluate the amount of surplus needed to keep it sufficient.
According to an article printed in the May 25, 2001 issue of the the News, Morgan voted against the budget that year because the surplus had been drained to such a low level that he believed it did not include enough contingency funds in the case of municipal emergencies. He suggested that the budget should have been left with a two-cent increase as originally presented by then-Mayor Carole Carson.
“I feel that there’s a huge amount of risk in this budget. I don’t know if there’s an adequate amount of surplus,” Morgan said then, at which time he criticized then-councilwoman Jackie Alberts for trying to chop too much out of the budget to bring it down. “Jackie is looking at it from one perspective — chop, chop, chop. She’s looking at line items and trying to find a nickel here and a dime there.”
Instead, Morgan presented a $1.3 million list of 26 different items, the financial risk involved, the percent likelihood of occurrence, and the amount of surplus that should be set aside based on the percentage. Those items include, for example, one more snowstorm than budgeted (50 percent likelihood, $19,”000 to be set aside); a commercial bankruptcy resulting in a loss of tax revenues (10 percent likelihood, $80,”000 set aside); an unsafe/unhealthy working conditions lawsuit (20 percent likelihood, $200,”000 set aside); and a train accident (1 percent likelihood, $1,”000 set aside).
Morgan said then that allowing for such contingencies is a tool that Prudential, where he worked as an attorney, used to calculate a budget. “It’s scary how accurate those numbers are. Even though you don’t know what will really happen in every individual situation, in the aggregate you end up with a surplus number that’s very reliable, and very accurate. You know some of those things are going to hit, you just don’t know which ones are going to hit. “
“Nobody (on council) was ready to accept what I said at face value,” he added, “but it started a dialogue as a possible tool for us to use. I worry about our bond rating. I don’t want to be faced with an emergency appropriation in November.”
Morgan also said he believed that the township should be involved with more long-term budgeting. “At Prudential we project out five years. We’re doing the 2002 budget now and we have to be finished with it by December. The municipal budget process for 2002 should be starting now and the budget should be projected out five years. It’s what financial industry does, what private companies do, and something government should do also.”
In 2001, the retained surplus was reduced to $611,”848 — 2.5 percent of the $24 million municipal budget.
Ironically, under Morgan’s proposal this year, the surplus would be reduced to $982,”832 — 2.7 percent of the $36.39 million budget currently under consideration.
The budget as currently proposed recommends a retained surplus of $3.4 million — 9.43 percent.
Morgan’s plan calls for a reduction in the tax rate by 12.1 percent to 27.1 cents, “instead of the mayor’s proposed 1.7-cent increase in taxes to 33.1 cents per $100 of valuation. That would be a 4-cent decrease that would rollback our taxes to the 27 cent 2007 tax rate.”
The 5.4 percent increase in taxes this year, together with past tax increases, increases West Windsor taxes by 22.6 percent since 2006, Morgan says.
The numbers were virtually the same in 2001 as they are under Morgan’s proposal, but in 2001, Morgan’s position was entirely different.
Morgan, however, says he has not changed his philosophy or way of thinking at all. “Back in the beginning, our surplus was pushed down to almost essentially nothing,” he said. “Now, it’s pushed all the way to the other side.” And he says he simply wants balance.
Under Morgan’s current proposal for 2009, he is advocating cutting back the $7.6 million in reserves by $6.65 million all together, leaving about $982,”832 in the fund balance. Morgan, however, says that his issue is what he says has been a lack of data collection and “homework” on factors like the emergency situations to depict why such an excess surplus is necessary. “This practice of setting surplus with blinders on is something that’s just got to go,” he says.
He compares the practice to having a car without car insurance. Someone is trying to plan for how he or she is going to pay for a replacement in the event it is totaled, he hypothesized. The person is left with a choice — either guess what he or she thinks the value of the car would be, or doing the homework involving research on Kelly Blue Book and other well-know references. And, if the person does not want to go through all the trouble, he or she could just put $50,”000 aside, which he or she knows will be more than sufficient. But, Morgan asks, what happens if it only turns out to be $35,”000?
“We are not using any level of precision, using simple statistical analysis that can go to the precision that can give us total comfort on the amount of surplus being much lower than it is now,” Morgan said. “What we’re doing is worrying vaguely about how much we need, and putting more than enough for all sorts of surprises.
“The fact of the matter is you don’t incur all risks and all surprises every year, and you don’t need to hold reserves against all of them,” he added. “I’ve been asking for a little more precision on assessing the risks with respect to which reserves we are holding, and I’m not getting answers.”
Morgan says a good method would be using standard deviation on overtime for various departments, a practice which he said the administration has been unable to do. “Our organization has very, very competent people who just aren’t used to it,” he said. “And they don’t have the data.”
So why is it that he was against a surplus balance of 2.5 percent in 2001, but is for one that is 2.7 percent in 2009? Because as of right now, keeping the surplus at a level between 1 and 4 percent is “adequate” according to the Analytical Characterization of Ratios under Standard & Poor’s Available Fund Balance Scale. “I don’t remember what the S&P standards were back then,” for the percentage necessary in the surplus to be deemed adequate in 2001, he says, but he felt then that it was inadequate.
According to his own charts, the township’s level of surplus in 2003, however, was at a level that was below $500,”000, when the S&P’s “high adequate” suggested was to have the surplus at over $1 million. Every consecutive year through 2006, the amount of surplus exceeded further the amount designated as “high adequate” by the S&P, but then dropped a bit in 2007, and sky-rocketed in 2008 and in what has been proposed for 2009. Morgan shows his proposal would leave a balance in surplus that would fall in between what is “high adequate” and “low adequate.”
The updated version of Standard & Poor’s “analytical characterization of ratios,” is one tool S&P uses to base its bond ratings for municipalities. According to an April, 2008, version of the scale, in order to have an adequate fund balance, between 1 and 4 percent is needed. Having a “good” fund balance would require the town to have between 4 and 8 percent; “strong” would require between 8 and 15 percent; and “very strong” would be above 15 percent. The only step below than “adequate” is “low,” and that requires a surplus of below 0 percent.
“If you take Standard & Poor’s numbers on how much surplus to hold for the different kinds of ratings, just by applying those standards, you can see our surplus is way out of line,” he says. Morgan says the township should maintain an investment grade — between an A or AAA rating, although he says AAA is too expensive. “We don’t need more than a single A there,” he said. “We can go down to adequate and maintain at least a single A, and probably an AA.”
And why is this? Because as long as the township stays within what S&P’s determines is adequate, it should be in sufficient financial status. “I don’t think we should push it up to multiples of adequate,” he said. He says he believes in “keeping adequate surplus, but not excessive surplus so that you can borrow things that the community wants to do. When you look at the surplus the mayor’s been holding, it’s been going up and down.”
Implementing Morgan’s proposal will “keep us somewhere in AA range, worst case an A,” he said. “And that’s investment grade.” Morgan also says he is not concerned that the surplus will not be replenished. “It is replenished every year,” he said, adding that even though it is a recession, the township’s tax base is not disappearing because the township does not have a problem collecting taxes from its residents, many of whom are not losing their jobs as a result of the economy. If they are, they are still taking care of their tax bills. Besides, “if people don’t pay their bills, we’re going to collect it from them when they sell their house because it’s going to be a lien,” he says.
“I was not happy with those early years with the level of surplus — I thought it was inadequate,” he added. “And I do believe you need to have an adequate level of surplus to account for surprises, but at some point, you need to put on the brakes.”
When should those brakes be applied? “The best way to find out is to apply some of these statistical techniques. My philosophy has not changed — what I’m saying is we’ve pushed the numbers too high,” Morgan says.
Morgan also argues that the township also has not done an inventory of the emergencies that can realistically happen, and that is a big part of the data that is missing. Still, “I’ve been here for 10 years, and the biggest emergency we had is the failing of the septic systems, and we went out to bond for that.”
The frustration, he says, is that the data is not kept, including the data on what S&P deemed adequate for a surplus amount in 2001, and Morgan says he just wants to try to “change behavior. These people need a shock, and suggesting we drop by 4 pennies (on the tax rate) is a shock to their system. It’s a wake up call.”
Morgan’s Methodology. Morgan has developed a slew of calculations to explain his theory that keeping $4.2 million in surplus, as the township has done for the past three years, “has cost the taxpayers about 6 3/4 cents per year per $100 of valuation,” and that maintaining the township’s AAA bond rating is “costing more than it’s saving, even after accounting for the small interest earned on the surplus funds.”
According to Morgan, “dividing the $4.2 million surplus by the average, about $625,”000, of what one penny in taxes yields for the past three years, shows the $4.2 million surplus has cost West Windsor taxpayers about 6 3/4 cents in additional tax per year per $100 of valuation,” says Morgan. “For a residence with the average valuation of $549,”000, this is about $370 extra in taxes per year.”
Morgan says that the additional surplus West Windsor needs for a AAA bond rating over an AA or A rating is estimated at 7 percent, or 3.9 cents in added taxes per $100 of valuation. “Seven percent of West Windsor Township’s approximately $35 million budget is $2.45 million, which is about 60 percent of West Windsor’s $4.2 historical surplus,” Morgan said in his analysis. “This $2.45 million estimated as needed for the AAA bond rating over an A or AA rating costs taxpayers 3.9 cents in added taxes per $100 of valuation.” Morgan said the calculations were made by dividing $2.45 million by $625,”000 — or the average tax revenue per penny — and determined that $2.45 million in surplus costs an extra $214 in taxes for the averaged assessed home at $549,”000.
“From 2007, the total savings from the AAA bond rating, including interest on the $2.4 million surplus has been about $341,”592,” Morgan added. “Divide the $341,”592 by the average 7,”767 residences in the township during the past three years, and the actual savings per average residence is about $44.”
Morgan said that the $800,”000 the township will save from the AAA bonds over a 15-year period in only one-third of the $2.45 million extra surplus needed each year.
“It seems to me that the AAA is a bad bargain for the average homeowner, who is paying $214 in taxes for a $44 savings,” Morgan said. “We should return that $2.45 million of excessive surplus right now as immediate tax relief to West Windsor taxpayers.”
Administration Responds. However, Business Administrator Chris Marion says that there have been some differences in approach and methodology that Morgan has taken in comparison with how township professionals have looked at the budget.
“There’s also some policy decisions that need to be made,” Marion added. “We’ve taken a long-term financial approach.”
Marion said he and Chief Financial Officer Joanne Louth spent two days analyzing Morgan’s proposal, including his figures and calculations, and that they have determined that his proposal to use the additional $2.45 million of fund balance, or surplus — on top of the township’s proposal to already use $4.2 million of the surplus — would result in the township using a total of $6.65 million of the $7.6 million available in surplus currently — as opposed to the administration’s own proposal to use only $4.2 million.
But, in looking at his calculations, Marion said that implementing Morgan’s proposal would only result in a 7.3 reduction in taxes, not a 12.1 percent reduction. Further, the tax rate would be lowered to 29.1 cents, and not as low as 27.1 cents, as Morgan had proposed, which would be a 2.3-cent decrease in the tax rate, not a 4-cent decrease.
And contrary to Morgan’s calculations that show his proposal would result in $214 in savings off the average person’s total municipal tax bill, Marion says it would result in $126 in savings.
Part of the disparity, Marion says, is that Morgan was using 2008 numbers to come to his proposal.
In addition, during the recession, the township might not be able to generate enough funds to replenish the surplus, resulting in a lower balance to begin with when it comes to the 2010 budgeting process, and could result in as high as a 23 percent immediate increase in taxes for 2010 as a result, Marion and Louth say.
In addition, approximately 30 percent of the proposed $2.45 million in additional surplus funds that Morgan is proposing using to offset taxes will benefit non-residential commercial taxpayers.
Furthermore, “the proposal relies heavily on the assumption that the fund balance available in 2009 will continue to be available for use in 2010,” and the township has already seen a decline in revenue for 2008, says Louth, who estimates that the township will generate even less money to put back into the surplus for 2010.
“The proposal is one dimensional in that it does not take into account the impact on the municipal tax rate, fund balance reserve, and the level of services provided in 2010 and beyond,” Marion said.
Following through with Morgan’s proposal could result in “total depletion” of the fund balance. Louth estimates that there will only be $3.6 million in fund balance available to support the 2010 municipal operating budget. That is a reduction of 44.8 percent from the proposed $6.65 million to support the 2009 budget.
And the township would have to account for that loss through other means to continue offering current services to taxpayers, they said. This means that the budget for 2010 could increase by as much as 23.7 percent — from 29.1 cents for 2009, under Morgan’s proposal, to 36 cents per $100 of valuation in 2010, which translates into a $379 average increase in taxes, they said.
Further, such a dramatic loss in surplus could result in a reduction in the township bond rating, which could ultimately result in the township paying more for debt service.
And even if the township follows through with Morgan’s proposal, that dramatic loss in surplus might not be able to be made up entirely in taxes, as the state has imposed caps on the increases in tax levy on a yearly basis. So, in this case, the township could ultimately end up having to cut $3 million in services to its taxpayers.
For example, the township’s garbage removal program costs $2.5 million a year. Cutting it would mean township taxpayers would have to pay for their own trash removal, which could cost them hundreds of dollars a year.
Mayor Shing-Fu Hsueh said he was “open for changes” in the budget, but “we’re going to crack all these numbers to make sure they’re good ideas.”
Still, “we’ve got to have a responsible budget, and not only one with short-term benefits,” the mayor said. “I don’t want to try to make people feel good for one year, and then next year, the whole budget process is falling apart.”
According to representatives from Standard & Poor’s, which gave the township the AAA bond rating, the amount of money in a municipality’s reserves is not the defining factor in determining a municipality’s bond rating.
A bond rating is “sort of like your own personal credit rating — the higher your rating, the lower your borrowing costs,” said Karl Jacob, a senior director in S&P’s public finance department for New Jersey.
When analysts look at issuing a rating, they just don’t look at finances, he added. They look at the local economy, management, condition of the assets, and how much debt a municipality has outstanding.
Still, “it doesn’t necessarily translate into a higher rating if you have a high reserve level,” Jacob said. “While we do have ratios we look at as part of the ratings evaluation, an analyst will look at these four characteristics that trend over time — and measure that against universal ratings.”
So, in effect, there are municipalities that are also rated AAA that carry either much lower or much higher levels of reserve, he said. For example, municipalities like Camden and Hamilton pay much higher costs for borrowing because they have lower ratings.
“The bond rating speaks to the level of risk and repayment,” Jacob explained. “The higher your bond rating, the more comfort there is that there are more resources available for more payment.”
“We don’t prescribe a number to say how much (surplus) is sufficient to maintain a rating a bill,” he added.
When asked whether it was worth it for West Windsor to use more of its surplus to offset taxes, Jacob said that “if West Windsor completely depletes their reserves or brings them down drastically,” the next time it is analyzed for a bond rating, analysts will certainly question it.
“Where we get concerned with financial position is when reserve levels jump up and down a bit, or if you’re using reserves to fund operations,” Jacob said. “What happens in year two, when you don’t have the reserves to fund those operations?”
And there are communities that choose to carry lower reserves, he said, but “everybody comes into S&P and tells us the bond rating is the most important thing in the world.”
“We’re in an environment right now where many communities are draining down reserve levels, but they’re not depleting them,” he said. “You need some cushion for contingencies and your budgeted revenues during the year.”
The council is expected to conclude discussions on the budget on Monday, May 4, in preparation for an introduction of the budget on Monday, May 18.
