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Faulkner County budget presented with challenges for 2014

Posted: March 3, 2014 - 3:41pm

The Faulkner County budget for 2014 and the following four years present a challenge to the Quorum Court. The challenge is paying off the five-year loan financing of the construction of the new Faulkner County Justice Building, in addition to financing the ongoing activities of county government.

Drive along South German Lane east of the City’s baseball complex to view the building. Construction is almost complete with expected occupancy by June. The architect, construction manager and the Judge’s office are to be commended for overseeing an attractive building that will be completed on-time and on-budget.

The Quorum Court decided to build the new building in 2007. The Court approved a 1-mill increase in property taxes dedicated to pay for the building. The 1-mill increase collects about $1M in revenues per year. During the past five years, $5M has been collected and used to pay a part of the expected $10Mcost. Today, a $5Mbank loan pays the remaining construction cost. So, the Quorum Court faces paying the ongoing operating cost of County services plus paying off the outstanding loan during the next five years. Principal unpaid this year rolls over to be paid during the years remaining.

First, examine the County’s annual budgets from 2004-14. Total expenditures have increased from $15.4M in 2004 to $36.1M in 2014. Figure 1 (page 2A) shows the annual budgets for the 10 years. One line shows the expenditures in current dollars (nominal) and the other in real (deflated) dollars. The compound rate of growth in nominal dollar expenditures for the 10-year period is 8.8 percent. The real expenditures increased by 5.5 percent during the same 10-year period. Both of these growth rates reflect the high growth rates of the County’s population of 31.6% and median household income of 28.3 percent during the 10 year period ending in 2010.

Next, examine the source of the County’s 2014 revenues as shown in Figure 2.

Almost one-third of County’ general fund revenues are from property taxes, 11 percent from the draw from the outstanding building loan, and the remaining from miscellaneous fees, fines and other charges. Remember that the County’s financial books and records reflect fund accounting practices, which is a bit different from the accounting practices adopted by non-governmental businesses. Suffice to say that there is a fund for this and a fund for that and monies go in and monies go out of each fund. The Faulkner County Treasurer’s office keeps the activities in each of the funds straight.

There is little likelihood that the County will experience significant growth in future revenues. There is little expected growth in the County’s sales tax — maybe one percent per year in the foreseeable future. The same for a low growth in property tax revenue — the slow rate of new construction is offset by depreciation of the existing structures.

Finally, Figure 3 shows the County’s expenditures by function. The percent of each category of the total 2014 budget of $36 million is shown on each slice.

Another way to describe how the County spends its tax revenue is that twenty-five percent is spent by the sheriff and public safety, 21 percent for roads and bridges, and the rest is for a long list of all the other services provided by county government – the two clerks, treasurer, collector, assessor, coroner, museum, courts, 911, and a host of others. During the preparation of the 2014 budget, all funds were set at their 2013 levels.

When we shake the sack containing all the monies going in and out of all the various funds, the bottom-line question is ‘Where is County financially today and what choices does it face in the future?’

The un-appropriated balance available for spending in 2014 = $910,600.

This amount can be used to:

Pay the accumulated interest on the outstanding loan.

Pay a portion of the loan principal.

Give pay raises to county employees that are being paid significantly less than comparable employees in similar counties.

Hold some in reserve to pay for unforeseeable events.

The $910,600 remaining balance is insufficient to fund all the alternative uses. So, the Quorum Court faces a classic economic problem, That is, how to allocate the limited resources (the $910,600) among the alternative uses (paying interest and principal, giving raises and holding a reserve). The difficulty is that the Court cannot solve the problem by appealing to market prices. Unlike farmer’s markets and furniture stores where prices guide consumer and business decision making, there are no market prices for each of the four alternative uses of the $910,600. Consequently, the Quorum Court will make its decision in the arena of a “political economy.” That is, given the absence of market prices to guide decision making, the Court will allocate the $910,600 among the four uses that maximizes what it perceives to be best for all taxpayers.

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