Recession prompts City fiscal safeguards
The effects of a slowing economy are impacting the collection of earnings tax revenues by the City. Earning tax collections as of May 31, 2009, have fallen behind May of 2008 collections by approximately $84,000 or 1.2%.
Most of the earnings tax that is collected comes from withholdings on employee wages. Collections are closely monitored to gauge employment levels in the City. Since the collections of earnings tax revenues trails what is happening in the economy by three to nine months, the drop in revenues experienced at this time is a clear indication that aggregate wage and employment levels are declining in the City.
Fortunately, two of Montgomery’s largest employers — Sycamore Schools and Bethesda North Hospital — are not as susceptible to economic downturns as employers in a manufacturing environment. Nevertheless, the City will keep a watchful eye on employment numbers in order to appropriately adjust the budget to reflect any anticipated reduction in revenues.
The City’s earnings tax is not the only revenue source facing reductions. Because of lagging income tax collections at the state level, Ohio is facing severe budgetary problems and will be forced to take drastic measures to reduce expenses. Some of this impact has already hit the City. Earlier in the year, all political subdivisions in Hamilton County were informed by the County Auditor that the State of Ohio will reduce revenues of the Local Government Fund by $4.4 million. These funds are historically distributed to cities and villages in the County. As a result, the City of Montgomery lost more than $18,000 from this drop in Local Government Revenues.
Sound Financial Policies and Practices
The City has instituted a policy of reserving a portion of the General Fund cash balance equivalent to 6 to 12 months of operating expenses, which means the City plans to keep $4 million (6 months) to $8 million (12 months) in cash in the General Fund. In addition to reserves in the General Fund, the City maintains a targeted fund balance of $1 million in its Capital Improvement Fund and one year of operating expenses as a fund balance in its debt service fund. In all funds where there are reserves, the balances are invested and are earning interest income.
In preparation for future reductions in local tax revenues, the City staff has undertaken an exercise of prioritizing options to identify cost areas which can be reduced or eliminated without cutting service levels to the community. And although the City does not face the deficit spending conditions at this time that the state and many of the surrounding local governments are facing, the Council and Administration are preparing for a worst case scenario should one occur.