The Annapolis Financial Advisory Commission has issued an unfavorable report on the proposed fiscal 2023 operating budget and raised doubts about the city’s ability to pay its bills in two years when the federal aid package it received during the COVID-19 pandemic runs out.
In a letter to Mayor Gavin Buckley and the Annapolis City Council on Tuesday, the commission warned the $170 million budget Buckley delivered to the council last month “risks a financial crisis for the city” because “at present [the budget] is not consistent with prudent financial management, or exercising fiduciary responsibility over taxpayer dollars,” they wrote.
Among the most vocal critics was Vice Chair Bob Burdon who warned during the commission’s meeting last Thursday the city must use the current budget deliberations to cut spending and address a growing structural deficit that’s projected for the 2025 fiscal year. A structural deficit results when a government’s spending is more than it receives in taxes in a particular period, regardless of how the economy is doing.
Burdon’s criticism centered on future budget projections, which show the city using up the remainder of the $7.6 million in American Rescue Plan Act funds over the next two fiscal years and being left with expenses outstripping revenue in fiscal 2025, which begins on July 1, 2024. After Congress passed the emergency aid bill in March 2021, the city used about $1.17 million for operating expenses in fiscal 2021. The city is expected to carry over $1.5 million to fiscal 2023 and $4.9 million for fiscal 2024.
“Looking down the road we do not have a pretty picture developing for this city,” Burdon said last week. The former president of the Anne Arundel County Chamber of Commerce has served on the commission since 2009. “At [fiscal 2024 and 2025] we are going to look around and say, ‘Oh my gosh, how did we get into this situation,’ and that’s a situation we need to avoid.”
Council members and the city’s finance director who attended the meeting pushed back on the assessment, arguing that the city is far better off financially than four years ago and will find ways to balance its books.
Finance Director Jodee Dickinson described Burdon’s “dire picture” of the city’s finances as inaccurate.
“I do not agree with that assessment. We do have a time frame here where in two years we’re going to have to consider other revenue sources and whether that means a tax increase or looking for another source of revenue. That’s what it’ll take. And the council will be making that decision,” Dickinson said. “The city is in far better financial shape than it was a few years ago, far better.”
Officials have acknowledged that city expenses are outpacing revenues. About 70% of the city’s spending during the current fiscal year is on the salaries and benefits of its roughly 680 employees. That is projected to increase to just under 72% in the upcoming year. On the other side of the ledger, about 60% of the city’s revenue comes from property taxes. The triennial property assessments, however, are not growing as quickly as city personnel costs.
The city has said a combination of conservative budget projections, prudent spending by department heads, and an influx of cash from the federal government during the pandemic has helped ease the city’s financial woes over the last 25 months. With less than two months until the end of the current fiscal year, the city is projecting a $1.3 million budget surplus.
The proposed operating budget is balanced as required by City Code and recommended no tax increases for fiscal 2023, which begins July 1. The funding plan boosts police spending, increases several fees and carves out money for new city positions. A shortfall between projected revenues and expenses will be shored up by about $1.5 million in American Rescue Plan Act funding, which was distributed during the pandemic to help municipalities with operating expenses.
After more weeks of deliberations, the Finance Committee, chaired by Alderwoman Elly Tierney, submitted a report on the budget to the City Council on May 9, including recommendations to fund an additional attorney position in the Law Office and one-time funding for substance abuse disorder and crime prevention programs. The report also recommended the full council come up with additional revenue streams or cost-cutting measures to counteract the federal funds running out.
The goal is to avoid putting any additional tax burden on residents, said Tierney, a Ward 1 Democrat. She suggested other revenue sources such as increasing the hotel tax or requesting a portion of the Maryland sales tax could help bolster revenue down the line.
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But for now, the budget is in a good place, Tierney said.
“I cannot emphasize enough the success we’ve had with the budget over the last four years. It’s balanced and aligned with modern accounting processes,” she said. “We are in a good place as far as financial controls. Every expense is accounted for. Every source is validated and verified. That’s a huge deal and it took four years.”
Other commission members echoed Burdon’s concerns, including James Cardillo, who suggested the city needs to take a hard look at the services it provides its residents and how it will pay for those services moving forward.
“I believe the elected officials need to just engage in some sort of rethinking and strategic planning on what city services the city wants to deliver to determine how best to structure the city staff to do that because we’re way too dependent upon human capital and it’s unsustainable as we continue to see,” Cardillo said during Thursdays meeting.
The council earmarked $50,000 for a community survey to determine what services residents cared about most and another $5,000 to fund a task force that would examine merging some public services with Anne Arundel County. Neither initiative has gotten off the ground.
“The city must address now the difficult choices to control personnel costs, including eliminating, reducing, or modifying city service and program delivery, or face the prospect of increasing taxes and fees to bring personnel costs into line with revenues and cash-flows,” the commission wrote. “The city should begin now the process of evaluating the feasibility of such actions.”
The council is set to convene a work session May 26 to discuss proposed amendments to the budget.