Chapter 3, Problem 13C

The city manager of University City is finalizing the budget proposal that must be submitted to the city council 60 days prior to the July 1 start of the next fiscal year, FY 20X2. An economic recession has significantly reduced the city’s revenues over the past two years, particularly sales taxes and building permit fees. Despite strong political pressures on city council members to sustain current city services, the legal requirement to balance the budget has forced the council to cut certain services and staffing levels over the past two years. Federal financial assistance has prevented even deeper cuts, but will be sharply reduced at the end of FY 20X1. Even though the economy has gradually improved, reduced federal support will make achieving a balanced budget even more difficult in FY 20X2.

Constraints and planning factors: The city council has mandated that there be no increase in fees and taxes in FY 20X2. Although retail sales and housing starts are projected to increase modestly in FY 20X2, the assessed valuation of taxable property is projected to decrease an additional 5 percent in FY 20X2, reflecting the continuing decline in property values. Moreover, General Fund operating costs, particularly employee health insurance and energy, are expected to outpace revenue growth. Consequently, the city manager is recommending a third consecutive year of no salary and wage increases for city employees. The following financial information is provided as of May 1 of FY 20X1.

General Fund

Analysis and estimation of required property tax rate for FY 20X2: After analyzing the preceding information, constraints, and planning factors, respond to the following questions. (Keep in mind, however, that the city council may impose further changes to the budget as a result of the several budget hearings that will be held over the next two months.)

1. a.   What amount of estimated revenues is required from property taxes for FY 20X2? (Hint: Make your calculation using the format shown in Illustration 3–6.)
2. b.   What tax rate will be required in FY 20X2 to generate the amount of revenues from property taxes calculated in question a?
3. c.   Assuming the property tax rate for FY 20X1 was $0.20 per $100 of assessed valuation of taxable property, will the tax rate calculated in question b violate the city council mandate of no increase in taxes? If so, how would you justify the rate calculated in question b, since the city council will likely be sensitive to adverse public reaction to an increased tax rate?