TAX NEWS - June 2010
Rhode Island Tax: Fontaine submits Woonsocket budget
That's one of the pivotal caveats in Fontaine's still-fluid package, but it's not the only one. It doesn't include new taxes on motor vehicles the budget envisions collecting.
The city projects sending out $3.7 million worth of new motor vehicle tax bills, but the impact will vary widely on individuals depending on the worth of the vehicle they own.
"Unfortunately, due to the urgency of submitting the budget within a challenging timeframe, there are still a number of factors that remain unknown," Fontaine said in his first-ever budget message. "Understanding the unprecedented challenges we face as a community, our goal was to produce a budget that allocated the burden as fairly as possible, keeping in mind the burden already facing our residents and employees as a result of the overall economic downturn throughout or state and our country."
The package represents an increase of $3.1 million in spending over the current fiscal year, or slightly less than a 3 percent hike in overall appropriations. The School Department accounts for $61.3 million of the package, which is actually $1.6 million less than it received in the current year. Of that, only $12.6 million would come from local taxation — the balance is a combination of state and federal aid.
Most of the increase in appropriations is the result of rising health care costs, new debt service on the $80 million Hamlet Avenue middle schools, and growing pension obligations — all in roughly equal proportions. There are no proposed increases in salaries or new hires, except for nine police officers required by an existing arbitration agreement.
"I have met with our four collective bargaining units and have presented them with proposals geared toward targeted savings and cost concessions," the mayor said in the budget statement. "Our work will continue throughout this month."
Finance Director Thomas Bruce said the mayor's goal is to spread the pain around as fairly as possible. Each of the four unions – representing police, fire, municipal workers and managers – has been asked to absorb cuts on a per-employee basis. Non-union workers and department heads have been asked for the same givebacks, including cuts in longevity, furlough days and higher health-care copays.
It's a fairly safe bet that this version of the budget will face substantial modifications before it is formally adopted by the City Council. But if it were to pass as proposed, the residential property tax rate would increase from $22.36 to $23.36 per thousand. On a house worth $200,000, that translates into an increase of $200 a year.
Commercial tax rates would increase slightly more, from $33.54 to $35.05 per thousand dollars.
But many city residents will likely be seeing a tax bill on their motor vehicles for the first time in many years in order to compensate for cuts in excise tax reimbursements in the state budget passed last week, according to Bruce.
As of press time, Gov. Donald Carcieri still hadn't signed the budget into law. But Bruce said the state budget would give communities just two options, including the sacrifice of all reimbursements under the old formula, which exempted the first $6,000 of the worth of motor vehicles. Under that scenario, the city would have lost $5.4 million next year, Bruce said.
The mayor's budget proposes an option officials weren't sure the state budget offered until Friday – issuing local tax bills based on an exemption of just $500 for every motor vehicle. The bottom line is that anybody who owns a vehicle worth more than that would get a tax bill on the balance of the vehicle's worth, at the rate of $46.48 per thousand.
Thus, a 2003 Buick Century valued, say, at $4,500 would be subject to about $186 in new excise taxes in 2011; the owner would have owed nothing in the current year.
In order to get this portion of the budget passed, the city would have to jump through some special hoops. State law limits the city to raising the overall levy no more than 4.5 percent. Because the revenue the city foresees collecting from beefed-up motor vehicle taxes would push the levy higher, the city would require a waiver of the law from the state Department of Revenue.
The City Council would also have to approve the waiver by a "supermajority" vote. That means the whole plan could be derailed if more than one of the City Council's seven members opposes the plan.
THE BUDGET is part of a fragile tightrope the city is walking in order to keep from falling into the pit of insolvency, officials say. The proposal was presented with so many variables because the city can wait no longer to begin fine-tuning a package that will result in getting next fiscal year's tax bills out on time, said Bruce.
The city must begin taking in next year's revenue in a timely fashion because it has some $9 million in short-term Tax Anticipation Notes due around July 1 – the start of the fiscal year. With its bond rating at junk status, in part due to fast-growing deficits, the city is at risk of a state takeover of its finances if it defaults on those TANs.
The city is already banking on borrowing $12 million in the form of a deficit reduction bond to erase its current deficits. Late last week, the General Assembly passed enabling legislation allowing the city to move forward with the plan.
The good news is that the principal, spread over five years, will not come due for the first time until fiscal 2012, said Bruce. Each year of the payback would be split into installments of roughly $2.7 million, including interest of about 4.6 percent. That's somewhat more favorable than officials had feared after Moody's Investor's Service put the city's bond rating at Ba1 in April – below investment grade, or junk status.
Bruce acknowledged that the mayor faces many challenges in gaining concessions from labor in the coming weeks. He said the City Council will also have much flexibility in modifying the budget.
But he warned that a financial disaster could be in the offing if the city adopts a budget the builds a new deficit into current spending after borrowing $12 million to wipe out the existing shortfalls.
"This year if we start running deficits not covered by the funding bond, we'll be right back where we started," said Bruce. "That's a real risk."
City Council President John Ward echoed that sentiment.
"We need to do a complete review of the budget and make sure we're not setting ourselves up for even more damage," he said.
At first blush, Ward said he was not ready to make many definitive statements about the proposed spending package. But he did say he was troubled that the budget is balanced on the assumption that Fontaine would get $2.5 million worth of concessions from the unions.
"I'm uncomfortable with a budget built on speculation," said Ward. "It concerns me."
The mayor briefed members of the City Council on the budget for the first time during a half-hour work session last night. Later, during a regular meeting, the council – as it routinely does – tabled the budget for further study and adjustments.
Meanwhile, a public hearing on the proposal is scheduled for June 17 in Harris Hall.
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