City Council on Tuesday night received a five-year financial report that showed Danville faces a structural budget deficit that will leave a projected cumulative deficit of $22.3 million.
If the structural deficit, which is based on current spending and revenue patterns, is not addressed, then the City will exhaust its reserve funds as early as fiscal year 2024, which would be the period between July 1, 2023, and June 30, 2024.
“Our trend is that our revenues are growing at 1 percent per year and our expenditures are growing at 3 to 4 percent a year,” City Manager Ken Larking explained. “This is not sustainable.”
“We need to recognize three things: One, there is a gap. Two, we need to continue to invest in Danville if we expect to have a sustainable future. And three, we need to make sure everyone is aware that we are not in crisis mode. We are taking a proactive approach.”
Closing the gap
To close the gap and allow for continued strategic investments that would accelerate growth in the city’s tax base, City Council will examine options in service reductions, employee compensation and benefits, and revenue enhancements.
Larking said service reductions could include elimination of positions, but that would be handled through attrition if implemented. “I am committed to doing it that way,” Larking said.
The options that City Council will examine were developed by the National Resource Network (NRN), which was launched as a component of the White House Council on Strong Cities, Strong Communities Initiative. The federal program provides comprehensive technical assistance to cities, including guidance on fiscal management.
David Eichenthal, executive director of the NRN, and his team have been gathering financial data and evaluating City operations since November. On Tuesday, the team presented its final report – “The City of Danville Five Year Financial Plan” – to City Council.
In developing recommended options for corrective action, Eichenthal said the team benchmarked Danville against other local governments: Harrisonburg, Lynchburg, Manassas, Martinsville, Petersburg, Pittsylvania County and Roanoke.
NRN team members regularly consulted with the city manager and his staff, as well as department heads, on the implications of recommended options. The team also relied on review of best practices in benchmark and other jurisdictions.
The NRN team identified initiatives with a total savings or new revenue impact of nearly $75 million.
“It is important to note that all initiatives should not (and, in some cases, cannot) be pursued simultaneously,” Eichenthal said. “However, the plan provides the means to fix its structural deficit while identifying resources for re-investment. In other words, the City does not need to fully implement all of the recommended initiatives to achieve structural balance. But it does need to adopt a significant number of them to free up resources for future investment.”
Eichenthal outlined a series of efficiencies in public safety, including shifting control of the Adult Detention Center to the Sheriff’s Department, as well as changes in the Police and Fire departments.
He also outlined a series of changes in employee compensation, which he said is outpacing growth in revenue. One adjustment would be to link future growth in employee compensation to growth in revenue. Another option would be freezing wages at fiscal year 2019 levels or cap wage growth at 1 percent for the entirety of the fiscal year 2020 to fiscal year 2023 period.
Eichenthal said the City should require employees to pay the actuarially determined employee contribution of their pension up to 5 percent. He recommends phasing in the employee contribution by increments of 1.25 percent per year.
A third area presented to City Council dealt with changes in the public library system. Eichenthal said the City Council should consider consolidating the library system by closing the Westover branch, which is located in a leased facility. An alternative to branch closure could be exploration of a joint city-county library system as part of a broader discussion of shared services.
A fourth area presented to City Council involved the airport. Eichenthal said City Council should look at ending direct operation of the airport. Instead, he suggest City Council consider operation by a third party of creation of a regional source of funding.
Eichenthal said operational efficiencies exist with departmental reorganization, managed competition and shared services. Applying the managed competition model to facility maintenance and custodial services within Public Works could drive down costs, he said.
The goal, he said, is not just to achieve structural balance in the budget, but to free resources for new investment in areas of focus identified by the City Council. Those areas are schools, reducing violent crime and growing Danville.
The priorities and focus areas identified by City Council will require substantial investment, which Eichenthal said are not be possible with Danville’s current tax rates and structure.
“To address the City’s structural deficit in a sustainable way, revenue options must be on the table,” he said.
A perception exists that Danville citizens are taxed higher than other cities, Eichenthal said. However, his team found that Danville residents have a comparatively low local tax burden. A Danville household earning the median household income pays $900 less (34.4 percent less) than the median household tax burden in peer communities, largely due to the relatively low property taxes.
He said Danville residents’ low tax burdens are largely due to the competitiveness of City’s tax structure, not to the region’s lower prevailing income levels.
He presented options for increases in real estate taxes and personal property taxes, and he suggested City Council levy a cigarette tax. For example, raising the real estate tax rate from 80 cents per $100 of assessed value to $1 would generate $17 million through 2023.
Going forward, Eichenthal said City Council, in consultation with the city manager, should build up to a total target amount of savings and revenue necessary to close the structural deficit, bring school spending in line with peer cities and true student need, provide consistent funding for infrastructure and economic development, and allow for other City Council priorities over the next five years.
The City Council and city manager should then categorize the various initiatives in order to reach the targets, he said. The categories would be: one, “implement immediately;” two, “implement with a delay or over time;” and three, “requires further study.”
The NRN report cost $350,000, of which $262,500 was paid by a grant from the Houston, Texas-based Laura and John Arnold Foundation. The Danville Regional Foundation contributed $25,000.