Recession Gives New Cities Rough Start

Some locked in low taxes, now face pinch

By DOUG NURSE /
The Atlanta Journal-Constitution

Sunday, December 28, 2008

It was going to be so perfect. Fed up with perceived inefficiency and neglect from Fulton County, the newly incorporated cities of Milton, Johns Creek and Sandy Springs were going to provide the same or more services at the same tax rate.

Their founders were so sure of that when they formed the cities, they capped the property tax rates at the relatively low millage rate of 4.731, the same level the county had taxed residents in these north Fulton communities.

Chattahoochee Hills in south Fulton did not limit property tax millage when it incorporated and has almost doubled the rate.

Timing, as they say, is everything. Now, revenues from sales taxes, permits and fees are flat or falling and cities all over Georgia are struggling along with the national economy. And the new cities are finding they don’t have the traditional options available to governments wanting to keep the same services: raising taxes and going to the bond market to borrow money.

The new cities’ leaders are concerned, having cut revenue projections already. Some are saying the situation might get worse, and they are expecting even more declines in revenue.
“There could be some real problems in terms of our ability to meet basic service demands in two or three years,” Johns Creek City Manager John Kachmar said. “We haven’t seen a drastic decline in revenue because there’s a lag, but we’re gaming out what could happen. We’re worried about what’s down the road. It’s very hard at this time to predict what any fall-off will be.”

It’s a rough time to be starting out. Chattahoochee Hills, a south Fulton city, was launched Dec. 1, 2007 — the month the recession started. Sandy Springs was launched Dec. 1, 2005; Johns Creek and Milton on Dec. 1, 2006; Dunwoody incorporated Dec. 1.

Sandy Springs is probably in the best shape, partly because it has a larger commercial tax base. Assistant City Manager Steve Rapson said officials saw early on that they needed to drastically reduce some of their revenue projections.

Chattahoochee Hills may be in the worst shape. It has a small population – 2,500 people — is mostly rural, with only 1 percent of its property developed commercially, and patrolling and maintaining its 57 square miles of roads is expensive. The city nearly doubled its property tax rate — it has no cap — the mayor and City Council members are working for no pay, and they are even taking turns mowing the lawn at City Hall.

The millage cap

Perhaps the biggest financial impediment facing north Fulton’s new cities is the cap on the property tax rate.

Proponents pushed cityhood promising better services, local control — and low taxes. Their legislative sponsors imposed a legal cap on their millage at 4.731, the same rate Fulton County charged at the time. And they set the bar high to raise property taxes, requiring a voter referendum before increasing taxes above the cap.

The low-tax, small-government message resonated among many north Fulton residents.
State Rep. Wendell Willard (R-Sandy Springs), who sponsored the legislation founding his city, said organizers thought it was important to make sure taxes did not exceed the cap without the people’s consent. “I think it’s a pretty good safeguard,” Willard said.

Other north Fulton cities adopted the same language in their own charters.
The low millage was fine as long as commercial and retail business thrived and the area grew. But now, it’s potentially a problem.

“Other cities have the ability to raise taxes to offset declining revenues,” said Milton Finance Manager Stacey Inglis. “We have to be more creative in trying to find more revenue. We may start charging for services, such as false alarm calls, where other cities just eat that charge.”

Christopher Bloor, a Milton resident, said he wouldn’t be surprised if the city cut services to the essentials, such as public safety and roads. “Things in Milton have always been tight,” Bloor said. “Other than Police and Fire departments, what services has the city offered? But we haven’t seen a lot of quality of life services offered [by Fulton County] anyway.”

Johns Creek resident David Kornbluh said he never was a fan of the millage cap. “I always thought it wasn’t the wisest thing to do,” he said, “but it was required to sell [the idea of cityhood to voters]. The numbers were not analyzed as thoroughly as they could have been.”

In south Fulton, Chattahoochee Hills has no cap on property taxes. Officials found the $2.3 million revenue projected in a pre-incorporation viability study to be off – by about $1 million. As a result, the City Council voted in September to increase the property tax rate from 5.6 mills to 10.9 mills.

Phillip West, a 20-year resident, said in an interview after the vote that the city did the only thing it could do, given the circumstances. “Yes, this is a hard pill to swallow,” West said. “But nobody knew the economy would turn down the way it did.”

Carol Wolfe, director of administration for Chattahoochee Hills, said the viability study relied on 2005 and 2006 economic data. “I don’t think we could have made it if we’d had a cap on the millage,” she said.

Obstacles to borrowing

When facing big-ticket construction projects, cities traditionally borrow money through the bond market, said Monte Vavra, Johns Creek’s finance director. That may not be an option for the new cities.

Wolfe, the Chattahoochee Hills official, said general obligation bonds require a city to commit taxes to pay the debt. That’s why they’re attractive to investors, who are guaranteed a return. So cities ask voters to cover the debt.

Issuing general obligation bonds requires a referendum. What are the odds of success?
When asked, Inglis, the Milton official, shook her head. “Zilch.”

In a survey last year, Milton residents were asked whether they would be willing to tax themselves extra to improve parks, build senior centers and make traffic improvements. The No. 1 response from a list was: “Don’t spend any more than what is generated from current tax base.”

Johns Creek Mayor Mike Bodker said he believes people would tax themselves if a convincing business case were made. “There’s no question it handicaps the city, but it forces the City Council to prove any millage above 4.731 is needed,” Bodker said. “I don’t believe people would say, ‘I don’t believe in taxes and I’m voting it down.’ “

The cities are studying the possibility of going to the bond market by 2010, assuming money is available. With the credit crunch, it could be tough going: The New York and New Jersey Port Authority, rated at the highest credit level, went to the bond market to borrow $300 million recently and got no takers.

With property tax rates limited, new cities are more dependent on sales tax revenues than older cities. In Johns Creek, sales tax proceeds make up about a third of its general fund revenue. Sales tax income is currently flat because of a slowdown in consumer spending, and the future looks uncertain.

“Everything you read, it sounds bleak,” Vavra said. “I projected a 9 percent decrease in sales tax revenues in 2009. That’s a lot.”

Property valuations are no cure

The millage cap’s impact wouldn’t hit so hard if property values were expected to keep rising like they were a few years ago. Even with the same tax rate, the rising value of property would put more money in city coffers. But with values flat or on the decline, there’s little prospect of more revenue.

“There are pockets in north Fulton where we’ll see a downturn of 4 to 5 percent,” said Burt Manning, chief property assessor for Fulton County. “We do expect to see a general flattening in the commercial values in north Fulton.”

Adding to the anxiety is a proposal the 2009 General Assembly is expected to consider that would cap property assessment increases at 3 percent. It’s meant as relief for taxpayers, but Kachmar said Johns Creek might have a hard time surviving if the bill passes.

“With millage and assessment caps in place, your ability to generate any new revenue is extremely limited,” Kachmar said. “There would be no money to pay for salary increases; parks improvements come to a screeching halt. You’d have to do triage. If the cost of gas goes up, you don’t buy as much gas. What do you do then? You say, ‘We’ll only patrol a little bit?’ It would have a very deleterious effect.”

Other revenue also iffy

Cities also draw income from licenses, permits, fees, investment income, and assorted odds and ends. There’s unlikely to be good news there, either.

Income from permits is down because people aren’t building, companies are going bankrupt or not seeking business licenses. Rapson said he slashed Sandy Springs’ projected revenue from permits and fees by 21 percent.

In Johns Creek, revenue from building permits has fallen off 50 percent from what was expected — since August.

With the nation in recession, federal and state governments are cutting back on grants. And even if grants are available, cities have to weigh whether they can afford the 20 percent local match that’s typically required and whether they can afford to operate the program the grant might establish. These days, the answer is often no.

“We’ve given money back to the federal government,” Rapson said. “There were too many strings attached.”