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Income tax shortfall, Cincinnati's standards and terminology create looming budget hole

Businesses' falling net profits a big factor
Income tax shortfall, Cincinnati's standards and terminology create looming budget hole
Posted at 7:08 AM, Mar 14, 2017

CINCINNATI -- The city of Cincinnati is facing the prospect of a $25 million budget deficit for the coming fiscal year, which begins in October, and City Manager Harry Black has asked the myriad departments for cuts of up to 10 percent to help overcome that.

Yet in its year-end report of September 2016, the city shows a prior-year surplus of $39 million. And it would seem that pay raises for some city workers championed by Mayor John Cranley totaling $9 million for the coming fiscal year only made that looming budget hole bigger.

What gives?

It largely has to do with accounting practices and terminology -- and what you might call a municipal budgetary “selfie.”

The city adheres to a philosophy of having a budget that is “structurally balanced,” and that differs greatly from just plain “balanced,” according to Budget Director Chris Bigham. Structurally balanced means that no money is taken from a prior year’s surplus to create a balance and instead all budget years must balance on their own merits and structures.

“Carryover fund balances and budget deficits should not be compared as apples to apples,” Bigham said. “One looks at the previous, or current, fiscal year, while the other looks at the coming year.”

Could the city use that $39 million surplus to pay the $25 million deficit and then just roll $14 million into the next year’s budget?

Yes — but no.

“(That) strategy has been used from time to time to delay the budget reductions with the hope that revenues will get back on track and increase,” Bigham said. “If this does not occur, next year’s budget will have a larger deficit. That is why the city manager has and will continue to recommend a structurally balanced budget.”

Those revenues Bigham references, at least through income taxes, have been a source of trouble for some time. The problem is not the money the city takes in from payroll withholding; that’s been rock-solid or trending up slightly for the last seven years.

It’s that businesses’ net profits are falling well below what was expected during that same time. In only one year of the past seven (2012) did net profits trend higher than withholding. In the coming year, they’re forecast to be 37.5 percent lower than the previous year. And that accounts for $14 million of the $25 million in red ink the city expects to see.

The rest of the deficit is from a hodgepodge of funds where the effect from each isn’t expected to be lasting or chronic -- unlike income taxes.

As for the $9 million in raises for city workers, that begins to cross the line into municipal politics.

In securing the raises, Mayor Cranley and city council have more or less wrested negotiations with the city’s unions from Black, and in so doing have exposed themselves to critics. The aim was to provide cost-of-living increases for workers who hadn’t seen them since the impact of the Great Recession in 2008.

Though they may seem inopportune given the budget forecast, the raises as promulgated by the mayor and passed by council raise no red flags otherwise, according to City Solicitor Paula Boggs Muething. She said that the state requires a balanced budget, rather than the more stringest structurally balanced one, and that the city charter allows the mayor and council to appropriate funds through legislation.

“Throughout the year, the budget projection fluctuates; passage of the annual budget is the snapshot in time which triggers the determination of whether or not a city has passed a balanced budget,” Boggs Muething said.

The city takes those budgetary “selfies” regularly to see where things are headed. That means that the projected cuts Black has warned about could be shallower -- or deeper -- based on how it all breaks down. Black is expected to present the budget to Cranley on May 17.

Cranley has said he’s confident that a structurally balanced budget is achievable.