BGR Analysis
Is there a clear and compelling need for the purposes proposed to be funded? Is the primary need (higher pay for city and school employees) well documented and defined?
City of New Orleans Yes
Orleans Parish School Board NoSeventy-three percent of the proposed funding would go for higher salaries for city and school employees.
Regarding city employees, a 1994 city-funded study by the national consulting firm of William M. Mercer, Inc., found that salaries for city workers were, on average, 31 percent below those for their counterparts in other cities. At that time, Mercer recommended a revised pay plan for city employees that would be phased in over a 5 – 7 year period. The total cost of fully implementing the plan was estimated to be $31 million in 1994. The 1994 Mercer Study also included an implementation alternative for the City to establish a “competitive” rather than a “fully competitive” structure.
Since 1994, all city employees have received two pay raises totaling 7.5 percent. Prior to the 1994 study, the most recent pay raises for city employees had been given in 1987 (5 percent) and 1990 (5 percent). Thus, on average, the salary levels for city employees have increased a total of 17.5 percent since 1987, a little more than half the inflation rate between 1987 and 1998, which is 32 percent. With the exception of the police department and a few isolated job classifications, the current pay scales do not reach the levels suggested in the Mercer plan’s “fully competitive” structure.
In 1998, the Civil Service Commission updated the 1994 Mercer Plan recommendations and sent a revised plan to the City Council. The revised plan, if completely implemented, would cost approximately $26 million per year.
BGR recognizes that there is a need to increase salary levels in city government in order to recruit and retain a quality work force. However, the frequently cited statistic that 36 percent of the city work force earn salaries below federal poverty guidelines is misleading and overstates the problem. The 36 percent figure assumes that every city worker has a family of four and that none of the other family members work or receive any other funds.
As the following federal poverty guidelines indicate, the percentage of city workers earning below the federal poverty guidelines would be zero, even under the current salary structure, if the only criterion were an individual’s salary level, rather than family size. According to the City Civil Service Department, no city employee currently earns less than $7,890 per year.
Federal Poverty Guidelines Family Size Income Level 1 $ 7,890 2 10,610 3 13,330 4 16,050 Source: Census Bureau and U.S.
Department of Health and Human Services,
March, 1997
As for other city needs, the desirability of maintaining the police force at 1,700 officers, opening libraries on Fridays, or eliminating the amusement tax has not been challenged.
Regarding school board needs, there may be a need for additional teacher pay, but the entire structure of salary and benefits needs to be reviewed. With the recent state pay increase, teachers in Orleans Parish are paid close to the southern regional average. There is little justification for across-the board increases for all employees. In addition, any pay raises should be considered in relation to all public school needs identified in a still undeveloped strategic plan.
Is the stated need (increased pay) the highest priority?
City of New Orleans Unknown
Orleans Parish School Board UnknownIn the case of the City, the need to update the pay plan is but one of many needs. Other major priorities include:
t maintaining the existing level of essential city services in the 1999 city operating budget. Although the City projected its deficit for 1999 at $31 million, this figure does not include the additional $10 - $12 million that BGR estimates will be needed to fund jail operations in 1998 and 1999;
t continuing to address the city’s estimated $1 billion in capital needs for new and improved streets, playgrounds, parks and public buildings; and
t improving the city’s sewerage and drainage infrastructure systems.
Absent a plan to cover the cost of maintaining the existing level of essential services, should the City embark on pay raises, eliminating the city’s amusement tax, adding more police and extending the hours for the public libraries?
All of these expenditures, while certainly desirable, are new spending items. Without an overall fiscal plan or a clear statement of priorities, the City may end up paying employees more, but eliminating hundreds of positions and reducing services. The police department may have 1,700 officers; but reductions in the civilian workforce within the department could once again put higher paid officers behind desks, rather than on the streets.
While BGR is sympathetic to the need to increase city employee compensation, this need should be considered in the context of a clear statement of priorities and an overall fiscal plan.
Unfortunately, the same need for an overall plan exists for the Orleans Parish School Board. The fundamental element that should precede any and all requests for additional funding is a strategic plan that indicates clearly the priorities for new or additional funding, and the School Board still does not have one.
The Orleans Parish School Board has recently agreed to cooperate with the Greater New Orleans Education Foundation in the preparation of such a plan. Still, as voters face the December 5 election, there is no plan and no generally agreed upon set of priorities for funding.
Is there an adopted or agreed upon plan that would address the stated need or problem?
City of New Orleans No
Orleans Parish School Board NoThe City of New Orleans has not adopted a proposed pay plan at this time for either the classified or unclassified employees. There is no indication what employee classes would be included (fire fighters, for example) or what percentage increases would go to classified or unclassified employees. There is also no information available on whether a revised pay plan would be tied to established benchmarks for productivity and work quality, as the City’s Chief Administrative Officer has recently suggested.1 The current description of the Workforce 2000 proposal includes a requirement for 15 hours of training for employees on an annual basis, but there is no mention of benchmarks for productivity and work quality.
In the case of the School Board, all employees would receive a six (6) percent across-the-board pay raise. As previously noted, however, there is no plan for performance accountability or productivity incentives and no rationale for across-the-board increases when some classes or types of school employee salaries are more competitive than others. The Memorandum of Understanding developed recently between the School Board and the Regional Education Foundation presents principles of accountability, but no specific plan has been developed.
Developing and approving a revised pay plan for the City will require a cooperative effort of the City Administration, the Civil Service Commission, the City Council, and the staff of the Department of Civil Service. With no pay plan in place, and with major compensation issues and policies yet to be resolved, it may be premature to ask voters to support funding.
Would additional revenues be necessary to fund the proposed plan?
City of New Orleans Yes, if one had been adopted
Orleans Parish School Board YesDespite the impending fiscal crunch, no credible plan has been put forward to reduce the city’s general fund by $22 million, the amount allocated to the proposed pay plan, without reducing or eliminating services. BGR believes that further “belt-tightening” somewhere in a $499 million budget is generally possible and should always be pursued.
However, the areas which would appear to be the most likely candidates for budget cuts are funded with federal or enterprise funds. This means that further cuts in these areas would have no impact on the city’s general fund revenue, which is the city’s primary budget problem. While the City has yet to deliver on its long-overdue plan to reorganize city government, it is not expected that a reorganization would result in immediate, significant cost savings.
In addition, demographic trends are not in the city’s favor. Recent population figures show the continued erosion of the tax base due to the out-migration of approximately 6,000 residents per year for the last ten years, on top of the major population losses experienced in the 1960s, ‘70s and ‘80s. The City has lost approximately 130,000 residents since 1960, a decline of 21 percent.
Furthermore, the City is still struggling to produce a balanced budget for the current year, with no plan yet announced to deal with a $10-12 million shortfall for jail operations. The financial prospects for 1999 look even bleaker, with no fund balance available and without the heavy reliance on one-time revenues that have been used to balance past city budgets. It is quite unlikely that the State will agree anytime soon to assume more of the cost of funding court and criminal justice system costs. The commission established by the Governor to study the issue of state–mandated costs is not even scheduled to submit its report until the year 2000.
Compared to the City, the School Board is in better fiscal condition. At the end of the last fiscal year, the School Board had a positive fund balance of approximately $17 million. BGR has repeatedly suggested, however, that no portion of the fund balance should be used to pay recurring operating expenses such as pay raises. The School Board needs to maintain an emergency fund amounting to at least five percent of its operating budget.
In addition to the need to maintain a “rainy-day fund” for emergencies, the School Board faces a contingent liability of $30 – 37 million as a result of the unemployment insurance billing judgment now under appeal. Unfortunately for the School Board, the current proposal would not only require additional funds, it fails to provide them. The $13 million which would go to the School Board under the current service charge proposal would still leave the Board nearly $4 million short, in the first year, of what the promised six percent pay raise would cost. In subsequent years, the $13 million figure would not increase, while the shortfall in providing the pay raises would continue.
If additional revenues are needed, is the proposed property service charge the best revenue option?
City of New Orleans No, at least not as currently proposed
Orleans Parish School Board NoA property service charge—but not the present one—may be a viable revenue option for the City. The current proposal, which will obligate the School Board to pay employees more money than the City proposes to transfer to the School Board, is certainly not the best revenue option for the School Board. Besides, the anticipated transfers of city funds to the School Board may not be constitutional.
The best revenue source would narrow or even eliminate many of the exemptions from the proposed service charge, would address some of the inequities embodied in the present proposal, and would avoid the other problems associated with the current proposal.
EXEMPTIONS
The proposed property service charge, like the ad valorem property tax, completely exempts numerous and extremely valuable properties. Proponents of the property service charge have argued that since the fee would be paid by everyone, the tax burden would be spread more evenly across the community. Unfortunately, this claim is only partially true. While some property owners who now do not pay ad valorem taxes, will pay the service charge, it is not true that “everyone will pay.” The exemptions to the property service charge include all land owned by:
t local, state, and federal governments, including property under lease to private corporations, such as Harrah’s Casino, the Chateau Sonesta Hotel, Riverwalk, the World Trade Center, One River Place, and private companies on Orleans Levee District and Dock Board lands;
t non-profit corporations including hospitals and educational institutions;
t labor unions;
t clubs, lodges, and fraternal and social clubs;
t business, industry and professional societies or associations; and t non-profit corporations devoted to promoting trade, travel and commerce.
Based on BGR’s analysis, approximately 48 percent of the value of all real property would be exempt from the proposed property service charge, as it is now exempt from ad valorem property taxation. An opportunity is thus lost to recover at least some revenue from these properties.
INEQUITIES
Some of the inequities associated with the property service charge proposal result from the exemptions. For example, only residential owner-occupants in poverty who are also 65 or older are exempt.
The fairness of a service charge, however, that pays no attention to ability to pay except for the elderly is questionable. What about younger people who own their homes but live in poverty?
Likewise, elderly indigent persons who rent their homes would not be exempt from the charge, which will likely be passed on to tenants by landlords. By paying no attention to ability to pay on the lower spectrum of the income strata except for the elderly, the proposed service charge compounds the generally regressive impact of the state and local tax structure.
Other inequities and seeming inequities are associated with locations and uses of property, particularly if the service charge is looked at in isolation. For example, the owner of a highly profitable and valuable office tower and the land on which it sits in the CBD and the owner of a vacant warehouse in Central City and its land could be assessed the same charge, if the parcels of land were the same size. This situation seems unfair if the service charge is looked at in isolation from the rest of the local tax structure; but if the entire local tax structure is considered, the ad valorem property tax corrects for what looks unfair about the service charge alone.
Another possible inequity with the service charge is that large, non-income-producing tracts such as those in eastern New Orleans and the lower coast of Algiers would be particularly hard hit. A city ordinance was introduced November 5 to establish a cap on the charge for large residential lots. It is unclear, however, whether the proposed cap will be legal since the ballot language included a cap for commercial but not residential property. It is also unclear whether additional adjustments will be proposed and what impact other possible revisions may have on the estimated yield of the service charge.
DIFFICULTIES IN COLLECTION AND ADMINISTRATION
The City has no reliable, up–to-date and complete database on property that would clearly identify the owner(s) of the parcels of property, the use of the property, and its size.
There will also be cumbersome administrative problems. For example, who will review federal income tax forms and birth certificates to determine eligibility for exemptions? Who will determine whether the land is in commercial, residential, or mixed use or is unimproved? Who will verify the legitimacy of a non-profit corporation? Who will resolve errors in billing, resolve payment disputes, update changes in ownership? Would there be an appeal process? If so, who would process the appeals?
NON-DEDUCTIBILITY FOR INDIVIDUALS
The property service charge is unlikely to be deductible on federal and state income tax returns for individuals.
DISTORTING ECONOMIC EFFECTS
The property service charge may cause distortions in the local economy, such as an impetus to create more 501(C)(3) nonprofit organizations to circumvent the charge; the consolidation of separate parcels owned by a single owner into a single parcel to take advantage of the cap; and the potential for more demolition of buildings in order to qualify for the “vacant land” rate.
NON-GROWING REVENUE SOURCE
Finally, the amounts allocated to a new pay plan for city employees ($22 million) and a pay raise for school employees ($13 million) are fixed sums. The dollar amounts provided would fund a shrinking portion of the increased personnel costs each year because of automatic longevity pay increases for city employees (currently two-and-a half percent every five years). The impact of inflation would further reduce fund value to both the City and School Board.
Are there any significant legal problems or issues associated with the proposal?
City of New Orleans Yes
Orleans Parish School Board YesThe proposed transfer of revenues from the City to the School Board may not be constitutional. The Louisiana Constitution includes a prohibition against one political subdivision’s granting or donating funds to another (La. Const. 1974, Article VII, Section 14(a)). The Louisiana Supreme Court has ruled that the Cooperative Endeavor Agreement authorization provided for in subsection (c) of Section 14 of Article VII is not an exception to the prohibition against one political subdivision’s granting or donating funds to another. (See City of Port Allen v. La. Municipal Risk Management Agency, Inc. et al., 439 So.2d 399 (La. 1983).)
In order to justify the transfer of funds to the School Board called for by the city’s proposal, the City will have to be able to show all of the following conditions:
1. that the transfer is made pursuant to a legal duty or obligation of the City to fund pay raises for School Board employees;
2. that the transfer is for a public purpose; and
3. that the City, as an entity making the donation or transfer of public funds pursuant to its municipal functions, will receive benefits comparable in value.That the City can meet the second part (public purpose) of the three-part test is self-evident; its ability to meet the first and third criteria is debatable.
BGR has found no provision of the constitution and statutes of Louisiana nor of the City Charter that obligates or requires the City to fund the parish public schools or school board or to pay the salaries and benefits of public school employees.
The Attorney General, in his recent opinion to Mayor Morial, Opinion No. 98-410, decided that because the City has the authority to enter into a cooperative endeavor agreement with the School Board, the City, therefore, has a duty or obligation to fund the School Board. This kind of “boot-strap” reasoning is highly questionable.
With respect to the “benefits received” condition mentioned above, the City will presumably argue that the transfer of public funds will contribute to improving education in the City and that improved education will foster economic development and promote the general welfare. However, opponents might contend that this argument is so broad and loose that it could be used to authorize just about any proposed city donation for ostensible economic development or general welfare purposes and would render the Section 14 (a) prohibition meaningless.
If the voters approved the tax but the funds transfer were ruled unconstitutional, the City would still be able to impose and collect the tax. Since there is nothing in the ballot proposition that requires that any specific portion of the tax proceeds be transferred to the School Board, the City would probably be able to levy and collect the tax and expend all the proceeds on the city purposes to which the tax is dedicated.
The content of the proposed Cooperative Endeavor Agreement between the City and the School Board is completely unspecified at this point. It would be possible for the City to present to the School Board, as a take-it-or-leave-it offer, a proposed Cooperative Endeavor Agreement that made the public funds transfer contingent on the school board’s acquiescence to a list of conditions, stipulations, and requirements which the Mayor and City Council, but not the School Board, deem to be in the best interests of public education. Such an agreement, either initially or in subsequent years, could require a significant transfer of power and authority from the School Board to the City.
Are the terms, conditions and provisions of the proposal adequately defined to provide a clear understanding of how the charge would be levied and the proceeds utilized?
City of New Orleans No
Orleans Parish School Board NoThere are inadequacies in the ballot language authorizing the proposed service charge, and the proposed ordinance that would actually levy the charge does not remedy them. Further, the Cooperative Endeavor agreement between the City and the School Board has not been made public.
Under the provisions of the New Orleans City Charter, a tax or fee can only be effective after an ordinance is adopted and becomes law. Such an ordinance must be advertised and must lay over for twenty days as provided in the Charter. An ordinance to levy the property service charge was introduced on November 5 and could be acted upon anytime after November 25. The first regularly-scheduled council meeting after the required layover is December 1. Even if a special meeting were called, the schedule would leave little opportunity for public review and understanding of the proposed ordinance before the December 5 election.
The ordinance should provide the terms, conditions and definitions which will govern the levy, collection and distribution of the property service charge; but as introduced, it does not. For example, “residential” and “commercial” are not defined. Should the terms be construed as they are defined in the zoning ordinance? Or in property tax law? Or in the sanitation service charge ordinances? If a parcel is used for both residential and commercial purposes, which rate applies? Do both rates apply? Is an apartment hotel residential or commercial? What about a for-profit five-unit owner-occupied apartment complex? A time-share condominium? To continue with questions unanswered by the proposal, what is the definition of “vacant unimproved” property? Is a playground parcel in a walled community “vacant unimproved”? Is a 2,000 acre parcel with a boat launch and a pier “vacant unimproved”? What is the meaning of “property”? Is it land or land and improvements? Does “land outside the levee protection area for which there is no access” include privately-owned marshes and non-navigable water-bottoms? What is “no access”—no road? No Helicopter pad? Do the dollar caps on the charge apply per parcel or per owner? Is all property owned by a non-profit to be exempt from the property service charge, including land leased to a private entity for commercial purposes? Or only the property owned by a non-profit that is currently exempt from ad valorem taxes because of a charitable use?
The ordinance imposing and levying the charge will have to be consistent in every respect with the description presented to the voters in the ballot proposition. However, many conceivable features of the service charge ordinance are not described in the ballot proposition.
For example, the proposition does not say who must pay the service charge, though it implies the owner. Could lessees or tenants be deemed the payers, actually removing the obligation on owners of commercial parcels and adding to the city’s collection and enforcement problems?
Furthermore, the proposition would authorize the imposition of charges at a given rate “per square foot” but does not say exactly what is to be measured–-whether it is land, unimproved surface area, or improved surface area of a parcel of property. While the City Council probably meant “per square foot of improved and unimproved surface area of land of each record parcel of land,” the ballot does not so state.
Finally, the scope, terms, extent, and conditions of the proposed Cooperative Endeavor Agreement between the City and the School Board have not yet been revealed.
Are there other factors which should be considered in the evaluation of the proposal?
City of New Orleans Yes
Orleans Parish School Board YesIf approved, the property service charge would be another tax levied only in New Orleans vis-à-vis the rest of the metropolitan region. This new charge, when added to higher sales taxes, property taxes, and user charges, might lead to additional displacement of residents and businesses to suburban parishes. The disparity of the tax burden between the City and surrounding parishes becomes particularly troublesome when coupled with the probable increase in sewerage fees and imposition of a new drainage fee, likely to occur in December or early 1999.
In addition, the City is likely to propose the next round of capital improvements shortly after the first of the year. According to the May 1998 Moody’s Investor Services report on New Orleans:Officials are currently working on the next five-year capital program, estimated at $100 million to $200 million and consisting of approximately 60 percent street improvements and 40 percent building renovations. Officials anticipate seeking voter authorization in 1999 for additional bonds to finance the capital program. Although the five-year capital plan recently introduced for city council review contains no general bond revenue beyond 1999, BGR was told by the capital planning staff that the next phase of the city’s capital improvement plan will total approximately $110 million and will likely be introduced in 1999.
While the disparity between New Orleans’ and surrounding parishes’ taxes is a growing concern, BGR also recognizes that citizens—both individual and corporate—may be inclined to leave because of the deterioration in services and the quality of life. Nevertheless, the disparity problem should be considered in the context of an overall fiscal and strategic plan to meet the city’s human and physical infrastructure needs.
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