STONE HARBOR – Stone Harbor was poised to go before the state’s Local Finance Board, in April, to obtain a waiver for its 2021 proposed budget.
The budget, presented for the first time by Chief Financial Officer James Craft Feb. 11, exceeded the allowable levy and appropriation caps under state law.
The borough March 16 took steps to avoid the requirement of a state waiver. A new budget presentation before the governing body was for a 2021 budget sufficiently reduced to allow the borough to act without state approval.
The budget is above the annual cap imposed by statute, but is at a level where the borough can use its cap bank flexibility to move forward without a state waiver.
The 2021 budget that was formally introduced March 16 calls for $19.8 million in current fund appropriations, an increase of just over $1 million, or 5.7%, from 2020.
It requires a $1.7 million increase in the local purpose tax levy, a 13% increase over 2020. If the budget is adopted, the municipal tax will move from 26.7 cents, in 2020, to 30.0 cents in 2021, a 12.4% increase.
The budget is making use of $1.86 million of current fund surplus. The surplus fund balance was depleted by over $600,000, in 2020, when anticipated revenues that would have replenished it did not materialize.
To keep the tax rate increase at 12.4%, the borough plans to use 73% of its fund balance in the introduced 2021 budget, a significant increase over the 58% of surplus balance that is its custom.
This leaves the remaining balance in the surplus at below $700,000, placing added emphasis on the need to recoup the surplus funds used this year.
With a double-digit tax rate increase, a lower than desirable surplus balance, use of its cap bank balance, and a budget that fails to deliver expected salary relief to public works employees, how did the borough, with a net tax valuation of just under $5 billion, get into this bind?
It Started with an Error
The 2020 budget, as adopted in April of that year, failed to include all required funds for a new beach patrol salary scale adopted a month prior. The new pay scale was deemed necessary to attract and retain lifeguards and beach tag checkers.
The pandemic added to the problem by increasing the number of guards and days worked by the guards.
The borough found itself in need of an emergency appropriation in August 2020 to cover the inadequate budget for guard and tagger compensation. The amount of the emergency appropriation was $335,000.
The borough incurred an expense for 2021 before beginning to formulate a budget for that year.
Fire Department Changes
After several years of trying to use stipends to maintain sufficient staffing in the volunteer fire company, Stone Harbor Borough Council approved a move to a hybrid department that would contain paid career firefighters and EMTs.
At public council meetings, the argument was that the change was the only way to guarantee the response time borough residents expected on emergency calls.
According to Craft’s Feb. 11 presentation, the change to a hybrid department placed a new $425,000 salary increase on the 2021 budget.
The borough initially operated on the belief that the change in the fire department status would bring with it an exception for cap purposes. That turned out not to be the case.
The contract covering most public works employees expired in December 2020. For some time, borough officials were concerned that the pay scale in that department needed to be increased.
The proposed increases in salary levels in public works added $267,980 to the initial budget presented in February. The accumulated burden of all the public works, fire department and beach patrol changes put the initial 2021 budget over the appropriation and levy caps.
Use of Surplus
Municipalities using surplus funds as budget revenue to hold down the need for a tax increase is common. This is done with the spending plan in mind that will ensure the surplus is replenished or even augmented at the end of the budget year. That did not happen in 2020.
Of the $1.8 million in surplus funds used in 2020, only $1.2 million remained at the end of the budget year, depleting the overall fund balance by over $600,000.
The use of $1.8 million of surplus in the 2021 introduced budget is, therefore, a much higher percentage of the total reserve.
Decrease in Local Revenues
Local revenues other than property taxes, in 2020, were down from normal levels. Since actual revenues from the prior year play a big part in projected revenues allowed for the next year, the borough was left with a decrease in its revenue assumptions, in 2021, of $267,498.
Local revenues include parking meters, beach fees, license fees and cell tower rents, to name a few sources.
A cap bank allows municipalities to have some cushion concerning the tax levy in case of unanticipated increases or emergencies. The cap bank allows a governing body to accumulate the amount by which adopted budgets are below the state levy cap level.
Municipalities can “bank” the “unused” funds for three years. Annually, governing bodies pass cap bank ordinances to create this reserve against more difficult times.
One problem with the initial 2021 budget presented in February was that it exceeded the level of reserves in the borough’s cap bank.
A New Complication
The budget, as introduced March 16, stands below the level that would otherwise have required a waiver. It remains a controversial budget that may not have enough support on the council to be adopted in April.
The borough scheduled two special council meetings - March 23 and March 24, at 4:30 p.m. - to review the budget, as introduced.
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