City leaders seek remedy for financial woes

Hoover is known as a retail hub with one of the highest income levels in the state, so some people may wonder how the city could be facing financial difficulties.

Mayor Frank Brocato said he at first had a hard time understanding that as well, but as he came into office in 2016, he quickly realized the city has serious financial challenges ahead.

The city government is headed for years of deficit budgets and no money for future capital projects unless something is done to boost sluggish revenues or cut expenses, according to a report from the Porter, White & Co. investment banking and investment management firm.

Based on current economic trends and city spending habits, the city likely will end fiscal year 2018 with a $2.8 million deficit in its general fund if corrective action is not taken, the consulting firm said.

Deficits likely will continue to build to $3.9 million in 2019, $5 million in 2020, $6 million in 2021 and $7.2 million in 2022 if nothing is done to change current patterns, the study indicates.

When presenting their report publicly, the consultants did not mention that the city’s debt payments are scheduled to drop by $5.3 million in 2023, but that doesn’t negate a projected deficit that year or the five prior years.

The financial challenges may come as a shock to some people, but the first step in addressing a problem is admitting there is one, Brocato said.

Sluggish revenues

Online shopping and increased competition from nearby cities continue to cut into Hoover’s retail base, the mayor said. While sales at the Riverchase Galleria campus increased 2.8 percent, to $435 million total, in the 2017 calendar year, the city’s overall gross sales fell by $65 million to just under $4.1 billion, city records show.

Consequently, Hoover’s sales and use tax revenues, which account for 65 percent of the city’s general fund revenues, took a hit in fiscal 2017. They dropped by $122,000 to $71,376,645, which was the first time the city’s sales and use tax revenues had declined since the “great recession” of 2008 and 2009, records show.

The city’s total revenue for all governmental funds decreased by $1.9 million in fiscal 2017, with almost $1 million of that coming from the general fund. Overall tax revenues rose only $280,352 in 2017, while license and permit revenue fell by $573,038, money from other governments fell by $990,652, and fines and forfeiture money decreased by $544,640.

City officials attribute the majority of the drop in sales and use taxes to the rise of online shopping. Money spent online is not taxed at the same rate as money spent in brick-and-mortar stores. While some companies do pay an internet sales tax to the state, Hoover recovers much less than it would if those sales took place in stores.

As a result, city officials expect sales and use tax collections to remain flat in the coming years, and Porter, White & Co. projects overall general fund revenues to grow at a rate of 1.85 percent.

Rising expenses

Meanwhile, expenses have been escalating and are projected to grow at a rate of 3.19 percent.

Several factors have led to increased spending, including the addition of 20 new full-time positions approved by the previous mayor and City Council in fiscal 2016 but hired in fiscal 2017, costing the city almost $3.5 million more in 2017.

The City Council also voted to give Hoover City Schools $2.45 million more in 2017 and had to absorb $3.9 million in debt and operating expenses associated with the addition at the Hoover Metropolitan Complex.

Expenses for the addition at the Hoover Met, including debt service payments, are expected to rise to almost $4.4 million in 2019 and be at least $4 million a year through 2022, Porter, White & Co. projects. The city has $32 million in reserves for its general fund, but that money would evaporate quickly, said Jim White, chairman of Porter, White & Co.

“We anticipate a continued drawdown of reserves unless you make some changes of some sort,” White said.

Plus, breaking even in the general fund is not enough, he said. The city routinely has transferred all but $100,000 of any funds left over at the end of the fiscal year into its capital projects fund.

But budget deficits would mean the city has no extra money to put into capital projects, such as roads, building renovations, vehicles and major equipment upgrades. 

“Without that surplus, the quality of life and quality of municipal services will decline,” White said.

The city needs about $10.7 million a year for capital projects, which could lead to a total funding gap of $17.9 million by 2022, according to Porter, White & Co.

Brocato said it’s a “bump in the road,” not a crisis, but something has to be done.

‘Getting our house in order’

The mayor in the April 16 City Council meeting took about 10 minutes explaining multiple ways his administration and the City Council have been working to cut expenses and get the city’s financial house in order.

For example, changes were made in the design of the sports fields at the Hoover Metropolitan Complex that saved the city $5 million, and changes were made to employees’ health care coverage that both expanded benefits and saved about $240,000 a year, he said.

The city has 44 jobs that have not been filled since they became vacant, and some of those positions will be eliminated, Brocato said. The city also has made cuts in overtime expenses and eliminated out-of-state and overnight travel unless it was found to be “missioncritical,” he said.

The city is no longer buying luxury vehicles that cost $60,000 to $70,000 and eliminated the Police Department’s helicopter unit, saving about $150,000 a year, Brocato said.

City officials have canceled the Freedom Fest Fourth of July celebration at Hoover Metropolitan Stadium, saving $80,000 to $90,000, he said.

“We continue to challenge our department heads every day to reduce operational costs,” Brocato said. “We’re making cuts at every opportunity, but we can’t cut ourselves out of this without fundamentally changing the city we all know and love.”Brocato said the city has so many good things happening right now with its school system and new and expanding businesses, and he doesn’t want to lose the momentum.

“We have to be in a financial position to support those efforts and take advantage of those opportunities as they emerge,” he said.

City leaders cannot allow the city’s buildings and infrastructure to deteriorate and don’t need to make more cuts in services, Brocato said.

“We cannot let our citizens down by diminishing the quality services they have come to expect from us every day,” he said.

This includes about $19.5 million worth of needed classroom additions that Hoover school officials shared recently, plus about $72 million of other needs that have not been budgeted.

“We all have to determine what role we can play in helping them address those needs,” Brocato said. “These are the types of challenges we were all elected to address.”

Tax or fee increase?

When Porter, White & Co. presented its findings publicly on April 2, Councilman Mike Shaw said the elephant in the room was whether the city is going to have a tax or fee increase, such as a sales tax increase or starting to charge residents for garbage and recycling pickup.

“If we’re talking about a tax increase, I would hope that we would thoroughly look at what the implications are because those are big numbers. That’s tens of millions of dollars coming out of our local economy, our local pockets,” Shaw said. “I would hope that we have the time to really analyze and look at the facts and the figures of what the implications of all the different options are going to be. … I would just hope that we don’t rush into a politically expedient decision at the expense of the intelligent decision and smart decision that’s going to set us up for long-term success.”

Council President Gene Smith said revenues halfway through fiscal 2018 are coming in $1.2 million more than originally projected and said the city has been able to cut $3 million out of expenses so far. Chief Financial Officer Melinda Lopez said the longer the council waits to make a decision, the more it’s going to affect city services as current staff continue to try to deliver the same results with fewer people.

Rice said early indications from an in-progress staffing study show the city is not overstaffed compared to other municipalities.

Councilman John Lyda, chairman of the council’s Finance Committee, noted the numbers shared by Porter, White & Co. are just projections. Given that this year’s revenues are coming in stronger than anticipated and expenses are lower than anticipated so far, “it’s certainly not a time to panic.” 

“There’s no need to make a rash decision that could impact taxpayers,” Lyda said.

Working together

Brocato on April 2 said he planned to have a recommendation for action to the council by its April 16 meeting, but when that meeting came, he held off on recommending a specific solution.

Instead, the mayor, who was facing accusations that he was trying to ram a tax increase through quickly, said it’s going to take a partnership to come up with solutions.

“This is not a one-man decision,” Brocato said. “We’ve got a City Council sitting up there that was elected by 90,000 people, so we need to bring everybody in and get everyone involved in that decision making. As a mayor, there’s only so many things I can do operationally, but the council handles the money. It’s important that we bring them in and they have an opportunity to share in this process.”

Brocato asked Lyda to call a meeting of the Finance Committee and for the council to work with him and the community to develop a proposed resolution by the June 4 council meeting.

“I think that’s a very prudent next step,” Lyda said.

Brocato also said he was forming an advisory committee of residents in the financial services field.

Without naming names, Brocato said, “a few individuals are seeking to exploit this situation for their own personal gain.” He understands that’s part of the political process, but “I’m not willing to let rhetoric and political opportunism define our efforts to resolve this issue. We’ve got to do this right for Hoover.

“While we need to be deliberate, we also have to be decisive,” Brocato continued. “We cannot wait forever or even until the next election.”

City staff have to start formulating the 2019 budget in May and need to know what revenues and expenditures to expect to have a budget ready for passage before the fiscal year begins Oct. 1, he said. Council members have had the consultant’s report for two months, and “it’s time to act,” Brocato said.

Councilman John Greene said he feels certain every member of the council stands behind the mayor and wants to figure out everything they can do to remedy this problem, and Councilman Curt Posey said he looks forward to sitting down and doing a “deep dive into these numbers and looking at possible solutions.”

Community comments

Former Hoover Councilman Jody Patterson said everyone knows city leaders are talking about raising the city’s sales tax by 1 percentage point, which would increase the city’s sales tax from 3 to 4 percent and the overall sales tax to 9 percent in the Hoover portion of Shelby County and 10 percent in the Hoover portion of Jefferson County.

That’s going to impact his family, he said.

He realizes other cities such as Birmingham, Homewood, Bessemer and Leeds are already at 10 percent, but “I don’t go along with that,” Patterson said. “There’s a point where we’ve got to manage our money. We’ve got to balance the budget.”

He appreciates efforts that have been made to cut costs already, but “I think there’s room to tighten up some more,” he said.

Paul Braswell, another Hoover resident, said he has been in the Hoover area since 1963 — before it incorporated. Hoover has progressed a lot since then, and “it takes more than it what it used to take,” he said. “I think it’s worth paying extra money to have a better quality of life and higher prices for the homes we decide to sell one day.”