Hoover headed for financial trouble if adjustments not made, consultant says

The city of Hoover 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, a financial consultant shared at tonight’s City Council meeting.

Based on current economic trends and city spending habits, the city likely will end fiscal 2018 with a $2.8 million deficit in its general fund if corrective action is not taken, according to a study presented by the Porter, White & Co. investment banking and investment management firm.

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.

Sales tax decline

Hoover’s sales and use tax revenues, which account for 65 percent of the city’s general fund revenues, declined in fiscal 2017 for the first time since the “great recession” of 2008 and 2009, according to an audited financial statement completed last week. They dropped from $71.5 million to a little less than $71.4 million, records show.

The city’s total revenue for all governmental funds decreased by $1.9 million in fiscal 2017, with most of that decrease — almost $1 million — 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, and 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.

Expenses growing

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 in fiscal 2016 but realized in fiscal 2017, costing the city almost $3.5 million more in 2017. Those hires included 10 new police officers, three public safety dispatchers and two inspectors.

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

Expenses for the addition at the Hoover Metropolitan Complex, 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.

Hoover needs to have positive cash flow to reinvest in its future, he 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.

Hoover Mayor Frank Brocato said the sky is not falling, but the city has some serious issues that have to be addressed.

City staff already have been cutting costs in a variety of ways, including a partial hiring freeze, Brocato said. The city continues to replace people in critical jobs but has about 25 full-time and part-time positions that have not been filled as people retired or were reassigned to other duties, City Administrator Allan Rice said. Those jobs were not eliminated, but they just aren’t being filled right now, he said.

The city also has a moratorium on out-of-state or overnight travel, except in cases where people have to travel to maintain their professional credentials, Rice said.

Brocato said he plans to make a recommendation for dealing with the financial issue to the City Council in two weeks. Porter, White & Co. shared its report with council members about six weeks ago, and he plans to take another two weeks to discuss it with council members before making a recommendation for action, he said.

Tax increase ahead?

Councilman Mike Shaw said the elephant in the room is whether the city is going to have a tax increase 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.”

Brocato said he doesn’t expect the council to make a decision in two weeks. He expects to have a recommendation for the council, and the council can act on that whenever it chooses. However, “I think they’ll act on it quickly one way or another.”

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. He asked Chief Financial Officer Melinda Lopez whether a change needs to be made for this current fiscal year or if the city can address the issue more fully for fiscal 2019.

Lopez said the longer the council waits, the more it’s going to affect city services as current city staff continue to try to deliver excellent service with fewer people.

Rice said early indications from a staffing study under way show that 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,” Lyda said. “There’s no need to make a rash decision that could impact taxpayers.”

Lyda said he’s looking forward to the mayor’s recommendation in two weeks.

See the summary visual presentation by Porter, White & Co. here and view the verbal presentation and discussion at Monday's City Council meeting in this YouTube video.