ED. NOTE: This is the second in-depth 2023 budget article exclusively for online subscribers. The first in-depth article, which examines Stone Harbor’s budget, can be found here. Read about all 16 municipal budgets in Cape May County here.
CAPE MAY – As municipalities across the state enter into the meat of their budget cycle for 2024, a look back at the 2023 budget in Cape May City shows a town in strong financial shape, but also one with some expensive projects in its near-term future.
Cape May City’s permanent population has been declining since 2010, but its median household income has increased. Property values are up. The state equalization table for 2023 shows the assessed value of real estate in the city at $2.9 billion, but it places the true value at $4.4 billion, giving the city an assessed to true value ratio of 67%. Assessments are, on average, significantly behind true market value of property.
With fewer than 3,000 permanent residents, Cape May City, according to the 2020 census, lost almost a quarter of its permanent population in the 10 years since 2010, dropping from 3,607 to 2,768. The Municipal Taxation and Revenue Advisory Committee, appointed by the City Council, has presented an analysis to the governing body that shows what the committee called the commercialization of the residential housing stock through the increasing popularity of short-term rentals.
The change may impact the character of the town for its remaining permanent residents, but it appears to help drive tourist activity in a city with a 2023 budget of $36.1 million, of which the general fund budget is $23.9 million.
Use of Utilities
The city makes use of three self-financing utilities: For water and sewer, budgeted at $7.5 million in 2023; beaches, at $3.4 million; and tourism, mainly concerned with Convention Hall, at $1.3 million. Attention to the utilities drives expense away from the general fund budget with its taxpayer dollars, to user fees in the utilities. Each utility has a major source of user-fee revenue that, due to the need for the utilities to self-finance, allows the user-fee rates to be set in terms of the costs associated with the utility’s activities.
For water and sewer, the obvious fees are for sewer expense and fresh water use. Cape May is the only municipality in the county that makes use of a desalination plant for its fresh water. The city supplies water through service agreements to Cape May Point, West Cape May and the Coast Guard base. Of its $7.5 million budget, the water and sewer utility receives $6.9 million in rents (user fees). Its operating expense is $5.65 million, and the utility’s debt service runs at $1.6 million.
The beach utility is largely supported by the sale of beach tags, expected to produce user fees of $2.7 million in 2023. The rest of the $3.4 million budget is met with almost $650,000 in utility surplus applied to the budget.
The tourism utility is unique in the county. It was established to make use of user fees for the support of the city’s Convention Center staffing and its activities. It draws support from fees for events, rental of space, a small amount in mercantile license fees and a percentage of the city’s room tax.
In total, the utilities remove one-third of the total budget expense for 2023 from the general fund budget.
Tax Levy
The tax levy for municipal purposes in Cape May City in 2023 was budgeted at $10.7 million of the total general fund budget of $23.9 million, meaning that taxpayers cover about 45% of the general budget. Taxpayers would be the first to point out that they still pay a significant share of the county tax levy due to their rising property values and a disproportionate share of the regional school tax, and are taxed for their local school district as well. However, from a general fund budget vantage point, the percentage required from taxpayers is the lowest in the county.
The remaining $13.1 million required to meet expenses in the general fund budget comes from a variety of sources, including $6.4 million in local general revenues, $861 million in revenues from shared services contracts, mostly to provide police services to Cape May Point and West Cape May, $700,000 in Uniform Construction Fee revenue and $575,000 paid by the city’s utilities for support of the general budget.
The two largest components of the $6.4 million in local general revenues are $1.8 million in parking revenue and $2.6 million in room taxes, including the bump in the occupancy tax that came from the extension of the tax on short-term rentals, an advisory committee recommendation to the council.
Surplus and Debt Service
The general fund surplus in Cape May City is the highest such surplus in the county. It stood at $12.7 million on Jan. 1. The budget, and thus the tax rate, benefits from the use of $4.1 million in surplus dollars as revenue in the 2023 budget. Careful management of expenses has led the surplus to grow each year, replacing the funds used in the budget and adding to them. The surplus in 2021 was $7.8 million, in 2022, $9.9 million, and in 2023, $12.7 million.
General fund debt service in 2023 was budgeted at $3.8 million, or just over 16% of the $23.7 million general fund expenditures. That has increased since 2020, when it stood at 14% of the general fund expenditures.
Vulnerabilities
Debt is the area that could imperil the city’s financial position. At 16% of the general fund budget, debt service now is in line with many of the county’s municipalities but below the towns with the highest ratio of debt service to total appropriations. The problem, or at least potential problem, is that the city faces some potentially very large capital projects for which it is seeking outside grant funding in order to limit the level of debt the city itself will have to incur.
One of those projects is an estimated $30 million expense for a new desalination plant. The city is already not able to meet state regulations for peak water availability if one of its wells is lost. The Coast Guard is expanding, development in the city and the municipalities it serves with water is moving consumption up, not down, and a future problem of iron removal as well as desalination means investment at some level will be required.
The cost for improvements to the seawall will also be expensive.
How much these types of capital expenses will impact the city’s budgets will depend upon how successful the city is in gaining alternative funding.
Contact the author, Vince Conti, at vconti@cmcherald.com.
