Where to Cut?

Gov. Phil Murphy issued a report on the financial conditions of the state budget May 22.
The 28-page report painted a bleak picture of the coronavirus pandemic’s impact and the steps taken to combat it have had on state revenues. A copy of the report is available on the Herald website.
Facing a more-than-$10-billion shortfall over the remaining months of the current budget and the next fiscal year, the state will be forced to make hard choices, reducing its ability to aid counties and municipalities, as they seek to rebound amid damaged local economies and high levels of unemployment.
State Treasurer Elizabeth Muoio says “it has now become a foregone conclusion that both national and state economies will enter a recession in 2020,” one from which, she adds, “full recovery may take years.”
Since early March, the focus of attention in the Garden State has been on the public health crisis produced by the novel coronavirus. Locally, that focus has broadened to include the opening of the tourist-based economy in time to salvage July and August, the peak summer months.
Soon, municipalities, most saddled with budgets constructed and adopted before the economic devastation of the pandemic became clear, will face the harsh realities of the economic downturn with an eye toward the longer term.
The Questions
Surviving the budget hit in 2020 may only be the most immediate part of the problem. Decision making in an environment of widespread uncertainty may force local governments to take conservative paths that could impact public services, municipal staffing levels, and previous expectations of projects that had been on the horizon before the virus arrived.
What plans must a municipality make against the prospects of a potential second wave of the pandemic? How long is it likely to take for the trends of travel and tourism to return to pre-COVID-19 levels?
How deep is the damage already done, and what parts, if any, of the business sector will be unable to survive intact? What will be the local impact of a state economic downturn that may be deepened by the state’s already precarious financial state of health before the pandemic?
Is the current situation a prelude to a perfect storm for taxpayers with state aid for school districts being reduced below levels that already represented serious cuts in Cape May County?
County, school and municipal components of the property tax bill all represent budgets that will have to rebalance in ways that could impact tax rates. If one looks at one specific county municipality, in this case, Cape May, the types of problems that loom for other county towns may come into a clearer view.
Cape May 2020 Budget Adoption
Under Cape May’s form of government, the budget introduction and adoption process has three distinct phases.
In the first phase, the city manager presents his proposed budget to the City Council, which occurred Feb. 25. By that day, New Jersey hadn’t encountered a confirmed case of COVID-19.
On that day, in Washington, before that same city council meeting, a Centers for Disease Control and Prevention (CDC) official, Dr. Nancy Messonnier, delivered a controversial briefing in which she stated the pending “disruption to everyday life might be severe.”
At the March 3 City Council meeting, Cape May formally introduced the 2020 budget, with no changes to what the city manager proposed. The budget projected $32 million in spending, with $20.6 million of that for the current fund budget that supports the city’s general operations. The remainder was spread over three self-liquidating utilities that provide water and sewer services, specific self-supporting tourism activities, and beach management.
At that same meeting, representatives of the engineering firm Mott MacDonald made a presentation on the city’s Water Management Plan. The city, which had so successfully innovated 20 years ago with the construction of the state’s first water desalination plant, is now facing the need for significant new investment, $29 million over 10 years, with almost half of that required in the next four years.
That March meeting was one day before a physician’s assistant, who worked with patients in and around New York City, was designated as the state’s first confirmed victim of the virus.
Without modification, the city adopted the 2020 budget April 21. Overall, the budget, including the utilities, was 3.4% higher than that of 2019. The budget anticipated increased visitor spending over a 2019 year that was labeled a banner year.
The decision to adopt the budget was not unanimous, with two members of the council arguing that projected revenues in the budget were unrealistic in light of the growing COVID-19 threat to the economy. The majority on the council decided not to reduce appropriations before adoption, but rather to trust to the city manager to control spending in line with any losses in expected revenue.
By this point, in April, the World Health Organization declared an international pandemic. In New Jersey, Gov. Murphy issued his stay-at-home orders, closed nonessential businesses, ended most construction projects, prohibited public gatherings of more than 10 people, and banned nonessential travel.
No one knew yet how much longer the lockdown would be, but local budgets were already taking a hit. The city’s chief financial officer responded to a question with an estimate that at least $600,000 of expected revenue in the 2020 budget had already been lost.
The Vulnerabilities
The budget that supports city operations, the current fund budget, proposed at $20.6 million, depends less on property taxes than do similar budgets in other county municipalities. Just about half of the budget was balanced with dollars from the local purpose tax, $10.5 million. The rest included $6.6 million from anticipated miscellaneous revenues and $3.3 million redirected from the city’s healthy $7.6 million fund balance, often termed the surplus.
The structure of the city’s tourism and beach utilities aid the operating budget by removing expenses from taxpayer-supported items to user support through fees collected from annual visitors.
In the present situation, this structure of the city’s budget makes the municipality vulnerable to a downturn in visitor spending that is in direct proportion to its increased dependence on such spending in normal years.
One-third of the operating budget, for example, depends on assumptions like $1.4 million in parking meter revenue, $1.1 million in occupancy taxes, and sufficient money gathered through the utilities to continue to offset fixed costs directly and indirectly.
Both the tourism and beach utilities are expected to earn enough to meet their projected contributions to the operating budget to offset staff support provided by city departments.
Lower than expected visitor spending this summer is a problem for a budget constructed to anticipate an increase over last year’s revenues. Significantly lower visitor spending this year can be a large problem.
City Manager Jerry Inderwies has instituted an expense control process that will require an extra layer of approval before departments can expend certain funds, even though the funds are “in the budget.” 
Yet, the concentration of expenses in the operating budget may make managing appropriations in direct relation to movements in an erratic revenue stream difficult.
Salaries and wages are a large part of any municipal budget, but “as you go” reductions may be quite difficult when one considers that 60% of the city’s salaries and wages are tied to emergency personnel: police, fire and emergency medical technician staff.
Other areas of expense that limit options include $2.3 million in health insurance premiums, $1.3 million in retirement fund contributions, and $2.9 million in debt service.
On April 7, City Auditor Leon Costello cautioned council members if the city elects to defer the canceling of appropriations until later, which the city did do, “you run the risk that you might not be able to get them out.”
At the time of the budget’s adoption, the Taxpayers Association wrote to the council, urging that the city “establish priority reductions, limitations and terminations to secure 2020 and 2021.”
Complicating the budget decisions that may need to be made is a set of ongoing projects, including the Franklin Street School’s repurposing, as a branch of the county library system, construction of a proposed $15 million public safety building, which one group of citizens is actively seeking to place on a November referendum, potential purchase of the fire-damaged Allen African Methodist Church property, a request from a local non-profit for city contributions to ongoing litigation regarding a 100-acre wetlands tract, in East Cape May, and a nearly $100,000 city contribution to a federal beach backpassing project meant to put much-needed sand at the cove.
Along with it all, there still looms the engineering report, calling for immediate investment in the water management system.
Decisions
What complicates all of this is a sense that decisions need to be made while the full scope of the problem remains murky.
The city’s fund balance provides a sense of comfort in a difficult time, but moving to tap it too early risks a future city response if the economic downturn is lengthy.
There will be losses from this summer season, but how severe will they be? Can the governing body afford to wait and see?
Is it prudent to invest in necessary projects without knowing the impact of a potential recession that may extend beyond this budget year?
Can capital projects that will add new debt move forward? Can some of them afford not to move forward?
Assumptions need to be made and some of them will be wrong.
To contact Vince Conti, email vconti@cmcherald.com.