MBAX 6431 Week 11 Final Public Budget Paper Example

A Structural Gap at Ashford Falls: Controllable Revenue Grows More Slowly Than Committed Spending, and the City Has About Two Years to Choose How to Close It

Student Name

Walden University

MBAX 6431: Finance & Budgeting for the Public Sector

Instructor Name

Month Day, Year

A Structural Gap at Ashford Falls: Controllable Revenue Grows More Slowly Than Committed Spending, and the City Has About Two Years to Choose How to Close It

The Claim

The general fund of Ashford Falls faces a structural gap: the revenue its council controls grows more slowly than the spending it has already committed to, so balanced budgets will require new revenue, service reductions or both within about two years. Ashford Falls is the composite city of about 210,000 people used throughout this course, and every figure in this paper is illustrative. The argument draws on the term's revenue analysis, expenditure review, variance write-up, capital request and five-year forecast, each condensed to what the claim needs. A source note under each table names the earlier document it comes from.

Revenue: Controlled but Capped, or Responsive but Uncontrolled

The city's $300 million in general fund revenue falls into two groups that behave differently. The sources the council sets, the property tax and charges and fees, make up 55 percent of revenue, but the property tax, the largest at $120 million, may grow no more than 3 percent a year plus new construction without a referendum. The sources the council does not set, the sales tax share and state aid, make up 38 percent and are the most sensitive to the economy. This year's variance write-up showed the sensitivity in practice: sales tax came in $1.8 million below budget after local spending flattened and a large retailer closed. The council therefore controls the slow-growing part of its revenue and not the volatile part (Bruce et al., 2006).

Table 1

Revenue by Control and Responsiveness, Illustrative

Source: Week 2 revenue analysis. Composite city; figures illustrative.

Spending: Mostly Committed

The expenditure review sorted the same $300 million by what restricts it. Labor agreements bind $170 million for their terms; required pension contributions bind $28 million; mandates bind $32 million; debt service binds $20 million. Only about a sixth, roughly $50 million, can be changed within a single budget year. The committed categories also grow fastest. Wages under current agreements rise about 3.5 percent a year, pension contributions about 6 percent under the actuarial projection and health insurance about 7 percent. The narrative for this year's budget showed the result: a $9 million increase that bought no new service, driven by labor agreements and pensions.

Debt Service as a New Fixed Claim

The capital request for Fire Station 4 adds to the committed share. A $20 million bond repaid over 20 years at 4 percent requires about $1.47 million a year, plus about $85,000 in new operating costs. The project is justified on need and coverage, and the request named the project it displaces. But its annual payment joins pensions and labor agreements in the part of spending the council cannot move for two decades, raising debt service from about 6.7 percent to about 7.1 percent of the general fund (Mikesell, 2018).

Where the Forecast Leads

The five-year forecast combines these pressures. With revenue growing about 2.3 percent a year and spending about 3.6 percent, the city slips about $5.4 million short in the second year and close to $19 million short by the fifth. Two scenarios show how exposed the city is. A recession that cuts sales tax by 6 percent and state aid by 3 percent, with the lag the revenue analysis predicts, roughly doubles the year-two gap to about $12 million and raises the year-five gap to about $29.8 million. A wage settlement of 5 percent from year three, rather than 3.5 percent, raises the year-five gap to about $27.8 million.

Table 2

Projected Gap Between Recurring Revenue and Spending, Millions of Dollars

Source: Week 9 forecast memo. Composite city; figures illustrative.

Why the Gap Is Structural

A cyclical gap closes when the economy recovers. This one does not, because it comes from the different growth rates of committed spending and capped revenue, which persist in good years and bad. Rubin (2020) distinguishes structural imbalances from temporary shortfalls on exactly this basis, and warns that using reserves to cover a structural gap only postpones the choice. Ashford Falls' reserve of about $45 million would bridge the base case for a few years but would run out quickly in a recession.

What Could Prove the Claim Wrong

Three developments would weaken the claim. Faster growth in taxable value from new construction would let the levy grow more than 3 percent a year. Labor agreements settling below 3.5 percent would slow the largest spending category. A change in state aid policy, such as a new revenue-sharing formula, could add uncontrolled revenue. None of these is assumed, and each would narrow the gap rather than close it.

Options for the Council

The council has four broad options, which can be combined: seek voter approval to exceed the levy cap; bargain wage growth closer to revenue growth when agreements expire in years two and three; reduce discretionary services, which at roughly $50 million is a small base for a gap that could reach $19 million; or restructure services, for example by consolidating functions with the county. Each has costs this paper does not weigh in detail. What the analysis does establish is timing: the choices are easier in year one, while the gap is small and labor agreements are about to reopen, than in year three, when the gap may be twice as large (Kavanagh, 2007).

Limits

The paper rests on illustrative figures for a composite city and on a forecast whose assumptions could be wrong in either direction. It treats the general fund alone; enterprise funds such as water have their own pressures. And it describes the structural position without recommending a single remedy, which is a decision for the council and its residents.

References

Bruce, D., Fox, W. F., & Tuttle, M. H. (2006). Tax base elasticities: A multi-state analysis of long-run and short-run dynamics. Southern Economic Journal, 73(2), 315-341. https://doi.org/10.1002/j.2325-8012.2006.tb00774.x

Kavanagh, S. C. (2007). Financing the future: Long-term financial planning for local government. Government Finance Officers Association.

Mikesell, J. L. (2018). Fiscal administration: Analysis and applications for the public sector (10th ed.). Cengage Learning.

Rubin, I. S. (2020). The politics of public budgeting: Getting and spending, borrowing and balancing (9th ed.). CQ Press.