Opposing views on city debt
Carmel budget deficit to continue until 2015
By Maheen Mustafa
With a population of 80,142, Carmel certainly has come a long way. Not long ago, it was an upscale bedroom community known for easy commute to downtown Indianapolis. The city has now transformed to a thriving cultural and financial hub of the Midwest; substantially resistant to the recession, Carmel has a $24.5 million water park and mega-fitness center, a 1,600-seat concert hall, a 500-seat theatre and a Japanese tea garden.
Did all of this come at a cost? A prolonged budget deficit – projected to last until 2015 – hangs over the city. To get a better grasp on the matter, Current spoke to Carmel mayor Jim Brainard and city council president Rick Sharp. Though opposed in their views, both gave clear perspectives on the factors leading to the deficit, and suggested solutions.
During Sharp’s interview many of the mayor’s policies were questioned. Current has incorporated the mayor’s responses to those particular criticisms.
Current: Can you give us your insight on the Carmel budget deficit and how the annexation is making the deficit last until 2015?
Sharp: The facts speak for themselves. The revenues the city will take in this year are approximately $10 (million) to $11 million less than the originally proposed budget.
The council agrees with the strategy of the mayor to close that gap by using money from pension funds that are no longer needed to fund the pension. However, the council disagrees with the mayor’s proposal to close another $3 million gap by drawing out from the Rainy Day Fund.
The rest of the gap is to be closed by the money given as a gift by the State of Indiana worth $5 billion for improving the local road infrastructure in Carmel. I am still of the opinion that money should be held, or at least part of it should be held to do road work, as opposed to burdening the Carmel taxpayer.
Brainard: Money given by the state of Indiana wasn’t a gift. It was more like a reimbursement to improve the roads and for the (U.S. 31) reconstruction project. We borrowed money, we used city money to pay off those bonds and as a result the state can close U.S. 31 and save money in Carmel on their project.
Regarding the Rainy Day Fund, I made changes to the budget and it was approved (Oct. 29). We did not draw from the Rainy Day Fund, we added $2.5 million to it.
Sharp: The mayor makes the argument because we spend a bunch of money on infrastructural work, we should use the money and pay back the Carmel taxpayers and use it in the General Fund this year. The disconnect in the statement is that we did not use cash or operating funds to make those road improvements. We used borrowed money, issued bonds, and so in my opinion, if that’s what the mayor feels the use of money should be rather than preserving it to make the upgrades and repairs that will be necessary, then I think we should pay off bonds early with that money.
Brainard: Carmel has not increased tax bills as a result of incurring debt. Just like a household budget, some major purchases involve borrowing, but the payments have to fit the revenue. If they don’t, Carmel does not borrow.
Most of the money in the Rainy Day Fund represents ongoing revenue the state mistakenly held back from normal annual income tax distributions. This is money from Carmel citizens, which they have paid on their tax returns. I am not comfortable with the idea of taking people’s income tax and hoarding large amounts in a savings account. We should use it to benefit taxpayers.
Sharp: The mayor makes the argument we always knew we were going to have to spend on a deficit because of the annexation. However, if you look at the budget, it’s very clear that’s not what’s causing the current structural deficit. The deficit is being caused by the increased operating cost of all of the improvements the mayor and (the formal Carmel) Redevelopment Commission have built. I think it shows there was a lack of planning. A prudent manager would have seen this coming and made allowances for it as the budgets went along. Instead, this has seemed to have arrived as a complete surprise.
Brainard: We said seven years ago we would have deficits. It would take three years to phase in the southwest Carmel (Clay Township) annexation. The numbers have been available since 2005. We knew the state bureaucracy would be slow to give Carmel the income tax revenue for these areas. When the phase-in is complete, the deficits will disappear and turn into surpluses, as planned.
Current: The phasing in of property taxes – how did that play a role in this deficit? It’s being said that this along with the annexation will prolong the deficit to 2015.
Sharp: I don’t think phasing in of taxes plays any role in the current deficit. All we were talking about was absorbing the extra expenses resulted in the annexation in southwest Carmel. We have plenty of money to deal with that. What I am concerned about is this year we are $11 million short and five of that is being made by a special one-time payment from the state, so are we planning on a $5 million reduction next year? This is the reason I don’t want the money out of the Rainy Day Fund. I think we will need that money next year.
Brainard: Five percent of annual growth is conservative, based on history. It is true, as everyone knows, that values have been down lately. When they bounce back they will bounce back big. Realtors I talk with say there is a lot of pent up demand for Carmel property.
Current: Are you optimistic about the future budget balance?
Sharp: I am. This community is blessed with enormous amount of wealth, not just of money but of creative people as well. Second, once we get the presidential elections out of the way, cooler heads will begin to confront the fiscal deficit.
Current: Can you elaborate on the budget deficit situation?
Brainard: We annexed a large portion of Southwest Clay Township in 2004. The citizen’s organization sued us in court to stop the annexation. We settled that case in October 2005. In that settlement agreement we agreed to abate or phase in the taxes from that area over a three-year period as well as provide certain itemized improvements in that area within a certain amount of time. And from that date on we projected in our fiscal planning that there would be a deficit during that phase-in period. We saved money between 2005 and 2012 to pay for that deficit so we did not have to raise taxes.
In 2012, they pay 25 percent of their taxes. In 2013, 50 percent will be paid. In 2014, 75 percent and in 2015, 100 percent. We also received county income tax tied to that area. So, in 2015 there will no longer be a budget deficit.
Current: Is there any other factor causing the deficit?
Brainard: No. If the economy grew more than it was projected there probably would not have been this much of a gap. We are projecting in our operating balance in 2018 we will have over $20 million in our General Fund.
Eight months ago, the state found $300 million they thought they didn’t have. So we get all this money for this year as special distribution, but we counted on it coming and we knew the numbers were off. The state made the error of putting this special distribution into the Rainy Day Fund instead of the General Fund.
By 2015, we’ll be bringing in more money than we spent right now. The plan has been to use our savings accounts to finance the annexation. Without the annexation, there would not be a deficit. It has been planned for and, at very conservative projections, will go away.