Is Revenue Cap helping or hurting Wicomico?

In a County Charter that contains 712 sections, dictating in explicit detail how Wicomico County is to be operated day in and day out. It is the 73 words included in Section 706B that continues to befuddle people ranging from Wall Street bond bankers to public school crossing guards.

“Tax Revenue Cap. Notwithstanding any other provisions of this Article, from and after July 1, 2001, revenues derived from taxes on properties existing on the County real property tax rolls at the commencement of the County fiscal year shall not increase, compared with the previous year, by more than 2 percent, or by the Consumer Price Index for all urban consumers (CPI-U) percentage of change for the latest calendar year, determined by the U.S. Department of Labor, whichever is the lesser.”

What is this tax revenue cap? How did it come to be implemented? After nearly 18 years, is it still pertinent? Is it still needed? Does it help or harm our county government? Does it help or harm the quality of life for county residents?

Looking back

The year 2000 was wholly unique in Wicomico County’s history. Real estate development was on fire. What would later become a real estate bubble was just good economic times. The population was growing and expected to surge even more as home prices were rising in the urban areas of the Northeast, and the prediction was retirees would be able to sell their homes with ease and retire to places like the Eastern Shore.

A conservative county leadership, under the format of a County Council that served as both the executive and legislative branches, had relied on rising home prices to stimulate revenues. No tax increases had been necessary for years — and everyone seemed to like it that way.

Then three things hit the county, all at once.

A salary study, ordered by the council in response to a growing sense of discontent among county workers, showed hundreds of employees, under market standards, were possibly deserving of pay raises. The consultants found that dozens of employees should receive significant annual raises, many of $5,000 or more.

Second, as crime became a growing concern, the council was under pressure to grow the county Sheriff’s Office and expand deputies’ law enforcement responsibilities. More money was also diverted to the State’s Attorney’s Office to handle increased prosecutions.

The failure of the county’s boot camp for youth offenders proved an expensive ordeal. The ramp-up in law enforcement “feet on the street” prompted the purchase of new equipment, Salaries grew under new employment contracts.

The third complication pertained to county schools. Several schools that were built when the county was undergoing a post-Bay Bridge opening population expansion in the late 1950s and early 1960s began to reach their 50-year marks, making them eligible for major renovations or outright replacement. work was either completed or began on Pemberton Elementary School (renovation), North Salisbury Elementary School (renovation/new construction), Salisbury Middle School (renovation/new construction), Bennett Middle School (new construction), James M. Bennett High School (new construction), the CTE annex at Parkside High School (new construction) and Willards Elementary School (new construction).

The state’s embracing of a commission that would ensure all school districts received fair funding — as opposed to funding going to counties with the most-influential lawmakers — led to the creation of a funding formula called Maintenance of Effort. Dubbed MOE, it was state officials’ way of ensuring local governments truly did their parts to fund education before calling in for state support.

Signs of a budget problem

The fiscal 2001 budget process was a bear. Much of the budget tension was being played out off the radar. While the county did enact a hiring and spending freeze in 2000, few people could have predicted what would transpire that May and June.

The community’s attention was firmly focused on a crisis in the city of Salisbury, where a May referendum was scheduled to rule on whether the city should adopt a city-manager form of government, ostensibly overthrowing the administration of Mayor Barrie Parsons Tilghman. Voters were also going to weigh in on the long-debated issue of whether the city and county governments should combine into a single ruling entity.

Political tensions were running hot — the county’s looming budget crisis was a decidedly back-burner topic.

On Thursday June, 1, 2000, the Republican-majority County Council — with Rusty Molnar sitting as president, “bit the bullet” and agreed to a 0.46 cents tax hike, setting the rate at $2.71 per $100 of assessed value. (Back then, taxes were assessed at 50 percent of a property’s converted value.)

A 24 percent increase in property taxes was unprecedented — not just in Wicomico but in counties across the nation.

The council also approved a 1 percent real estate transfer tax, designed to raise between $1.8 million and $2 million annually.

Because of a family emergency, one council member who opposed to the tax increase couldn’t participate in the vote. Still, the tax hike was approved 5-1, with conservative east county Republican Richard Adkins as the lone dissenter.

With the exception of Salisbury Democrat Marvin Long, none of the five approvers would ever fare well politically again. In the 2002 election, Democrats led by retired educator Tony Sarbanes and prominent lawyer Charles “Chip” Dashiell took control of the council and with it the county.

The 46-cent hike was the highest in Wicomico history and stunned a public that had been focused on government consolidation and city-manager. Year over year spending would be increased $11.1 million. The council would agree to fund most of its departmental requests, including huge sums for their three problem areas: $12.5 million for education, nearly $3 million for salary increases and $2.5 million for public safety.

As Molnar, a Republican under extreme constituent pressure, even said at the time: “Most of the budget requests seem quite reasonable.”

Tax revolt!

Overall, the public reaction wasn’t good. In fact, it was all quite unpleasant. People didn’t see the county as having righted a series of non-taxing wrongs — the response was that the council had been overzealous in its desires to tax and under zealous in its need to cut spending.

Then there was what could only be described as a tax revolt.

A collection led by conservatives and real estate entities formed what was labeled as a grassroots nonpartisan group called VOICE, which stood for Voters Opposing Increased County Spending). VOICE’s immediate objectives were to repeal the transfer tax (as Realtors were demanding); amend the approved 2001 budget to include a revenue cap (as conservatives were demanding); convert the county to a Home Rule government, as opposed to a Charter government; and make the Board of Education more accountable for spending decisions by making school board member’s posts elected (that will finally come true in this year’s election) .

VOICE didn’t dawdle. Its anger at such rapidly increasing county spending launched an immediate petition drive; it quickly secured the 8,220 signatures needed to place a revenue cap and void the excise tax on the November 2000 ballot. (VOICE didn’t stop gathering signatures until it reached 18,000; at the time the county had about 41,000 registered voters.)

In the battle of public opinion, VOICE had the upper hand from the start. No group was developed to counter it until the Coalition For Wicomico’s Future, comprised primarily of public school employees, made a fall arrival.

Many voters would say later that they didn’t understand what they were voting for, that they thought they were backing a tax rate cap instead of a revenue-generating cap tied to the inflation rate that measures spending by household consumers.

Some people voted in favor of the revenue cap and against abolishing the real estate transfer tax — the thinking being the county would still have at least $1.8 million in new revenues each year, and likely more as the real estate economy continued to chug.

The balloting wasn’t even close — the revenue was approved 18,741 to 10,061. The transfer tax vote was closer, but it went down 15,693 to 12,848.

The message that was either unheard or ignored was a revenue cap would cripple county government for years to come, since future County Councils would be forced to cut the property tax rate in to comply with the 2 percent annual revenue cap.

That has indeed occurred, but the county was also able to tap into General Assembly legislation and increase taxes by a nickel three years ago, just to meet Maintenance of Effort requirements.

The cap was implemented within the 2002 fiscal budget.

Revenue framework

The county relies on a combination of property and income tax revenues, which typically equates to 48 percent and 36 percent of general fund revenues respectively.

The county’s general fund revenue growth has trended below the rate of inflation on a compound average annual basis over the last 15 years. The county’s assessed value for the same period was above the rate of GDP growth, but during the Great Recession years there were five consecutive years of declines.

More recent performance has shown some growth in income tax revenues and property values, but nowhere near the pre-Recession numbers.

The revenue cap plays a role in the county’s credit rating. The Wall Street bond raters aren’t fond of situations in which the entities they are recommending for loans are handcuffed in their ability to raise cash to repay the debt.

Over the last decade, credit concerns about the revenue cap constraint have been somewhat offset by the Wicomico’s ability to increase property tax revenue above the cap for educational operating purposes. In addition, the county currently levies income taxes — or state piggyback taxes — at the maximum rate of 3.2 percent.

The county also gains flexibility from the ability to increase fines and fees, increase the recordation tax rate and impose a transfer tax, which are not subject to a cap.

County Executive’s thoughts

It could be argued that Wicomico’s switch to a County Executive form of government in 2006 was related to the 2000 tax increase. The notion had been batted around for years and years, but voters in that referendum seemed to like the idea of having one hand on the county’s tax-and-spending apparatus, with the County Council playing a checks-and-balances role.

The first County Executive to operate under the cap, Rick Pollitt, waited until six years in office to say much definitive about the cap.

Previously, Democrat Pollitt had mostly just articulated that since the cap came from the voters, any efforts to roll it back should emanate from there.

In his 2012 “State of the County” speech, however, Pollitt reviewed the then-10-year-old property tax revenue cap and the county’s fiscal health would forever be hampered because of the cap’s restrictions on government’s ability to fund essential services.

“We know of the growing concern of the diminished capacity providing for quality public education, public safety, and infrastructure, the kinds of things that we as residents and taxpayers expect and demand of our county government,” Pollitt said at the time.

“We have seen a steady decline over the past 10 years in many of the benchmarks that define a community as a vibrant, progressive location where people want to live, start a business, or start a family.”

In that speech six years ago, Pollitt said he would be asking Dr. Memo Diriker, the renowned Salisbury University Professor and Founding Director of the Business, Economic and Community Outreach Network at SU, to conduct a nonpartisan review of the revenue cap since its inception.

“I believe this exercise will provide vital information to the County Executive, County Council, and our community at large as we debate what services we expect from county government and what we’re willing to pay for them,” Pollitt said.

Enter Greater Salisbury

With the 20th anniversary of the revenue cap looming and with a growing sense within the business community that the community needs to invest in public education to have a better-performing workforce, the Greater Salisbury Committee lent its backing to a study from Dr. Diriker and BEACON.

A part of the community for 50 years, GSC is committed to improving the business climate of the Greater Salisbury area by engaging its corporate and civic leadership to develop solutions to the problems that affect the region’s competitiveness and viability.

The question, then:

  • Does the 2002 revenue cap help the community or hurt it?

And then some other questions:

  • Do elected leaders need Draconian controls to affect decision-making?
  • Should they be held accountable to words in a charter or voters at the polls?

And then an offshoot question:

  • Should we indeed invest more in our schools than the state’s Maintenance of Effort number?

GSC formed an internal committee and then banded with Diriker on a study. County Executive Bob Culver and County Council members were all looped in. For Culver and the council, the cap is a routine discussion point. Some officials advocated overturning the cap during the Great Recession, but instead the elected leaders decided to slash spending by up to 20 percent.

Also, to ensure political cohesion, county residents would likely have to be re-educated on the cap — what was initially approved was a gambit of sorts. If voters were to somehow misinterpret the elected leaders’ intent, there could be upheaval at the polls.

The simplest way to force a change would be for the council to approve a Charter Amendment, which would then have to withstand a public referendum vote.

Summary findings

To discuss what changes are needed, if any, a set of facts has to be stated to begin any deliberations.:

  • The objective of the revenue cap is to limit wasteful government spending and eliminate unexpected large tax increases. There are however, some unintended consequences of the current format of Wicomico County’s revenue cap.
  • The cap only works in an environment where inflation is 2 percent or less.
  • The language of the cap creates a ratchet-down effect when county revenues fall behind the total allowable revenue.
  • The CPI-U rate is not an accurate measure of the rate of change in local government expenditures.
  • The revenue cap is not designed to accommodate unfunded state or federal mandates.
  • The revenue cap does not have an emergency contingency provision to allow elected officials to address extraordinary budgetary demands in cases of disasters or major economic disruptions.

Ratcheting-Down Effects

  • In the past, the county has taken less than the full allowable revenue under the cap. (in 2009, for example, the county only allowed a revenue increase of 0.1 percent instead of the full 2 percent).
  • Not taking the fully allowable revenue has led to over $5 million being forever left on the table. This has a further detrimental effect since all future increases will be limited by this lower base figure.
  • This ratcheting effect could lead to the county losing out on over $25 million in the next 10 years.

Lost Revenue

  • The county has also been unable to collect and use over $15 million from 2006- 2016.
  • This loss is due to the fact that inflation has been higher than 2 percent revenue cap during this time period.
  • Should inflation increase to historical averages, the county will be unable to collect millions of dollars in revenue in that year; and the ratcheting effect will compound the loss in revenue in future years.

Changes in Property Taxes

  • Due to the ratcheting effect of previous tax increases below the cap, the current taxes are below prior levels when adjusted for inflation.
  • If the current tax rate per $100 of assessable value (0.9587 cents) is increased by 6 percent, the owner of a median assessed value home ($172,400) would only pay $99 more that year in property taxes, which is below prior taxes when adjusted for inflation.

The BEACON Report

The Greater Salisbury Committee publicly released the Diriker/BEACON review on March 12. Some of its findings:

  • A huge percentage of the Wicomico County voting population was not of voting age when the Revenue Cap became the law of the land. Therefore an effort to educate the citizens about the Revenue Cap, and how it works, is appropriate and needed. “We think it’s appropriate to simply take a look at it,” said Mike Dunn, GSC President and CEO. “We want people to know what the law of the land is.”
  • Of those who are aware that Wicomico County has a Revenue Cap in place, very few people could explain the Cap “to their neighbors.” The Revenue Cap is difficult to explain, decipher, disseminate.
  • A Revenue Cap is NOT a tax rate cap; many people confuse the two.
  • The Revenue Cap was a reaction to very bad legislating by the Wicomico County Council in 2000.
  • There has been very little public discussion about the Revenue Cap since the first few years of its existence. Public discussion about the Cap is a good idea.
  • There has been a demonstrated fall in the performance and ranking indicators of our public school system since the Revenue Cap went into place.
  • The Wicomico County Public School system is funded now, as it has been for some time, as a Maintenance of Effort school system. Translation: As a matter of public policy, Wicomico County funds its public school effort to the bare minimum that is required by state law. Is there a link to this MOE funding formula, and the Revenue Cap being in place?

Moving forward

GSC and BEACON have identified potential and serious unseen consequences that may await Wicomico County if the Revenue Cap stays exactly as it is.

Therefore, the Revenue Cap Committee is suggesting the following potential fixes:

  • Change the language of the Cap to be able to take the higher of CPI-U or 2 percent each year
  • Using a different inflation index (S&L IPD) instead of the CPI-U index.
  • Implement a safety valve which allows flexibility to cap limits in case of drastic economic changes. Typically this requires a majority vote either by the public or pre-determined board.
  • Using homestead exemptions (save on taxes on a person’s home) or circuit breaker programs (benefits to taxpayers, with benefits increasing as incomes decline.)
  • Implement a sunset/reset clause which will automatically terminate the Cap after a fixed time unless it is extended.
  • Elimination of the Revenue Cap? Implement a tax rate cap as an alternative.

Contrarian viewpoints

Salisbury accountant Bob Moore chaired the GSC’s panel on the revenue cap. Moore, who also chairs the Salisbury University Foundation, is well known for his dispassionate manner, especially when dealing with matter-of-fact financial matters. During a presentation on the overall situation, Moore’s primary input was that the revenue cap warranted a community discussion at all levels because a changing economy will likely create a tipping point.

“The county does not really have many tools to deal with challenges to our government in terms of how revenue can impact a wide variety of areas of our budget,” Moore said.

“This study is not about a property tax increase. That would be a very simplistic approach. It is about how to give the county a wide variety of ways to deal with problems. It’s about being able to add all of the resources needed to supply responsible government.”

As a CPA, Moore’s biggest concern seemed to be the cap’s reliance on CPI — the Consumer Price Index..

“The CPI rate is not an accurate measure of local government spending. The CPI rate is related to our own households — food is a big component of that,” Moore said.

“Food is not a big part of Wicomico County’s budget. They’re in the education business, they’re in roads, public safety — the county spends a lot on Public Safety. The CPI has nothing for Public Safety, nothing for education. There are indices out there for government expenditures — that would be a much more effective way of addressing that.”

On the long-term economy, Moore said the county’s “good fortune” might soon run out.

“The revenue cap only works in an environment where inflation is 2 percent or less. Why in the 17-18 years have we not had an Armageddon because of inflation? The reality is we haven’t had any effective inflation in these last 18 years. There have been some economic explanations for this. We’ve been through stock market meltdowns, we’ve been through real estate meltdowns. That had made the county and us lucky,” Moore said.

To make any changes to the revenue cap, the county’s conservative wing will need a great deal of persuasion. As is constantly revealed in county budget public hearings, a sizable percentage of the county is more concerned with their own household cash flow and tax assessments than many of the big picture concerns voiced by business leaders.

Parsonsburg’s Joe Holloway has been on the County Council since 2006 and maintains the cap has been a good thing.

“What the tax cap did was make government work smarter. There were more fees charged for things. It wasn’t as much of a giveaway.”

Holloway also makes the point that the county budget has grown from about $100 million in 2000 to nearly $150 million today.

According to the Maryland Association of Counties, however, uncontrollable costs such as unfunded state and federal mandates, emergencies and increased demand for services grow the size of county government.

MACO argues that every community is different, and county budgets must account for uncontrollable costs whose growth are completely out of the hands of budget makers. County budgets, then, must also mirror the needs of the community; county officials are the most knowledgeable about community needs and should be given the flexibility to address those needs

Wicomico Realtor Don Coffin, the VOICE co-founder and acknowledged “Father Of The Revenue Cap,” said that nothing in the past two decades has changed his mind about the cap.

“Unless someone was to convince me that the county cannot adequately do those things for us that we can’t do individually, or as businesses or as charitable organizations — because of the revenue cap — then I am strongly in support of it remaining in place,” Coffin told WBOC-TV News.

“Looking from a historical perspective at politicians, it has been demonstrated time and time again, they will spend as much money as they get and they never get enough. I have never met a politician, and I don’t care what brand they are, who has said, you know, we’re getting more tax revenue than we need.

“I think the revenue cap is really a blessing and has done the very thing it needs to do for the taxpayers,” he said.

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