Advanced budget planning by municipal councils and staff will become more critical than ever because of lagging tax collections and the current negative growth in the consumer price index.
Act 388 of 2006 allows council to increase the city’s millage rate by the annual percentage increase in the state’s CPI plus the annual percentage growth in the city’s population. From January to July, the average percentage change in the CPI was a negative .8 percent. Unless dramatic changes occur in this index in the last six months of 2009, cities will not be allowed to increase the millage rate next fiscal year except by the percentage increase in its population.
To further complicate the budget planning process, cities need to plan for a decrease in business license revenue in next year’s budget. Because the business license fee is calculated using the company’s gross revenue from the prior year, it is anticipated that business license revenue in 2010 will be less than in 2009. While economists hope the economy will rebound in 2009, business revenue in 2009 is expected to be less than in 2008.
Property taxes account for 26 percent of the average municipal budget, and business license revenue accounts for 17 percent. The third revenue source impacted by the economy is proceeds from local option sales taxes, hospitality taxes and accommodations taxes, which on average, account for 12 percent of a city’s total revenue. Therefore, 55 percent of a city’s budget is directly impacted by the local economy, according to the FY 2008 Local Government Finance Report.
The time to begin to plan for these decreases is now.