TO: Mayor and Council, City of Dunwoody
FR: Dan Weber
DATE: Tuesday, September 30, 2008
RE:
Hybrid BudgetTo assist in your decision making process, here is a discussion of the reasons the hybrid model is the best choice for the city.
A. Services Levels Have Been Cut To the BoneIn order to shoehorn the CH2 contract into the budget, services been cut to the bone. There isn’t much left. Here is a comparison that shows what a difference two months has made:
| Projected July 2008 | 9/23 Budget |
| Roads (potholes, paving, capital improvements) | $2.5M | $252k |
| Parks | $400k | $120k |
| Other Capital Improvements | $1.5M | $500k |
Other services levels, such as emergency maintenance and electronic record keeping, have also been cut or eliminated.
B. The Contingency is Too SmallThe contingency has been cut again. It is now down to only 3%. The Georgia Government Finance Officers Association recommends that the contingency be kept to a level of 5% to 20%. If a reasonable level of 10% were used, the required contingency would be $1.4M.
With the downturn in the economy, the city could very well not realize the projected revenues, particularly those that depend on business activity or spending (business and beverage licenses, hotel taxes, alcohol taxes). There is a significant financial risk in using the CH2 model.
C. Additional Cuts Are Being MadeEven with the service level cuts made above and the reduction of the contingency, the 9/23 budget still shows a $650k deficit. As this is written, additional negotiations are underway to cut further.
D. Taxes Should Be Kept LowIt is important to do all we can to keep taxes low.
The last CVI feasibility study was based on 2.04 mills, which is what the county charged in 2007 for municipal services. The city charter allows an increase of 1 mill up to a cap of 3.04 mills.
The 9/23 budget assumes a rate of 2.74 mills - an increase of 0.70 compared to the projected rate of 2.04. The 2.74 rate does match what residents are currently paying the county in 2008, so in that sense a 2.74 rate in 2009 would not be a tax increase.
But the 2.74 rate leaves only .30 mills for future years before hitting the cap of 3.04. This is particularly important in light of the downturn in the economy and the assessment freeze built into the charter.
It would be much better to keep taxes low. Perhaps use 2.74 mills in 2009 and return to 2.04 mills in 2010. This can be done with savings from the hybrid budget. It would be better to keep taxes low for residents and for future planning for the city.
E. 2010 Will Be No BetterSome may be tempted to believe that 2010 will be better than 2009. This is not so. The 9/23 budget includes the Georgia Power franchise fee of $1.5M that would normally be paid in 2010. There will be no payment from Georgia Power in 2010.
The city will receive $1.6M in taxes on insurance premiums for the first time in 2010. These new revenues will offset the loss of the Georgia Power franchise fee.
The council must also consider that the contract payments to CH2 will increase in 2010 from $7,875,000 to $9,450,000, an increase of $1,575,000. What new tax revenues will offset this increase? There will be an increase in some revenues from certain items (e.g., penalties for late payment of property taxes) in 2010, but not enough to offset the $1,575,000 in added expense for the CH2 contract. Thus, the city could very likely be in more of a bind in 2010 than in 2009.
F. The Hybrid Budget Saves $3 Million in ExpensesThe first and most obvious point is that savings realized by the hybrid model come from the elimination of the overhead, markup on subcontractor costs, and profit built into the CH2 contract.
Attached is an Excel workbook containing the three worksheets that were passed out at the work session: (a) the hybrid model master spreadsheet; (b) the four city salary survey; and (c) the budget developed by you on Tuesday, 9/23.
The staffing levels for each department were constructed based on recommendations we received during meetings with city officials from other cities. Conservatively, the salary used for each position equals the average of the maximum salary reported by Roswell, Alpharetta, Decatur, and Marietta for that position, as shown by the 2008 annual salary survey at the Department of Community Affairs website. The calculation of the salaries is shown on the second worksheet. The “burden” added for FICA, medical, etc. is 35%, which may be on the high side.
One criticism previously directed at the hybrid model is that the 9/23 budget (which includes the CH2 contract) had a head count significantly higher than the recommended levels contained in the hybrid model. The 9/23 budget reportedly includes a head count of 39.5. To equalize the head count of the hybrid model for comparison purposes, we added a line item at the end showing 15 additional employees at a cost of $1.5M. Even after this add, the hybrid model shows a $2.9M savings compared to the 9/23 budget.
You may want to start with the lower staffing levels that other city officials have said would be adequate (i.e., without the 15 additional employees). If, at a later date, the city manager can justify adding a position, then do so. If, for example, in late 2009 or early 2010, the city manager convinces you the city needs a full time arborist, then you may agree to spend the money on that position.
To the extent you can keep the staffing level below 40, however, you will save $101k in employee compensation, plus saving for IT, office space, and furnishings. For this reason, the savings in 2009 could be substantially greater than $2.9M.
As Mr. Ross commented during the work session, a $2.9M (or more) in savings may not, in practice, work out. I do not disagree, but at the same time it is not out the realm of possibility. If the savings are not $2.9M, they nevertheless are likely to be substantial.
Please be sure to take a critical look at the hybrid budget to satisfy any concerns you may have. I have added comments to each line item to explain how the number was calculated. The group with whom I have worked (Gordon, DeAnn, and Brian) have reviewed the hybrid budget and have not been able to find any substantial errors.
There is reason to believe the hybrid expense budget is reasonable. When compared to the first CVI study, which projected $11 to $15 million in costs for Dunwoody to run its government based performance benchmarks (with $15 million being for an enhanced level of service), the total hybrid budget of almost $15 million does not appear to be unrealistic. This is particularly so when one considers that the hybrid budget, like the 9/23 budget, includes very little money for roads, parks, capital improvements, and contingency, as explained below. The enhanced benchmark budget put together by CVI included substantially more money for these items.
G. Police and 911Both the 9/23 budget and the hybrid budget include $4.1M for police, which should be enough for 33 officers. The task force projected a higher cost for more officers. The CVI study projected a cost of $2.8M for 28 officers, but that cost did not include start up, facilities or IT costs. With those costs added, the adjusted total CVI cost would be about $3.2M to $3.5 million. It may be possible to cut the $4.1M somewhat, but Police is one service where it would be wise to be conservative in estimates.
Jim Gaddis is standing by to work on 911. Chamblee wants to work with us, but they want a study first. CVI is willing to do the study. Jim was to call the consultant who did work for Sandy Springs and Johns Creek to see if he can do the study. If Boyken becomes involved, they could coordinate this effort.
H. ImplementationBoyken International is preparing a proposal to present to the council on Wednesday, and I am sure Mr. Boyken will explain what his firm can do better than I, but here are a few thoughts.
Boyken is a very substantial firm with expertise in estimating costs and managing programs and construction projects for owners, including cities and other governments. They are similar to CH2 in many respects.
First and foremost, if Don Boyken tells us he can do this project, I believe him. This is a small and relatively simple project for his firm, which manages projects worth billions of dollars each year. He is offering to do the project at a reduced rate. He has credibility because he is a community servant leader, having served with the DHA since 1989 (president for 2 years) and currently is on the Sandy Springs planning board.
Boyken International has in-house resources to start up the city operations, including IT and human resources. They understand the development and permitting process as well as anyone. They can hire consultants – an experienced police chief and finance director – and work with the Georgia Municipal Association and city officials in Chamblee, Decatur and elsewhere who stand ready and willing to help.
Boyken also offers an important advantage with regard to police – they can start with building the police department now by searching for and ordering the long lead time items (cars and radios) and getting the facility leased and built out. The CH2 contract does not include building a police department. The council is left to do that on its own, until after a city manager is hired and then a police chief is hired – which likely will not happen until December. The result would be more months of potentially costly IGA with the county.
I. SummaryThe CH2 model is the more expensive option and it requires a higher tax rate. Even if the budget balances with CH2 (which it may not), there is little flexibility left with on 0.30 mills to work with in future years before hitting the 3.04 mill cap.
By contrast, with the hybrid budget, the city will likely save $6M to $9M over the first three years compared to the CH2 model. These are significant savings that are sorely needed.
After looking at the whole picture, the correct conclusion is that the CH2 model is actually riskier than the hybrid budget. The CH2 model presents a significant financial risk, with services already cut to the bone and a paltry 3% contingency. Locking in to the CH2 contract for 3 years at a time of economic downturn and with city expenses increasing in 2010 ($1.5M more to CH2 in 2010) simply does not make sense. The financial risk with the CH2 model certainly outweighs the minimal risk in using Boyken International for implementation.
There is no intent here to take anything away from CH2. They are an excellent company with a good track record. This should be a business decision based on which path makes the most sense financially and what the new city can actually afford. Some may think that using CH2 is a way to buy peace of mind, but with service levels cut so severely, the small contingency, and the downturn in the economy, there likely would be many sleepless nights in 2010 and 2011.
Thank you for you willingness to serve and to make these types of decisions for the good of the community.
