Ominous pressures provide context for budget

With payroll tax revenue making up half of Covington's General Fund, creating new jobs is the City's priority when it comes to development.


(EDITOR'S NOTE: This is one of two stories on the City of Covington's 2019-20 budget.)

COVINGTON, Ky. - It began in January.
Every time administrators at the City of Covington talked about the 2019-20 budget they were putting together, they described a litany of financial pressures, challenges, and hard realities that would both limit the scope and implementation of new ideas and that sounded ominous tones about the coming years' budgets.
Before long, the message became a broken record.
That was intentional, City Manager David Johnston said.
"I wanted to make sure that everyone - managers who were setting goals for their departments, City Commissioners who would be voting on the budget, and residents who would be affected by it - understood the challenging financial environment in which this budget fell," Johnston said.
"These are exciting times in Covington, and we crafted a strong budget that will continue to improve the City's economy and life for its families," he said. "But just looking at the numbers doesn't give you a complete picture."
As policy decisions are made in the coming year, City officials said, it's imperative that residents understand these challenges, because they will dictate where, how and how much money is spent and why the City is taking a long-term approach to budgeting.
What are those challenges?
EXTRA PENSION PAYMENTS: To help reduce the unfunded liability in the larger Kentucky Retirement System, the Bevin administration continues to mandate that local governments pay extra funds on top of their already hefty normal employer contributions. Covington paid more than $700,000 "extra" in the current fiscal year and must pay an additional $820,000 "extra" in the coming fiscal year, bringing its pension expenses in the new budget to over $8 million. That "extra" payment increases by an additional 12 percent on a compounding basis each year.
LOSS OF IRS: The federal government's decision to shut down the "Flat Top" paper processing center on Fourth Street this fall will cost the City about $500,000 a year in payroll tax revenue. (NOTE: this number is actually much higher when measured against the IRS' peak employment years ago.)
FIRE GRANT: In late 2016, Covington used a federal SAFER (Staffing for Adequate Fire and Emergency Response) grant to hire eight additional firefighters. That grant recently expired, meaning the City must use about $611,000 in General Fund money to retain the additional employees each year going forward.
PROPERTY ASSESSMENTS: In early 2018, Fidelity Investments persuaded the Kenton County Property Valuation Administrator's office to reduce the assessed value of its Covington campus by about half, reducing property tax revenue to the City by about $165,000 a year. Similarly, Corporex has applied to the PVA to bring about a reduction in its tax bill for the coming year.
DIVERSION OF GROWTH REVENUE: An explosion of growth in the urban core has brought increased energy and a more robust economy to Covington. But the financial impact of that growth is largely not being reflected in the City's General Fund, which is used to fund services.
To date, much of that growth revenue is rebated to developers or is reserved by law for specific uses outside the General Fund.
The creation of a Tax Increment Financing (TIF) district in 2013, previous decisions to use Industrial Revenue Bond incentives in unusual ways, and other incentive programs have created a "gap" between gross and net tax revenue of almost $4 million, according to finance documents.

Collectively, those five challenges - all of which are largely beyond the City's control, Johnston recently told the Board of Commissioners - required that officials be conservative in spending and that they adopt a long-term approach.
For the first time this year, the City under Finance Director Muhammed Owusu budgeted using a five-year model. The analysis and long-range modeling enabled the City to make decisions with future impact in mind, Owusu said, "rather than managing the City with a 'checkbook' philosophy."
It also proved to be a powerful education tool, making clear the devastating impact of state government's pension mandate: by 2025, the City's pension contributions - barring relief from the state - are projected to reach almost $14 million a year, up from about $6 million a year ago.
"To Covington and all cities in the Commonwealth, that kind of burden is unsustainable," Johnston told the Commission. "This budget is balanced. But next year - if nothing changes - we will be in the red."
Cities across the state are facing similar challenges. In fact, Louisville is taking steps to close a $35 million shortfall. By 2023, Lexington expects a $29 million gap.
Covington's projections have given urgency to the City's ongoing efforts to attract jobs, since payroll taxes represent almost half of the City's General Fund, Johnston said.
Toward that end, the City:
  • Has been working with consultant Cooper Carry to create a conceptual master plan for the soon-to-be-vacant 23-acre IRS site and gain development control of the property from the federal government.
  • Has been working with consultant Garner Economics to create a citywide economic development action plan that focuses on identifying Covington's strengths and turning those into jobs and investment.
The City also hopes to move to a priority-based budget model in the coming year.
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