HUNTSVILLE — By a narrow, 7-6 vote at Monday's special session, Scott County Commission rejected a 12-cent property tax increase that was proposed by its Budget Committee, leaving the county's operating budget for fiscal year 2016-2017 in limbo.
After it became obvious that commissioners were at an impasse, they adjourned Monday's meeting, with County Mayor Dale Perdue immediately calling them back into session for next Monday, Aug. 13, at 6 p.m., where they will once again consider a way to a balanced budget.
How Monday's meeting will play out is anyone's guess. But there are a few things that are already known, and a few more that can be assumed.
Why an approved budget is important
The State of Tennessee imposes an Aug. 31 deadline on county governments to submit budgets to the State Comptroller for review. If County Commission has not approved a budget at that point, so that the Department of Local Finance can present it to the comptroller, the state will intervene. Among the first things that will happen? State aid will be halted, which would mean peril for any county department that relies on state funding. Some departments would have to shut down, including the Scott County Road Department, which relies totally on state gasoline tax revenue to fund its budget of approximately $2 million.
Why a tax increase has been proposed
Rising interest rates have forced Scott County to take a close look at its debt. The county's principal payments have been structured on variable interest rates; as those increase, the county's payments increase. To combat this rise in interest rates, the Scott County Finance Committee has looked for a way to amortize its debt, moving the notes to a fixed, three percent interest rate.
To accommodate the change in payments that will result from that amortization, the Budget Committee has recommended 6.3 cents be added to the tax rate, which will generate about $189,000 in additional revenue for FY 2017-2018. In the proposed budget that County Commission was to have considered Monday, had it approved the tax levy, the Budget Committee estimated that debt service expenditures would increase to $1,471,268 this year from $1,269,972 last year — an increase of just over $201,000.
Additionally, County Commission's Budget Committee has proposed to increase the tax rate to fund a pair of issues it has placed a priority on: increased wages for county employees, and an increased fund balance.
The pay raise for county employees is most easily explained: the Budget Committee is proposing to increase the salaries of the county's 150 employees by about three percent, which would be their first pay raise in three years. Members of the Budget Committee have said the raise is necessary to help cover cost of living increases for those employees.
The increased fund balance is a bit tougher to explain. Think of the fund balance as a rainy day balance — a reserve to tide county government over in tough times, or to cover large, unexpected expenditures. The county currently has about $1.6 million in that reserve, Finance Director Ginger Reynolds said Monday. That seems like a lot, but with an annual budget of $8.5 million for County General alone, it actually isn't.
Just one use of the fund balance is at the start of each fiscal year — when bills are still coming due but the year's tax revenue has not yet begun to trickle in. At that point, things get dicey for the county's finance department. When things are at their worst, invoices are sometimes slow to be paid, resulting in angry vendors.
It gets worse: the State Comptroller's Office has in the past threatened to force county governments to keep a certain amount of money in their fund balance — a requirement that is already in place for public school systems in Tennessee. Second District Commissioner Sam Lyles — a former chairman of the Budget Committee who has in the past lobbied for an increased fund balance — warned again Monday that the state might eventually step in.
Fourth District Commissioner Rick Russ echoed Lyles' concern, saying that if Scott County avoids a smaller increase and the state steps in to raise the county's tax rate by 40 cents, "We haven't done our job."
How the county reached this point
The low fund balance was not always a concern. Prior to 2010, Scott County had about $3 million in its fund balance. That was before new construction debt for school projects at Burchfield, Robbins and Oneida kicked in. For two consecutive years, the county dipped into its fund balance to pay the note on those school projects before voters approved a wheel tax referendum in 2011 that helped cover the school debt. By doing so, the county was able to avoid raising the property tax at that time, but depleted its fund balance in the process.
There are other factors that have contributed, as well. Scott County's hospital, which once generated a seven-digit sum each year in lease payments, is no longer an asset. The county first granted Mercy Health Partners — the parent company of St. Mary's Medical Center, which was leasing the facility in 2010 — an amended lease agreement that eliminated the payments, and later transferred ownership of the facility to a private corporation in exchange for an agreement to reopen the hospital.
Additionally, federal changes to Medicare reimbursement have resulted in the Scott County Ambulance Service — which was once a profitable entity for local government — losing some of the surplus revenue it once had, and that surplus was routinely transferred to the county's general fund.
In 2015, the Budget Committee proposed a 24-cent tax increase, which would have both balanced the budget for FY 2015-2016 and increased the fund balance, the first step towards returning it to pre-2010 levels. Commissioners balked at that proposal, originally settling for a 12-cent increase that balanced the budget but did not add to the fund balance.
Commissioners at the time argued that the lower increase would necessitate another increase within a short period of time. The Budget Committee was able to avoid a tax increase for FY 2016-2017, before reaching the current situation.
What happened Monday
At Monday's meeting, the proposed 12-cent tax increase — which would have included 6.3 cents for rising debt payments, 3.0 cents for the proposed pay raise for county employees, and 2.7 cents to add to the fund balance — was voted down by a 7-6 count. While more commissioners favored the increase than rejected it, eight are needed for passage (County Commission has 14 members; eight represents a majority).
A subsequent proposal would have increased the tax rate by 10 cents — accounting for the debt service requirements and saving the employee pay raise, but sacrificing the increased fund balance — but failed by an identical 7-6 vote.
What happens next Monday
Assuming no one else changes their mind, Monday's vote will first hinge on 6th District Commissioner Patti Brown, who was not present at this week's meeting. Brown is the only member of the Budget Committee who was not on hand for the first vote, and it has been widely assumed that she will cast a vote in favor of the proposed tax increase, which would give it the eight it needs for passage.
However, that is only an assumption. Brown was also absent when the Budget Committee voted to forward the 12-cent property tax increase proposal to County Commission — meaning she has not yet tipped her hand on how she intends to vote.
If Brown votes "aye," Monday's meeting will be a short one. Property owners outside the Oneida Special School District will see their tax rate increase from $2.37 to $2.49. If, however, Brown votes "nay," the focus will likely shift to County Mayor Dale Perdue. In the event of a 7-7 tie, the mayor — as chairman of the commission — has a rare obligation to vote, similar to the U.S. Senate, where 50-50 ties result in a tie-breaking vote by the vice president. It doesn't happen often; it's happened only once in Perdue's tenure as mayor.
Should Perdue vote against the proposed tax increase, or should one of the "aye" votes from this week change their vote, commissioners will be back at square one. And with the Aug. 31 budget deadline looming ever closer, commissioners will be reluctant to walk away from the table lest they saddle the county with a government shutdown.
Absent a vote to approve the 12-cent tax rate increase as proposed by the Budget Committee, the most likely compromise will be the 10-cent rate increase that was considered this week. It would axe the fund balance increase but would save the three percent pay raise for county employees. It failed by a 7-6 vote this week, but several of the "nay" votes paused at great length before appearing to reluctantly cast their vote.
The next likely consideration is a 7-cent tax rate increase that eliminates the employee pay raise and the fund balance increase.
No new taxes?
How likely is a budget that does not include new taxes? Not likely, say commissioners familiar with the nuts and bolts of the budget proposal. The prospect of increased interest rates will prevent that from happening. Should Scott County pass a budget that does not account for the possibility of increased debt service payments, and interest rates increase as anticipated, the fund balance would be drained to cover the increase — which, depending on a variety of factors — could leave Scott County dangerously close to defaulting.
Commissioners who oppose adding to the tax burden of property owners have implored their colleagues to explore alternative means of revenue. But that is an avenue that takes months — or even years — to fully explore, while the budget must be approved in a matter of weeks. And, so far, commissioners have rejected the one method of alternative tax revenue that has been proposed, which was an entertainment and amusement tax. The wheel tax cannot be increased except through a voter referendum, a gamble that would take months to complete even if it proved successful.
The bottom line: increasing the property tax is the easiest and most effective way for county governments, like Scott County, to increase revenue. And a tax increase is almost guaranteed for Scott County in FY 2017-2018.
Should commissioners approve the proposed 12-cent tax increase, the average Scott County homeowner would pay about $25 extra in taxes this year, or a little more than $2 a month for homeowners whose taxes are escrowed. That is based on the median home value in Scott County, which is $84,700. The tax bill on a home valued at that price would increase from $501.89 to $527.25 this tax year. Homeowners whose house is valued at $100,000 would pay about $30 extra in taxes this year, or about $2.50 per month.
Scott County’s tax rate currently ranks in the middle of the pack among Tennessee’s 95 counties. Based on 2016 tax rates, 41 counties in the Volunteer State have property tax rates that are lower than Scott County’s, while 53 have tax rates that are higher than Scott County’s.
That ranking among Tennessee counties has generally declined over the years. Twenty years ago, in 1997, there were only 12 Tennessee counties with a property tax rate that was higher than Scott County’s $3.29. Ten years ago, in 2007, there were 22 counties with a property tax rate higher than Scott County’s rate of $2.67.