Hard rocks, few places

For months last year, one topic was foremost on Asheville City Council members’ minds: how to make ends meet.

With revenues falling, a lengthy series of work sessions and staff meetings unfolded as the city scrambled to address a $5 million budget shortfall. Eventually, the budget was balanced through a combination of cuts and fee increases aimed at keeping core services intact and avoiding staff layoffs.

This year, however, things look even more desperate: Many of the less painful cuts have already been made, the new Republican-dominated General Assembly is looking to slash the state budget, and city revenues are expected to be lower than last year.

At Council’s Feb. 4 retreat at Warren Wilson College, Administrative Director Lauren Bradley said staff are "cautiously optimistic" about property- and sales-tax revenues but that other sources, such as building-permit fees, are depressed.

“On the whole, I don't see revenue growth in our future," noted Bradley. "It will be below our historic norms and probably below the current year. All things told, I think it will be a manageable process.”

What happens in Raleigh could affect that assessment, however. The General Assembly doles out about $15 million in sales-tax revenue to Asheville, plus another $10 million for its share of other revenues (such as the beer-and-wine tax). A cash-strapped and cut-inclined Legislature might decide to withhold some of those funds to balance its own books.

In January 2010, the city issued a report titled “A Financial Crossroads,” citing both short-term (the economic downturn) and long-term (lagging growth compared with Buncombe County) factors contributing to Asheville's fiscal troubles.

Below, we consider a number of ways the city could try to balance this year’s budget, assessing each option’s advantages and disadvantages, and how likely it is to actually happen.

Annex, annex, annex

For most North Carolina cities, annexation is a significant source of income. This is one of the few states that allows involuntary annexation: If certain criteria are met, the city can forcibly absorb surrounding areas, bringing in new property- and sales-tax revenues.

But for various reasons, Asheville has used this particular option far less than other major Tar Heel cities. The “Crossroads” report notes that in the last decade — a boom time for the area — Asheville’s population grew by just 11 percent, the lowest rate among the state's 15 biggest cities. And for every person who moved to Asheville between 1950 and 2000, five moved into Buncombe County outside the city limits.

Meanwhile, the Sullivan Acts, which withstood a recent legal challenge by the city, prohibit Asheville — alone among the state’s cities — from making annexation a condition for access to water lines.

Historically, City Council's attitude toward annexation has ranged from cautious to outright timid. Last year, for example, a proposed Royal Pines annexation would have brought in 670 new residents and nearly $500,000 in annual net revenue after the first few years. Faced with residents' complaints, however, Council members backed off.

Forced annexation, of course, often involves stiff opposition and even lawsuits — the city's still in court over a 2007 attempt to annex Biltmore Lake — which is one reason most states don't allow it.

It also takes time and often requires up-front expenditures. State law requires cities to provide equal services to annexed areas, and that means cash on the barrelhead, even though such moves are usually profitable in the long run.

What's more, GOP legislators in Raleigh appear poised to prohibit the practice outright; they’ve already introduced a moratorium that would halt not only any future annexations but also those already under way. Council member Esther Manheimer has repeatedly told her colleagues, “We should prepare for a future without forced annexation.”
How likely is it?

At a work session late last year, Council member Cecil Bothwell raised the possibility of taking in new areas while it was still an option, but his colleagues showed little enthusiasm for the idea. Annexation seems an unlikely solution to the city' s budget dilemma.

Raise taxes and fees

Like any other city, Asheville relies primarily on property taxes for revenue. Increasing the tax rate could address all or part of the looming budget gap.

Of course, no one likes to have their taxes raised — particularly during a recession. Historically, Council has gone to considerable lengths to avoid doing so, preferring to look for other revenue sources or spending cuts. What’s more, 2011 is an election year for three Council members.

At this year’s retreat, all Council members except Bothwell (who’s repeatedly pointed out that property taxes are one of the less regressive means at the city's disposal) said they wanted to "hold the line" on property taxes, though Manheimer noted that the state's woes might throw the city "a curve ball."

This is a potential moneymaker, however, and if the alternative is drastic cuts in services, it might start to look more appealing.

Politically, fees are generally less onerous than property-tax increases, and last year, Council members bumped up everything from festival-booth fees to water rates so the city could avoid raising taxes.

Of course, the more money a fee brings in, the more people (and businesses) it affects — and the more opponents an increase might face. City staff originally proposed a much larger water-rate hike last year, only to see Council scale it back. Business-license fees, in particular, could become a flash point.
How likely is it?

More than it might initially appear. Although Bothwell was the only Council member to outright endorse a tax increase during last year's budget deliberations, Manheimer and Jan Davis also noted that it might eventually be necessary just “to keep the lights on,” as Davis put it.

The scenario might go something like this: Around March, when budget deliberations begin in earnest, staff rolls out a number of dire predictions of reductions in staff and services if the city balances its books via cuts alone. But despite their distaste for higher taxes, Ashevilleans like their city services, and faced with difficult choices, Council members just might decide that an increase is a necessity that won't sink them politically (after all, three Council members plus the mayor — a voting majority — are not up for re-election this year). If an increase is approved, don't expect it to be big, unless the budget situation proves positively dismal.

So, after grilling staff extensively during public sessions to underscore the gravity of the situation, Council members shake their heads reluctantly and mutter something along the lines of “Desperate times call for desperate measures,” betting that major cuts in services would hurt them even more.

Meanwhile, depending on the size of the projected deficit, additional fee increases seem almost a certainty.

Spending cuts

In the end, there are two ways to balance a budget: boost revenues or trim expenses.

Last year's cuts affected things like overtime, staff training, temporary positions and festivals while mainly keeping the basics intact.

Having already hit those relatively easy targets, however, the city is facing a bigger challenge this time around.

Asheville is a major local employer, and next to increasing property taxes, avoiding layoffs is typically a top priority.

The prospect of cuts to things like trash collection, community centers or law enforcement is also likely to trigger public protest. As it is, reduced community-center hours have sparked grumbling in affected neighborhoods.

And with advocates already pushing to expand support for mass transit, recycling and the arts, expect a major backlash if the city chooses to balance the budget by making deep cuts in these areas.
How likely is it?

Some cuts are almost guaranteed unless there’s some extraordinarily good news concerning revenues: Grants to nonprofits will probably come under heavy fire. We could see some city staff layoffs, though pay cuts are more likely.

“I'd take a look at our facilities and our recreation budget, specifically the employment aspect of those facilities; our Parks and Recreation Department has a $12 million to $13 million annual budget,"  Council member Bill Russell notes. “I'm absolutely, adamantly opposed to any tax increases at all. There are some significant changes that are coming through our Health Care Task Force that could save a few million dollars.”

Even if City Council does opt for tax and fee increases, there will probably still be some cuts as well; expect a major political battle over who bears the brunt of them.

New taxes

Currently, Asheville’s only special tax is a 4 percent hotel tax. But by state statute, all of that revenue goes to the Buncombe County Tourism Development Authority.

Even though most local hotels are in Asheville, this is technically a Buncombe County tax, approved by the commissioners back in the 1980s. It brought in $7 million last year, $5.2 million of which was used to market Asheville to the world. The remainder goes to projects such as The Orange Peel expansion and Pack Square Park.

“It's just a great model,” says Kelly Miller, executive director of the Asheville Convention and Visitors Bureau, who credits that money with helping spark Asheville's revival. “It's behind so many things people take for granted. These dollars help us tell the Asheville story. The people staying in those hotels generate $2 billion in economic impact.”

If the hotel-tax revenues were going into city coffers instead, there might not be a budget problem, though following Miller’s argument, the loss of those marketing dollars might impact other revenues. But since state law specifies otherwise, that leaves the city with the option of asking the General Assembly for a new revenue source, such as an additional hotel tax or a food-and-beverage tax.
How likely is it?

In the current political environment, the odds of that happening are slim. Although state Rep. Patsy Keever, a Democrat, said during last year’s campaign that she would support a dedicated hotel tax for the city, Republican Rep. Tim Moffitt has said he favors spending cuts and would be unlikely to support such a measure.

Meanwhile, even City Council seems divided about the idea. At the retreat, Council member Gordon Smith touted the idea of Asheville getting its own occupancy tax, "considering where our rate is compared to others around the state." Davis, however, countered that with hotels already struggling, "Now is not the time.”

For a new tax to become a viable option, Asheville would need to come up with something palatable to the entire legislative delegation — or else do some amazingly persuasive lobbying.

The times they are a spare-changin’

Clearly, the city of Asheville is not in an enviable position, and whatever combination of cuts, taxes and growth it uses to balance the budget, local lives will be affected. In the coming months, Council members will make key decisions determining which lives — and how much. For residents who wish to speak up, the time is now.

— David Forbes can be reached at 251-1333, ext. 137, or at dforbes@mountainx.com.