Village of Gates Mills

Before addressing revenue and expense, let me offer a word about process. The day-to-day operation of the Village is overseen by the Police Chief, the Fire Chief, the Service Director and the Administrative Assistant to the Clerk, each of whom is responsible to over uncompensated Mayor and Council. Control over operating and capital expenditures is continuous and multi-layered:

The budgeting process for an upcoming year begins in the fall and concludes at year-end or shortly thereafter with adoption by Council. The process is a bottom-up one. Each department estimates the anticipated cost components of its operations based on expected staffing, past expense experience and new or enhanced services it proposes to provide, as well as its anticipated capital needs.

I hope you find these comments and the ones that will follow informative. It is important for Villagers to be well informed as the cost of government continues to rise in almost every community. As residents and voters we are asked repeatedly to make judgments concerning leadership, taxation and other important matters. My aim is to simplify your decision-making process. Informed judgments generally are good judgments. Copies of these thoughts and more financial information about our Village will be available on our website (www.gatesmillsvillage.com) as well as on our cable television Channel 23. In addition, comments and questions may be sent to me at rsrform@core.com.

On Saturday, May 31, 2008 the Gates Mills Land Conservancy will be hosting a 5K River Run & Walk beginning at 8:30 AM at the Gates Mills Community House located at 1460 Chagrin River Rd. in Gates Mills. Pre-registration is $15 and race day registration is $20. Mailed in registrations must be received by May 28, 2008. Please mail completed entries and payment to Hermes Sports & Events, 1624 St. Clair Ave., Cleveland, OH 44114. On-line registration can be completed at www.hermescleveland.com until 9:00 AM Friday, May 30th. Participants receive a collectible T-shirt, water bottle and post race refreshments by Sara's Place. For more information and a list of our sponsors, go to www.gatesmillslandconservancy.com. Hope to see you there!

The Vials of Life are provided to any Village resident that requests one. These plastic vials, similar to prescription bottles, contain important medical information about family members that is very important to Police & medical emergency responders. The vials, which are to kept inside the refrigerator door, can be picked up at the Gates Mills Police Department. It is important to update the information inside the vials on a regular basis.

Beginning May 7, 2008, a portion of Old Mill Road will be closed indefinitely due to erosion that has compromised the stability of the road surface.

The road closing will affect the section of Old Mills Road from the intersection of County Line Rd. to Mayfield Rd in Chesterland. A portion of the intersection will remain open to allow traffic access to and from Old Mill Rd. and County Line Rd. Signs will be posted indicating detour routes.

Officials from Chesterland and the Geauga County Engineers office will continue to evaluate this situation for a permanent solution.

Because compensation and benefits are such a significant share of all Village expenses (53%), you should know that at least annually the Village surveys 8 surrounding communities to compare labor rates and benefits. Because of individual community historic benefit practices, absolute comparisons are very difficult and benefit valuation by responding communities can reflect their local subjectivity, particularly if the benefit does not have an obvious cost, e.g., the use of village property. Some benefits are mandated by the State as a percentage of pay. A committee made up of both elected officials and other residents reviews these surveys, together with the request of the department heads, in an effort to be certain Village pay rates and benefits are competitive but not excessive. Generally our wages and benefits satisfy that standard even though some neighboring comparison communities are substantially larger in number of residences, number of business organizations and other factors. While we occasionally experience an employee resignation for greater compensation in a neighboring community, this has not been a frequent problem. Unfortunately, when it does occur the Village sustains the loss of the costs of training and uniforms, which are invested in most employees. The product of the review by the Wage and Benefit Committee becomes an important component of each departmental budget proposal.

In 1996, the Village employed 30.4 full-time equivalent (FTE) employees. This year that number is 33.7. The actual number of employees today is 97, but many of those are part-time or seasonal. Gates Mills contains 8.8 square miles and has 55 miles of roads. These are critical components in the budgeting for all services. For example, given Village size, it has been determined that, if we are to have 2 police cars on the road at all times, we must have 12 patrol officers (21 shifts per week per car plus sick time and holiday replacements). A full workweek without overtime consists of 40 hours. The same math applies to the Service Department, particularly during snow season. The Wage and Benefit Committee has determined that current staffing levels are appropriate for the services provided to our residents by the Village.

Beyond Wages and Benefits, the operating expenses of each department are somewhat predictable. Motor vehicles must be replaced when the cost of repair for an adequately functional vehicle exceeds the cost of replacement. For example, our police cars average 4 years of service and 125,000 miles, while our service department equipment averages 10 years and 162,000 miles. As with all of us, the cost of motor fuel is a significant one even though we purchase at bulk rates. Large purchases, such as road salt and other minerals, are bid by Council before commitments are made. The list of operating expenses for the most part mirror those of any other business organization with some notable exceptions. For example, road maintenance, exclusive of major projects, costs more that $300,000 each year, and legal expenses for the routine business of the Village (including the enforcement of our criminal ordinances) is about $129,000. In the area of safety, each police car carries a defibulator recognizing that the first minutes of cardiac care are critical to patient survival, and members of our Police Department are trained regularly in their use. Annually, tens of thousands of dollars are invested in equipment to address potential emergencies and, of course, periodically technical obsolescence requires replacement. The good news is that our various departments consistently live within their operating budgets established by Council.

Over the past several months, in an effort to update Village residents about the ways in which their tax dollars are spent, I’ve written about the cost of conducting the business of Gates Mills. While total operating costs of $4 million are considerable, they are not extraordinary. Among the 14 communities we look to for comparative data, there are nine whose operating budget exceeds ours. (Please remember my earlier comments concerning the difficulty of meaningful comparisons.) More important and most significant, the Village consistently operates within its Council approved and statutorily mandated balanced budget. All of which leads to questions regarding the sources of revenue that fund that budget.

Broadly, the categories of revenue, in no particular order, are fines and costs, licenses and rentals, interest, income and other taxes, inheritance taxes and real estate taxes. The first three of those are not significant in the big picture and so I shall not dwell on them, although I’d be happy to answer any questions concerning them. Income and other taxes and real estate taxes constitute 91% of the Village revenue budget.

The least predictable of the significant revenue sources is inheritance tax. Over the last 26 years these have averaged almost $460,000, but in several years the actual amount was $200,000 or less. Simply said, annual State inheritance tax income, which is transmitted through County government, is unknown until the check arrives. Historically, all inheritance taxes are placed in the capital improvement fund and thus do not offset operating costs. The same is true for gas well revenue. That fund currently has a balance of $1.5 million. It represents the vast majority of the Village’s funds available for emergencies such as repairs to and replacement of roads, culverts, the Village Hall and the CommunityBuilding. Planned expenditures for those purposes will soon deplete that balance.

Municipal income taxes and our share of State sales and other taxes approximate 37% of the budget. The only control available to Council for these items is the rate of tax and the rate of credit against Village income tax for employment taxes paid by residents to the community in which they are employed, both of which have been unchanged since our tax was enacted in 1968. Today other communities are considering increases in income taxes to levels greater than our current one. Because there are only a few businesses operating in the Village, this income is unlikely to change in a meaningful way, short of a tax increase or credit decrease.

The remaining 54%, or $2.35 million, of revenue is from real estate taxes. You may think that total small in relation to the real estate tax each of our almost 1,000 homeowners pays, but we must remember that the Village portion of our current real estate tax rate is only 20%, the balance being for State, Countywide and Mayfield School District levies. While we periodically vote on those “other” tax issues, our limited number of voters means that we have very little impact on the outcome of the vote to enact those taxes. Gates Mills does not have a lot of new residential development and so tax growth is only incremental, even though total taxable property value continues to rise. Real estate tax revenue can only rise as new taxes are voted. Renewals of existing tax levies by law do not raise more money from current homeowners. The total dollar value of a tax levy is fixed at the time it is approved. Only through additional construction can taxes increase unless new levies are voted.

With regard to these levies, each mill of taxation (.0001) produces about $221,500 of revenue. Existing levies are for 3 mill, 3.5 mill and 3.42 mill and expire in 2008, 2010 and 2011 respectively. Altogether the levies provide slightly more than half of the Village operating budget. In addition, the Village has a 1 mill levy dedicated to land conservation and administered currently by the Gates Mills Land Conservancy that has used the funds to protect vulnerable parcels in our community.

The question continually examined by those of us volunteering in Village governance is, given inflation and modest revenue growth, how do we fund ongoing service levels and, if we cannot, which services are to be cut. Next month I’ll share information concerning the use of borrowing to fund some of our costs. In the interim, I invite you to visit the Village web site (www.gatesmillsvillage.com) or to contact me at rsrform@core.com. For those of you without internet access, you may call me at 440-423-0792. Please feel free to ask your questions. Only through information can we make good decisions about a very special village.

The preceding chapters of this series have dealt with organizational structure, operating process and Village income and expenses. If you have missed any of them, they along with the most current five-year cash flow projection can be found at the Village web site (www.gatesmillsvillage.com). The nature of governmental accounting is such that balance sheets like those of business entities are not generally maintained. Typically governments use cash basis accounting that focuses on liquidity. Rarely are assets such as real estate and motor vehicles valued over their useful lives or encumbered by loans. When money is borrowed it is against the “full faith and credit” of the community.

With that backdrop, now let’s look at Village solvency and liquidity. The good news is that the Village assets exceed liabilities by a significant amount, but because most of those assets are operating assets and operating real estate and improvements thereon which are held for use and not for sale, the Village continually must be attentive to issues of liquidity.

The critical financial statistics involve cash, easily monetized investments and debt, both general and project oriented. An important measure for a community such as ours is “free cash”, i.e., the cash in excess of short-term operating obligations and short-term debt repayment requirements. Best practice suggests that a community should have six months of operating cash on hand ($2 million in our case) in addition to the funds necessary to satisfy extraordinary contractual commitments and to service all debt, i.e., pay the interest and principal as due. Because of investments in real estate in the last several years, currently Gates Mills’ free cash is only about $400,000 or 10% of our budget.

The vast majority of communities fund their large capital projects by the issuance of notes and bonds. The term of notes may not exceed the life of the asset being purchased or constructed. Bonds typically have 20-year terms and generally require a sinking fund payment annually to insure that the bonds can be retired when they come due. Two-thirds of Gates Mills’ current debt (about $6 million), both funded and unfunded, was issued in connection with the installation of City of Cleveland Water in the late 90’s. Water assessments and fees will ultimately provide the funds to satisfy those debts. In addition, the Village issued a note for street repair following completion of the municipal water project. The balance on that note is now $1.6 million and is repaid at the rate of $200,000 per year. Beyond those debts the Village owes about $270,000 to the State of Ohio in connection with the wastewater treatment plant and another $1.1 million on various capital projects.

The Long Range Planning Subcommittee of the Village Finance Committee (Council members and other residents) periodically prepares a five-year projection of Village cash needs. The operating cost component of that projection is built from the bottom up by each Village department and challenged by the Subcommittee, particularly as to the cost increase assumptions employed. The income projections also are based on historic trends and projections. Current projection reflects a consumption of our existing free cash in the near future and a shortfall at the end of 2012 of $1.3 million, well below the best practice standard.

Recently, Village Council voted to place on the March 4, 2008 ballot a 2.9 mill five-year levy exclusively to fund road and culvert repair and replacement with payment beginning in January 2009. While it is important for Village Council to have unrestricted levies for the general conduct of Village business, this new levy, if approved, will insure a steady flow of funding for road and culvert replacement until 2014 at the rate of about $642,000 per year. It is believed that even in the face of escalating costs for the raw materials required for these repairs and replacements this should insure safe conditions on our roadways for the entire period.

Year-to-yearVillage revenues are expected to be substantially flat or to decline slightly. This is in the face of expenses projected to increase in excess of inflation. There are a number of factors contributing to each of those unfavorable trends. On the revenue side, with little new construction, flat (or lower) real estate values and successful conservation efforts, our real estate tax base is stagnant. Remember that only 19.73% of all real estate tax comes to the Village. The balance goes to Mayfield Schools, County libraries, welfare, etc. And Village income tax revenues are constrained by a slightly aging community increasingly living off investments rather than wages.

Wages and benefits also play a meaningful part in our increased operating costs. While the Wage and Benefit Committee has maintained our relative position among neighboring communities, wages and benefits (principally health care costs) have added significant expenses beyond inflation, and because municipal accounting expenses asset purchases when they occur rather than capitalizing and depreciating them over their useful life, periodic asset replacement adds to the annual expense burden.

In Gates Mills we have 54 miles of dedicated roads, i.e., those which government is responsible to maintain. In addition, there are more than 150 culverts. Recently the Village has begun inventorying the culverts and, while the age of the newer ones is known, the vast majority have been in existence longer than many of us. From periodic inspection of both roads and culverts we know that time is taking its toll on their physical integrity. While only two of our roads are state or federal highways, over the years our elected officials and service department have been successful in getting contribution from federal, state and county government to aid in some of the road and culvert work. For example, early this year we expect to receive $324,650 from the county and $364,000 from the federal government to help in the repair of Gates Mills Boulevard. But even with that aid, our share of needed work amounts to $424,650. And this is in addition to the approximate $320,040 in the budget annually for minor repairs. Current estimates are that over the next five years we will have to invest an additional minimum of $3,300,000 if Village roads are to be safe and passable.

In a target effort to address this last cost issue, Village Council has elected to place a 2.9 mill levy dedicated exclusively to road and culvert replacement and repair. If approved on March 4, 2008 this levy, which will be for five years and first be payable in January 2009, will cost a homeowner $88.81 for each $100,000 of taxable value. Over its five-year life, it will fund all Village road and culvert replacement and repair, absent extraordinary failures. This is work that must be done if roads are to remain open and safe. This initiative deserves your serious consideration. By voting you signal Council as to the standards you want our Village to maintain. Please vote wisely.

On May 19, 2008 a road repair project will begin on Gates Mills Blvd. between Old Mill Rd. and SOM Center Rd; the project is expected to last through July 17, 2008. Work will take place daily, Monday through Friday, between the hours of 8:00 AM and 4:30 PM. During project work hours, traffic will be limited to local access only; normal traffic will resume after project work hours and on weekends. During brief overnight periods, portions of the roadway will be limited to local access traffic. Signs will be posted to assist motorists with the detour route.

Conducting the business of the Village, i.e., communication equipment, heat and light, motor fuel, trash collection, legal services, maintenance and periodic replacement of operating assets and a myriad of other costs (exclusive of roads and culverts), consumes another 42% of all operating costs. As we evaluate the cost of operating our community it is helpful to recall that in the 42% are such other items as the look-around provided by the Police when our homes are unoccupied, our well equipped and very responsive Volunteer Fire Department, our efficient trash collection which facilitates the State mandate for handling of recyclables, the seasonal beautification of the Village and the maintenance of Village properties such as the community building to mention just a few. Like payroll and benefits, these costs are reviewed monthly by the Clerk, the Mayor, Council and the professional staff. Greater detail on all these costs can be found on the Village web site (www.gatesmillsvillage.com) or you may pose your questions to me at rsrform@core.com.

Perhaps the largest of the non-people costs incurred annually by our Village are for the general maintenance and upkeep of roads and culverts. While $200,000 plus of those costs are the missing 5% of the operating expenditures, they are only a small portion of the road and culvert challenge experienced by all communities. We rarely stop to think about the age and useful life of 55 miles of roadways (including adjacent shoulders and guard rails) and the more than 150 culverts in Gates Mills. There is no comprehensive record of the age of most of those assets, but it is fair to say some are quite mature and they experience constant wear and abuse from traffic and the elements, particularly in winter, and periodically require significant renewal or replacement.

Our Service Department’s conservative estimate of the necessary capital expenditures for roads and culverts over the next five years, above an almost like amount that will be provided by the Federal, State and County governments and the operating budget, exceeds $2.8 million. While at times we think of the Village as an out-of-the-way community, there are literally tens of thousands of vehicles daily which pass through the Village and add stress to our roads and culverts, and that wear takes its toll. Through periodic inspections, the Service Department maintains a long-range plan to address wear and deterioration, but even those estimates have no contingency for surprises which do occur.

Training and equipment for Village safety forces are an ongoing expense. Did you know that Gates Mills is a partner with seven other communities in a SWAT team? Its armored vehicles and special equipment are expensive to maintain and technological obsolescence is a frequent occurrence. The jaws of life used to pry or cut open a damaged vehicle are used frequently. The infrared body heat sensing equipment maintained by the Fire Department, while not used frequently, can be life saving in a smoke-filled house fire. The Village regularly invests in training for the safety forces to insure residents can have the most efficient services.

And so it goes. Looking at Village costs, I’m struck by the ever-growing challenge to sustain our safe and comfortable way of life in Gates Mills without overtaxing our citizens. With that thought in mind, when I next address the tax subject I plan to share with you the income side of Village finances. There you will see both opportunities and challenges.

Beginning May 19, 2008 a road repair project will temporarily close Old Mill Road between Cardinal Lane and Chagrin River Road. The closure will last until approximately July 4, 2008. Signs will be posted to assist motorists with the detour route. Some traffic congestion is expected and motorists should plan accordingly.