AF City Council Interviews: City Finances and Inflation

05/31/2023 / David Rodeback

I asked members of the American Fork City Council for their thoughts about the City’s financial condition. I had a particularly detailed conversation with Councilman Shelton, who has professional expertise in financial matters, about the effects of inflation on City finances.

City Finances and the Fund Balance

State law requires municipalities to keep a minimum cash reserve of 5% of the current fiscal year’s budgeted revenue. Until 2021 the maximum allowed reserve was 25%; now it’s 35%. (See Utah Code 10-6-116.)

One significant point of pride among all five council members is that, over the past several years, the City has built its reserve from below 10% to the maximum allowed by law, 35% — and the intention is to keep it there.

This is not just a rainy day fund, Councilwoman Staci Carroll explained. It has allowed the City to be opportunistic — for example, in acquiring a large piece of land for a planned regional park south of the freeway.

Councilman Ryan Hunter said, “We’re as strong as we’ve ever been, financially.”

Councilman Kevin Barnes pointed to an important source of the City’s fiscal stability: large sales tax revenues from the car dealerships in the city.

Councilman Clark Taylor said, “People would be pleased if they’d come in and see American Fork’s budget. We’re austere. People don’t think we are, but we really are. And we have top-notch staff.”

Clark Taylor - American Fork City Council — Councilman Clark Taylor (official photo)

The city council’s involvement in the budget process begins in February, he explained, and stretches into June, with the approval of a final budget. (The City’s fiscal year 2024 begins July 1, 2023.) He said the FY2024 budget will have a robust $12 million budget for roads, and that the City has maximized its use of available grants from the Mountainland Association of Governments.

He listed some budgeting challenges which involve unfunded mandates from state and federal governments, such as the installation of water meters in the pressurized irrigation system, increased pensions for public safety employees, and changes in public safety radio frequencies.

I asked council members about what appeared to me to be the quietest property tax increase I’ve ever seen — last year. Collectively, they made several points.

First, residents with whom they spoke about the increase, before and after it took place, were reasonable and understanding. Councilman Barnes consulted a lot of his neighbors, trying for a good cross section, and “didn’t get much flak.”

Councilman Shelton said, “What I hear from residents is, I get it, we have need for things. We just can’t pay for it all at once.” He wants the City to devise a new metric for considering fee and tax increases: the total cost to the resident of the changes proposed in any given year. This would help the City stagger needed increases to spread out the total impact on residents.

Second, if there is an increase this year, it will be small.

Third, the 2022 increase was the first property tax increase since 2007, and that is unwise. Council members and residents alike appear to understand that it’s wiser to have small increases more regularly (the Alpine School district’s approach) than large increases every decade or two. Councilman Barnes called this “a critical lesson.”

More than one council member recalled two-term former Councilmember Heidi Rodeback advocating that approach during her service on the council (2006-2013), to no immediate effect — but now it is becoming conventional wisdom.

Councilman Shelton said, “Whether we raise taxes or not, we ought to have the discussion every year” — partly for the sake of public involvement, he said.

(I note that the crucial reason for small, regular tax increases is that Utah’s Truth in Taxation law — by design — slowly strangles municipal budgets unless there are regular tax increases to keep up with inflation. The chief mechanism here is the county’s calculation of each city’s certified tax rate for each year, which does not consider the effects of inflation. Here is my detailed explanation of the certified tax rate, which, perversely, can force a city to call a lowered rate a tax increase, or in rarer cases say that a rate increase is not a tax increase.)

Inflation and Its Effects

Several council members pointed out one key effect of inflation on the City: labor costs keep going up, and they tend not to go down when other inflated prices may. This complicates competition with other employers and other municipalities to hire and retain excellent employees.

Kevin Barnes - American Fork City Council — Councilman Kevin Barnes (official photo)

Councilman Barnes recalled Salt Lake City and another city or two in the region trying to attract police officers away from smaller cities. In January 2022 American Fork gave its police and fire personnel a raise, which helped, he said, but hiring and retention are still a challenge. This extends to other City departments too; “we have all sorts of openings now.”

He said that many prospective employees compare only salaries (where the City is less competitive), not whole compensation packages, including pensions and other benefits (where the City is more competitive). So it’s particularly hard to compete with private sector wage increases at present.

Bonds being an important tool for the well-managed city, I asked Councilman Shelton how drastically inflation has changed the cost of bonding. For existing bonds, he said, there is no effect, because all the City’s existing bonds have low fixed rates. For new bonds, rates are up slightly — because we’re talking about 20- and 30-year bond rates. Short-term rates are higher.

Rob Shelton - American Fork City Council — Councilman Rob Shelton

Meanwhile, inflation erodes the value of existing debt — a silver lining, he said.

Addressing the topic of inflation more broadly, he said, “The city is probably in the best financial position it’s ever been in because of the root causes of inflation.” Drastic, inflationary increases in the money supply during and after the pandemic were partly used to send funds to municipalities, including American Fork. They were partly used to send funds to households nationwide, which led to additional consumer spending, which boosted sales tax revenues. And higher inflation rates lead to higher interest rates, so the City is earning significant interest on its reserve (the fund balance).

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