Revenue Crunch Not Yet Sobering
Palm Coast City Council’s Ambitions

For Palm Coast, the middle of the past decade yielded flush years that filled city coffers. Reserves alone topped off at $48 million in 2006. The city is not about to see that kind of wealth again soon. Reserves in the general fund and other city funds are at their lowest since the city incorporated 10 years ago. In inflation-adjusted dollars, today’s reserves are 18 percent lower than when the city incorporated. They’re projected to go lower, with no new revenue yet in sight, and with long-term debts totaling $177 million.

For all that, City Manager Jim Landon is still pushing several optional projects with huge costs: a new city hall, which would cost at least $10 million; a water desalination plant, which would cost several hundred million dollars; and a city-owned industrial park. Palm Coast would bear the lion share of the construction costs of the desalination plant and the park. Residents would pay significantly higher water bills. But there’s no interest among council members in raising taxes (unless it’s to underwrite the Flagler Chamber of Commerce’s pet commercial projects).

So far, Landon has support for those projects from Mayor Jon Netts. The rest of the Palm Coast City Council, which—with Councilman Frank Meeker’s occasional exception—Netts and Landon disproportionately dominate, is going along.

On Tuesday, the council meets at 9 a.m. to set its goals for the coming year (at its City Walk offices). The sessions are more talk than substance. Last year’s lasted almost six hours. But they do produce a list of goals that formalize the council’s intentions into a hierarchy of the doable versus the desirable. They also provide the public with a clear look into the council’s understanding of its own finances and the city administration’s efforts to shape that understanding. Despite the last few weeks’ revelations of grimmer numbers than they’ve been used to, council members have not changed direction much. Nor has Landon given them reason to. Last year’s top goal was more city signs and gateways, a goal met many times over. Other top priorities included the new city hall, the desalination plant, the industrial park, and a couple of road improvements.

This time, goals are being set for an election year: In September 2011, Netts and council member Holsey Moorman are up for re-election. Mary DiStefano is term-limited, but she could challenge Netts for the mayor’s seat. Those dynamics will be in play as council members angle between their interests, voters’ expectations, the city’s capabilities, and, more than ever in its young life, the city’s limitations.

Here are some of those limitations.

Three sources of revenue filled city coffers during the flush years: Property taxes, development impact fees, and building permit fees. All three are in decline or worse.

Property taxes generate revenue for the heart of the city’s operations—administrators’ and workers’ police and fire protection, parks, and so on. Property tax revenue peaked in 2007 at $30.2 million. For the past three years, including this year’s projection, property tax revenue has declined to about $26.5 million. There’s no way to increase that number except by building more homes or raising taxes. Neither is happening, though it explains Landon’s desperation to push along two massive new developments west of U.S. 1—Old Brick Township, which would add 5,000 homes, and Neoga Lakes, which would add 7,000. The Neoga Lakes developer, Dan Camp, however, said last week that construction wouldn’t start until the market turns around. And neither development has won regulatory approval yet.

Impact fees are a one-time tax on builders, paid at the time of construction of a home or a commercial property, and tacked on to the buyer’s price. The impact tax is designed to defray the cost of development by providing money for roads and other infrastructure improvements. As construction activity collapsed in Palm Coast, so did impact tax revenue. In 2006, impact taxes brought in $11.4 million. Last year: $1.3 million.

Permit fees: During the construction boom, Palm Coast socked it to builders and developers, charging permitting fees at such a steep rate ($500 to $600 for a single-family home) that it discounted them 90 percent since last year. Those fees were bringing in revenue averaging more than $6 million a year between 2004 and 2006, generating a huge surplus in the building department. Last year’s revenue was down to $1.1 million.

One of the goals at the city council’s session last year was to have a financial reserve of 10 to 20 percent of government operations. The financial report for the year drew a grimmer picture. General fund revenue decreased by over $1.5 million, but the city also spent $1.3 million more than it had the year before, primarily on the two new fire stations and more police. Reserves in the general fund as a percentage of the previous year’s spending was 6.1 percent, a level almost unknown in Palm Coast’s history.

It would have been even lower if the city hadn’t sold its old city hall to Palm Coast Data for $2.9 million as part of a deal’s sweetener to keep the company from bolting. But the city, looking for cash, had just as much of an incentive to leave the building and sell it. That $2.9 million was a one-time revenue shot.

“Overall I’m confident that things will improve,” Netts said. “And as they improve those reserves will go back up.”

Ray Britt, the city’s finance director, says funds are decreasing, but in good part by design: the city built new parks and two fire stations with impact fees, it four-laned the north end of Belle Terre Blvd. for some $27 million, about $14 million of which will be spent this year. Those construction projects are ending, and with them the need to spend money. “We’re not going to do more projects,” Britt said. “In other words that trend that you see there is not going to continue.”

But one project remains a money drain on the city: water desalination. Flagler County, St. Johns County, Flagler Beach and Bunnell have all abandoned the project. Each drop-out meant that Palm Coast share of the project cost increase.

And another—Landon’s and Netts’ desire to build a new city hall—would add yet another strain. In 2005, 82 percent of voters rejected Palm Coast’s proposal to build a new city hall—a vote more lopsided than any in the city’s history. Despite that vote, plans and presentations continue on a new city hall that would be paid for without asking for voters’ permission. Landon spent the last several weeks laying the groundwork for more action on  a city hall, speaking openly of his distaste for Palm Coast’s current offices at City Walk. The city is paying $240,000 a year for those offices. At that rate, the city could be there for 42 years before it reaches the $10 million cost of a new city hall. (The comparison is hackneyed, but no more so than the city administration’s own projections of static costs when it presents its city hall plans.)

“Let’s assume the economy improves. That means space is going to be more valuable, and therefore one would assume the rents would go up at a faster rate,” Netts said, defending the new city hall initiative. For now, construction costs are lower. “Take all this in consideration. It probably makes sense to look at construction.”

Tuesday’s goal-setting session should give council members the opportunity to clarify where they stand.