Town faces declining sales tax revenues

Pagosa Springs Town Manager David Mitchem will address the Town Council today, presenting a February sales tax revenue report that might indicate a local economy in decline.

The initial report, from April 13, showed sales tax revenues down 25.46 percent from the same month last year — a 5.78 decrease in sales tax revenues to date for 2009. However, according to Don Warn, Archuleta County Finance Director (whose office generates county and town sales tax figures), the original report omitted revenues from five local businesses that would have added anywhere between $20,000 to $38,000 to February’s total.

In the presentation today, Mitchem states that, even with the addition of a full $38,000 to February receipts, the reduction would still amount to a sales tax revenue decrease of 16.6 percent.

The news follows mixed sales tax revenue reports from the past few months. While reports have been positive recently, with January sales tax receipts indicating a 5.71 percent increase over the same month last year and a 7.15 percent increase in December sales tax, up from December 2007, November 2008 was down 11.67 percent from the previous year.

According to Mitchem’s report, “Town’s staff is fully prepared for a fifteen-percent expenditure reduction, should next month’s revenues trigger further cuts.”

Mitchem’s report refers to the budget policy adopted by council last November that allows the town to respond to decreasing sales tax revenues on a month-by-month basis. As passed by council, the policy called for a 5-percent reduction in the 2009 budget compared to the 2008 budget, but also stipulated monthly monitoring of town revenues in order to recognize fluctuations in those revenues. Given a significant dip in the revenues (based on reports from the previous two months), the town could respond with further budget cuts in response to decreased revenue streams.

By policy, a 10-percent drop in revenues would lead to a 15-percent budget cut, and a 15-percent drop would lead to a further 20-percent reduction in expenses. Cuts to the budget would entail as little as asking department heads to excise nonessential services (with a 10-percent drop in revenues) to implementing a full hiring freeze and focusing on only essential services (in the worst-case scenario). The policy states that “the town will not delay its response to changes in revenue streams,” suggesting that any such changes reported would necessitate immediate response by the board.

Should the March sales tax receipts match those from February, however, the town would be bound to a 20-percent expenditure decrease, contrary to Mitchem’s report prepared for council today. Simply stated, by policy, another month registering over a 15-percent decrease in sales tax revenues — close to this month’s estimated 16.6 percent decrease — would require a 20-percent budget cut and not the 15-percent cut stated in Mitchem’s report.

Furthermore, if for some reason the 25.46 percent decrease was accurate and March receipts show a similar decrease (i.e. over 20-percent), it is uncertain how the town would respond as the budget policy only anticipated revenue decreases of 15-percent. Clearly, neither Mitchem nor the council conceived that the economy — local or national — would fall to levels beyond a 15-percent drop in sales tax revenues.

Hearing the report today, council will most likely consider the broader implications of the news but wait for a report on March 2008 sales tax revenues before taking further steps. Another significant decrease in sales tax revenues for March would not require action by the council as, per policy, further cuts to the budget would be automatic, across all town departments.

However, action by council might be required should a March decrease in sales tax revenues exceed 20-percent, since policy does not enumerate how much expenditures would be slashed given sales tax revenue decreases beyond 15 percent. Today’s discussion in council could shed some light on how council would proceed next month — whether a 16.6 percent or 25.46 percent decrease for this month, compounded by how sales tax revenues are reported for March.

Conversely, if March shows an increase in sales tax revenues, likely driven by spring break tourism in the area, council would need to either look at those revenues over a two-month period or an aggregate report of revenues for the first three months in 2009. Given the volatility of the national and local economy, possible outcomes most likely outnumber possible solutions.

For now, with uncertain numbers for February and March figures unavailable until mid-May, about all council can do is wait and see. As council member Shari Pierce said, “I believe we are on track with the policy we put in place, but I would rather discuss and continue to be proactive as I believe we have been.”