BY MAIRE O’NEILL
Editor’s note: The following article is longer than most, however, it explains some important background on the FY2024 County budget such as the decrease in GRT revenue from Los Alamos National Lab that is projected by County staff and the reasons given for proposing the half-cent gross receipts increase.
Five out of seven Los Alamos County Councilors support a half-cent gross receipts tax increase that is reflected in the FY2024 County Budget. What’s strange is that the first time the proposed increase and the reason behind it were mentioned was at a County Council meeting was March 28, just three days before the FY2024 Proposed County Budget was posted on the County website.
After three nights of budget hearings, the proposed increase is still not a done deal. Council Vice Chair Theresa Cull made a motion to direct the County Manager to return with two ordinances for Council to consider, one that would increase the GRT by .5 percent effective Jan. 1, 2024 and the other implementing the increase July 1, 2024.
Councilors Denise Derkacs, Suzie Havemann, Melanee Hand, Keith Lepsch and Cull voted yes, and Councilors Randall Ryti and David Reagor voted no.
So how does a County with a close to $40 million surplus and a proposed budget of $382,810,801 come to the decision that an increase in GRT is necessary? Throughout the three days of hearings County Manager Steve Lynne adamantly advocated for the tax increase, at times discussing other options to cover the $6.5 million shortfall he is projecting when questioned by councilors, but steadfastly holding on to his belief that not implementing the half-cent increase this fiscal year could eventually lead to a $120 million shortfall over the a 10-year period. This shortfall, Lynne explained during the hearings, is due to a projected decrease in Los Alamos National Lab spending on construction, and uncertainty about GRT revenue due to the exemption of manufacturing from GRT for plutonium pit production. While the projections have been discussed by County staff obviously for some time, there has been no open discussion in Council chambers, even when Department of Energy Field Office Manager Ted Wyka was on the agenda at a recent Council workshop in White Rock.
At the March 28 meeting, Lynne, speaking under his County Manager’s Report agenda item, mentioned that a “significant item in the proposed budget will be a proposal for a new half-cent GRT increment”.
“We’ll have a fair amount of discussion during the budget hearings about that but I wanted to mention it so it’s not 100 percent surprise to you all,” Lynne said.
On April 13, Council Chair Denise Derkacs submitted a column on the budget hearings to local media for publication that stated that “the budget assumes a 0.5 percent increase in the municipal gross receipts tax, beginning January 1, 2024.” See https://losalamosreporter.com/2023/04/13/council-chair-denise-derkacs-county-budget-hearings/
On April 17, the day the Budget Hearings opened, Lynne also sent a column on the budget for publication https://losalamosreporter.com/2023/04/17/fy-2024-budget-hearings/.
At the outset of the hearings April 17, Lynne said he certainly understands that initially the proposed increase seems a little counter-intuitive.
“We all know that the Los Alamos National Laboratory is hiring and that today our GRT is higher, but in the long-term view when we think about the future, we’re expecting a significant decrease and fundamentally the proposed GRT increase replaces that decrease,” Lynne said.
He said the County doesn’t often change its taxes and the last time taxes were changed for any kind of general County revenues was 2007. He said if Council agreed with the concept of the half-cent increase or another version of the concept, it should be reflected in the final action Council would take. He said Council had the option at any point along the way if Councilors felt there had been enough discussion on the GRT, “logistically having some sense of the Council about this topic would be helpful, primarily because if it’s not going to be approved as proposed, we’ll probably need some time to readjust some significant portions of the budget”.
“After the budget hearings if Council approves any type of GRT change, the suggested motion is to direct us to come back with the appropriate ordinance to implement that change. The way that works in our state, the state limits us to making changes on July 1 and January 1. So on this first year, if there is a change, it would be half-way through the year so what we’ll see in FY24 is only half a year of revenue associated with the new increment,” Lynne said. “And then going forward it would be a full year. So the equivalent of what’s being proposed, which is a half-cent, translates into about $6.5 million for half a year in FY24 and then approximately $13 million in FY25.”
He again mentioned that one of the primary drivers and the reason that the increase is being proposed is that for the long-term, a major decline in gross receipts tax revenues is projected.
‘The magnitude of that decrease is about $15 million. At the most fundamental level what’s being proposed is simply to replace what we’re projecting will be going away. That projection is based on the fact that manufacturing in our state has significant exemptions in the state gross receipts tax law and in the past when LANL did manufacture (plutonium) pits, they took advantage of that exemption and that’s the expectation going forward for moving into the manufacturing mode,” Lynne said.
He noted that the County’s Capital Plan is “very robust”
“There’s a lot that we need to address and get to. In the near-term, for the first two to three years, the increased gross receipts tax helps the Capital Plan and helps mitigate how much debt we need to issue in order to execute that plan,” Lynne said. “It certainly improves our fiscal condition especially going into and anticipating bond issuance. Having additional revenues, additional debt service coverage ratios – all of that puts us in a better position for possibly a healthier bond rating and related lower financing costs.”
He continued, “One of the most important things when I think about it is the financial flexibility. There are large changes projected and some significant unknowns and having that additional financial flexibility, it’s something that the County has experienced before. Being essentially a one-employer town, we are subject to quite a bit of unexpected variability from time to time. We do our best to project given the information we have today, but that information could be very different a year from now. Again, we projected our best… but the amounts and the timing certainly could be different”.
Lynne said there are certainly down sides to the GRT increment.
“Certainly an increased tax burden on individuals is not a pleasant thing to contemplate. No one ever enjoys that aspect of it. It’s certainly an increased cost to LANL. They are the major employer but in this particular case, they’re also the major driver for why we’re looking at this,” he said.
Lynne said he had tried to find some examples of how an individual pays GRT but that there’s just not good information out there. He estimated that for a household of four with a net income of $60,000 with an estimate that 1/12th or $5,000 of that income on taxable items at a half-cent GRT, the new increment would be a new tax of $25. He said that gives, given those assumptions “a sense of the potential magnitude of the negative impact of the potential impact on a household or on an individual”.
“I also wanted to share some comparisons because people typically ask about that and it also provides some context for this discussion. Our neighbors in some of the communities that we consider comparable – currently their average GRT rate is about 8.14 percent. Our current rate is 7.1875 percent and if the half-cent is included as proposed, our new rate would be 7.5625 percent. Anyone doing the math might notice that’s not a half-cent higher than our current rate. It just so happens that the state is lowering theirs by one-eighth of a percent,” he said.
He said statewide in the county seats, the average GRT rate is 7.95 percent.
“Los Alamos is currently 30th out of 33 in terms of being the lowest rate and with this proposed rate we would be about 25th out of 33. Since the last increase in 2007 the CPI has increased about 45 percent and the proposed year change is about 15 percent. That’s how much our revenue would change based on this new increment. It includes our municipal increments, our county increment and the state share increment. All three of those buckets of GRT generate revenue for the County. It excludes the rest of the state increment and the NCRTD increment,” Lynne said.
Councilor Randall Ryti asked when County staff became aware of the prospect of the decrease in revenues and if it was sometime earlier this year.
“We’ve been, I’d say, aware of the possibility but it’s really this year that we had substantive discussions with LANL staff and had, I’d say, enough information to do a real projection,” Lynne replied.
Ryti said it seemed like it would make sense to have some sort of vote on the GRT increment instead of rolling it in with the rest of the budget, noting that a there were a lot of things that would be changed it Council didn’t go with the half-cent increase. He said the timing of the increase would be another factor.
“If we act relatively soon it still wouldn’t be until after July 1 – it would be half a year. It seems like it would be important to understand if this is that urgent that we have to do it right now. It seems like we need to understand where we are relative to revenues even for next year before we really proceed,” Ryti said.
With regards to the urgency issue, Lynne said one aspect of that has to do with part of the County’s history and the fact that the GRT increment is going to help with the Capital Plan.
“Part of the County’s history has been the fact that a lot of our infrastructure was not built originally built by us. It was built by someone else and given to the County. We’ve had this unusual situation of having to learn how to absorb into our financial planning the process of infrastructure major maintenance and major replacement and we’ve done that better in some areas and in some areas I think we’re still catching up. And some of that’s reflected in what’s in our Capital Plan. Part of what we see over the years with some of our infrastructure is that we didn’t catch up as quickly as we could have or should have perhaps. I’ve heard other councils and other councilors comment, ‘Well those rates should have been higher earlier’,” Lynne said.
He continued, “Part of the reason for proposing that is to not fall into that trap. Again, I understand new taxes are not popular, but obviously I’m recommending that this not be kicked down the road. That’s one aspect of it. The other is the logistics associated with it, given the uncertainty. So we could say, ‘It’s uncertain, so let’s wait’. And we can walk through scenarios. But I want to describe it very generally. There are two aspects to it – timing and magnitude. If we just wait let’s say a year and do a half cent, we’ll lose either half a year or a full year of revenue and that’s one time. So that fix is perhaps relatively simple.”
Lynne said obviously it could be fixed in a lot of ways but “one simple thing might be to look at our Capital Plan, pick a large new item and defer it”.
“Just the timing aspect alone might have a relatively simple or potential solution. If it’s the overall amount, it’s a very different sort of equation because that’s recurring. So again we’re looking at projecting a loss of $15 million. The proposed increment doesn’t even cover all of that. If we cut that in half and just do a quarter, what we’ll see is a recurring loss in the neighborhood of another $6.5 million and that’s a very different thing to deal with in the long-term,” Lynne said.
Councilor Ryti noted that there is the possibility of bonding certain items in the Capital Plan.
“What always occurred to me was the broadband initiative that’s in there for $35 million, and just like the GRT increment, some bonds are voted on or you can elect to vote on them and that would be a way to know if voters bought into the project if they voted for it. It seems like that’s an alternative to have a mix of one or the other. We don’t have to pick just one; there are a lot of options, which has me wondering about the need to do it right now. Obviously if we kick the can down a tiny bit, making sure the public is aware of this, we still have time for an ordinance but then you still have to know what is your budget assumption,” he said.
Ryti said it felt like Council was discussing the whole budget in one moment because it seemed like a very complicated process if Council didn’t get resolution on the GRT increment.
“I also feel like I’m not sure the public has become aware of this increment. The $25 Mr. Lynne had estimated per family sounded nominal compared with other increases. There’s also the $20 million in commodities increases for utilities that’s spread across all the ratepayers who are going to pay that. There’s a lot of increases already in here and I think that’s part of the sensitivity. If we can understand that this is a small increment to the average taxpayer and that’s one positive for it but it is still some impact. I wanted to get some better idea on what the other options might be and maybe take an increment that has an election and see if the voters would approve adding it because there’s a history of that happening with GRT increments in the County. Has that been considered,” he said.
Lynne responded that it had been and that he would probably recommend against that.
“I think fundamentally this is a budget exercise and our charter does provide for referendum but actually specifically excludes it for tax decisions and that’s for a reason. It’s just not the type of activity that’s well-suited to the referendum process. As you’ve just highlighted, there’s quite a bit of complexity and really conveying all of that effectively into what might be a well-informed election-type decision is a reason why that exception in our charter is there. That would be staff’s advice on that particular item. I think the conversation they alluded to was perhaps bonding on a specific project like broadband and I think we could go back and revisit this topic and look at alternatives if that is what Council wants to do,” he said.
Lynne said that if Council chooses to go with the half-cent increase and finds in two years that it’s not really necessary or the impact isn’t that great, the GRT can always be adjusted downward and all that will have happened in the near-term is that it will have funded the Capital Plan.
Councilor Suzie Havemann asked how confident the County is that other Lab activities are going to be diminishing. Lynne responded that certainly since 2019, the big change has been the ramp up.
“I’d say the confidence level in both the federal posture and the Lab itself in the movement towards pit manufacturing. In terms of their infrastructure plans it’s been talked about for quite a long time but it’s evidenced by their hiring, they are doing it. The big change has been their budget, which has close to doubled in the past three years. It’s a fairly dramatic change. Part of the conversation, part of the question I asked them and part of my concern when we look forward, a fair bit today is construction and so years ago when we did this projection we were showing a big spike for construction and a big drop off and I was concerned about that and asked that question,” he said.
Lynne said the response he got had two elements. One was that the original plans LANL had for construction were even more dramatic and would have had a very large spike and a very large drop.
“Their capital plan has changed and what they shared is that as construction drops off, they’re expecting operations to ramp up and then the total budget will be relatively level at this new higher level, so from this $4.5 billion number, they’re really projecting it in that neighborhood for several years out. So, yes there’s a decline in construction but the operations side is expected to pick that up. Then it’s a question of how much of the spending is taxable and it’s a question we have every year with them. Is there any big change you’re expecting in taxability, because the budget doesn’t matter. What matters is taxable spending and there have been times when there have been other swings so that the confidence level I’d say in terms of timing plus or minus a year is plus or minus 25 percent,” he said.
County CFO Helen Perraglio noted that GRT revenue has ramped up to about 117 percent higher than when County staff were talking with LANL this time last year.
“We’ll see that in some of our proposed (revenue) but as far as decline, it could be somewhere between 15 to 20 percent, maybe even higher. The reason why is because some of it is unknown as to how (LANL) will claim their exemption and we’ve been working with them to try and understand how that works,” Perraglio said. “They will be looking back for all the R&D, so the best way for me to explain it and for me to understand it on my end, is that all this ramp up we’re seeing, a lot of it is part of their R&D spending. They can look back to claim their credit and so we don’t know how far or what magnitude of their budget is on that R&D but they can claim their credit based on dollars we’ve already seen come through as large increases.”
She said as the County continues to have discussions with LANL, as soon as the County has more information, “as soon as they do to plan from the information that we have today, this is our best guess as to the timing and we see the significant decline in our projections starting in FY27 and so you’ll see about a $15 million decline there”.
Chair Denise Derkacs noted that there are several options on the proposed GRT increase.
“We can’t not do it. We can lower the amounts, we can delay the amounts, we can do incremental increases; there are lots of options. But for this fiscal year, we’re looking at $6.5 million less in revenue if we don’t do that .5 percent increment beginning Jan. 1. The easiest place to make money from is the Capital Improvements because we’ve already tentatively approved the budgets to just keep our departments functioning. So when I look at this list the one project that sticks out to me, that I personally support and want to see happen, but that may not be as critical to happen immediately is, I hate to say this – the WAC building,” she said. “Most of the other things I’m seeing on here are infrastructure-related, program related, maintenance-related – things that the public has told us they want us to fund. So I would put forth that maybe we don’t fund as much and that if we don’t do that what is the ripple effect of not doing that this year. There are a whole bunch of things that we had hoped to juggle around and move into that space to free up other things. I’m putting this out here for discussion.”
Lynne said he was hoping before getting to specifics to have some conversation about the options he had presented and see if there was some kind of nexus or trend in Council sentiment.
“What I was hearing you say sounded like a presumption of just pushing it out a year but that’s one option. Before diving into specifics if there was some kind of consensus on what path to take. There may not be at this point and we might have to have several iterations back and forth and that’s okay as well,” he said.
When it came time to decide about the GRT increase, Councilor Melanee Hand kicked off the discussion.
“Basically staff is asking us to get a feel for where we stand on this so that we look forward. I think all of us have some idea of where we stand on that. If you want me to put it out there first, I’ll put it out first. I think I would go either with Option 1, which is do it now, .5 percent, and the reason why is our community survey says we want and need certain things and that budget responds to those citizen needs. One way or another we’re going to have to pay but waiting most likely means it will be more expensive later and we have already waited too long for many of the things that are on that list because I’ve heard it year after year when I was on different boards etc. I’ve been hearing these needs for many years. We can delay it but I think even though the times are tough I think it’s always going to be more expensive if you wait,” she said.
Councilor Suzie Havemann said she understands that it can be jolting when the public hears about a tax increase of any kind without a lot of time to really soak it in and understand the ramifications.
“And there’s always a little bit of reluctance to want to grow your local government. There’s a fear of empire building. Fear is not the right word – A resistance to want to have your local government do some empire building and just growing, growing, growing. I feel like this tax is for the most part going to impact Triad and the Laboratory’s budget and I think that the benefits outweigh the half cent increase,” she said.
Havemann told Lynne he had made a good point when he discussed how a family of four making $60,000 – their average local consumption is about $5,000 and their GRT impacts their personal budget is about $25.
“I’ve thought about that too in a whole lot of different scenarios. I thought about it for retailers, service providers, professionals here. I guess what I’m trying to get to is I think that Councilor Hand said it very eloquently and I just absolutely couldn’t agree more. I’ve heard it too and I agree, you pay now or you pay later and I think we’ve got a lot of needs in this community and it’s kind of time that we step up and get to investing in those things. So I would support the very first option, which is basically what you present in your budget,” she said.
Councilor Hand said she also wanted to mention that “many or most of our citizens are going to benefit from the things that we’re spending the money on”.
“There is an impact, I understand, for lower income individuals but those lower income individuals are also going to benefit from those programs. So we need to recognize that these are benefits for many people, not just a few,” she said.
Vice Chair Theresa Cull said she agreed with Councilors Hand and Havemann.
“I don’t like to see tax increases but I’ve also been hearing from a lot of people that we need to really get to maintaining what we’ve got. I never believe what the Lab says about funding in the future to be honest with you. If something changes and the projections that we’re making right now aren’t accurate, I would definitely want to revisit this in the future,” she said.
Councilor David Reagor expressed concern that if GRT rate is increased now, all that money will be spent.
“And if a crunch comes up in the future you have to raise it again because it’s a mentality and that surplus will be gone by the time we get there. When the Lab contribution shrinks that surplus will all be gone and we’ll have to raise it again for that future surprise or cutback. So I think we wait until we see that for sure and understand it’s in the planning but it’s not here yet so we don’t worried about it. So I would say we do not raise the taxes and let all of the state cut show up so it will be down around 7 percent,” Reagor said.
Councilor Randall Ryti spoke at length about the proposed increase. He said he had looked at the GRT numbers from the state trying to find information that he could benchmark.
“I appreciate Mr. Lynne’s approximate numbers and when I looked at the numbers I thought he was a little bit off because there’s more taxable than we think about. I went to my utility bill – there’s GRT on that so everybody pays that and it’s on the gas/electric. Unfortunately the commodities are also increasing,” he said. “It is a complicated issue because there’s a lot of equity involved in considering this and whether or not you should be collecting the revenue now.”
He noted that there was a 2 percent increase to Social Services and 1 percent to Cultural Services.
“I think that some of the programs that were looking at supporting people – we’re not doing that in this current budget. So I’m concerned about that. If we look at the revenues, historically it was in the $4-$5 million range was the transfer from the general fund to the CIP for this period. Now we’re looking at numbers that because of this tax – that’s part of where we’re short falling – there’s transfers being projected to the general funds that are, because we’re going to have the revenue, $21 million, so it’s kind of like we’re creating a deficit because we’re transferring money to the CIP,” he said.
Ryti said he understands the need to do the projects on the CIP list.
“But the question I still would raise is what other options do we have? I’m somewhat reluctant without knowing that we’ve exhausted the options available to us, that we just go ahead and adopt (the increment). Certainly that’s one solution but it doesn’t seem like it’s the only solution out there because we could find the missing $13 million basically in that transfer row, which just means you can’t do as many projects,” he said. “Is there a way of ranking them if we wanted to do all the projects that we can if we implement the half percent increase. Some people are struggling if it’s $100 a year and not $25 for some people with lower income. And it’s a number that we don’t have to implement. We have to charge people the commodity price for utilities. We can’t subsidize that per the charter and it doesn’t seem right anyway….. We’re collecting an extra $6.5 million and it doesn’t seem like we’re going to be at a negative budget for next year. I don’t really support the first option.”
Councilor Keith Lepsch’s comment about the proposed GRT was “that the budget we just approved kind of requires this”. Councilor Ryti disagreed.
“I think I had noted that it doesn’t require this. Theoretically in the out years we will be going very negative with the revenue scenario, but our rainy day fund was still well above the 20 percent requirement even subtracting $6.5 million,” he said.
Ryti complained that there were no other options being brought to the table. He said it’s hard to come up with solutions if there aren’t any other options being considered.
“I don’t feel like it’s inconsistent to vote for the budget but not vote for this because it is a very narrow solution,” he said.
Chair Derkacs verified with staff that 39.64 percentage of the proposed budget and that if $6.5 million was deducted and the GRT rate was not increased this year, the percentage of non-assigned funds would still be 36.02.
Cull said the problem is if $6.5 million is cut from FY2024, what is that $6.5 million.
“Are we still going to want to do it in FY2025 and what does that do to the out years? Without having some kind of analysis or something showing what effect that might have, and what we might cut, it’s really hard to actually postpone the increase. I’ve also thought about reducing it by half, starting it in January 2024 and adding the other half in July 2024. Same issue, what would you cut. We could have said no to about $3 million in options,” she said.
Lynne said the process would be two ordinances with two different effective dates, and during the hearing Council could potentially accept one and reject one.
“We also could go through the options tonight but given the hour, it may not be that useful. This would be a one-time change. If you changed this into something that’s staggered, it would be two separate ordinances we’d have to bring forward at different times for different Council actions and the dollar impact might be slightly different,” he said. “If both ordinances are rejected staff will have to come back with an entirely different budget. If it’s just a single six-month deferral, it’s much simpler equations. Keep that in mind for your future decision-making.”
Havemann asked about the deadline for adopting the budget. Lynn said June 1.
“The budget you just adopted currently includes the projection that this is in January. If you defer six months it will look a little bit different. If you don’t have new GRT, you’ll have a drastically different budget and that could be handled through major budget revisions. Depending upon how this vote goes, I presume there’s some level of consistency when we get to these hearings,” Lynne said. “If there’s going to be no new GRT, we’ll effectively have to have a new series of budget hearings to completely re-do the budget. It’s that large of an assumption built into the existing budget. If it’s just this motion and it’s just one $6.5 million amount, as Councilor Ryti pointed out, that could just be taken off the reserve number. One option for that is that we simply have less reserves and we don’t change anything in the budget. We just have less revenue for one six-month period. That’s the simplest option to consider if you do the six-month deferral.”
Chair Derkacs asked if neither ordinance was approved, would the budget have to be reworked.
“But if we still have a 36 percent reserve why would it have to be revised for this year,” she asked.
Lynne then noted that it would not have to be revised.
“I would just strongly recommend it. There’s a lot of outgoing costs and if there’s no revenue projected to cover those costs in the near-term – we’re not talking about the last three years of the plan, we’re talking much sooner than that – I think it would be worth re-looking at. If you have to you could defer that as well for another year or two but that long-range projection instead of missing $6.5 million it will be missing $120 million over that 10-year period. That’s the gross magnitude of having no new GRT. In the long-term it replaces that projected decline and in the short-term it helps bolster our capital plan and whatever debt we have to issue,” Lynn said.
After watching every minute of the three nights of budget hearings, a lay person might wonder why Councilors were only made aware of the proposed new GRT in late March and instead of having an agenda item much sooner so that Council and the public would have an opportunity to weigh in on the direction the budget should take. Instead, the decision on the GRT appeared to be rushed without much time for the investigation of other options. The proposed new GRT was already figured into the budget that was presented and discussed by Council during the hearings.