Pepper Pike Election: Thoughts on Estate Taxes & Services As They Relate to Proposed Tax Rate Increase

The below text was sent as an email to those on my distribution list on Wednesday evening, July 7, 2010.

Greetings and a good summer to everyone.

First, as always, if you would like to be removed from my distribution list, please let me know. I understand and respect people's desire to receive less email. Please know that I do not share your emails with anyone, this is my personal list and those are two reasons why I keep your email addresses in the "blind copy" recipient section.

Now, a warning: this is a very long email and it's definitely written in my style of "writes like she talks."  However, I really only discuss two topics that concern the upcoming ballot issues: estate taxes and services.

I've written about these two specific topics because they relate to information in communications that many residents have asked me about and that advocate against the tax.  As you will see as you read this email, I am not advocating that anyone vote for or against the tax-related ballot issue.  I am, however, stating my opinion about these two specific topics as they relate to the tax issue.

In the communications, there are at least two assumptions that fail to be mentioned anywhere.  Yet, in my opinion, they are integral to why Council placed a tax rate increase issue on the ballot for voters to consider. Please know that these comments are 1000% mine and mine alone. Here goes:
Residents have repeatedly told us, on the record, at meetings, town halls, in emails, over the phone and face to face, two things in particular that contradict what the communications advocating against the tax issue suggest:

1. Residents have said repeatedly and in a variety of ways that they want us to stop relying on estate taxes as was done in the past and prefer that we use them to build a rainy day fund and/or capital improvements only.

Residents repeatedly and very vocally have chastised the former Council and the mayor for having relied on estate taxes for years, for not having a rainy day fund at all, and for relying on an acknowledged unreliable source of revenue (the estate tax) to fill in gaps between costs and expenses.  This criticism is exactly correct and Council and the mayor have all agreed that it was unwise to rely on estate taxes as they had been relied upon for years and years. 

The responsible response by Council and the mayor to this criticism and realization, also on the record repeatedly, was to commit to a reform effort that will create a separate rainy day fund, determine what the estate tax revenue can and should be used for, and examine what would be the appropriate amount of estate taxes to
budget for, if any.  Many residents don't want us to budget for any estate tax revenue and to have "0" in the budget, though it was agreed, eventually, that that was excessively pessimistic.  That's why now there is $300,000 budgeted for 2012 through 2015. (You can see the five year budget forecast as of 5/14/10 here).

The City has to budget in the prior year for the year ahead, but we don't know what estate tax revenues we will receive until the County is accruing those revenues and we too can see what is accruing in that current fiscal year.  We receive the funds 2x a year (February and September) and we can ask for advances, but we also occasionally see the account decline once a person's estate settles and the amount they put in escrow turns out to be higher than what we actually are going to receive.

This is to say, we cannot see in November 2010, as we budget for 2011, what we will get in estate tax revenue for 2011. So all we can do is budget for what we think we will get. In the past years, the finance director has been conservative in that estimate -  $500,000 - knowing that it does come in high many times, but that it also comes in low  - and it has come in low in the past, including 2009 (when it came in at less than $500,000). 

Mr. Jim LeMay, the author of one of the communications residents have asked me about, and who is advocating against the ballot issue, previously indicated to Council his belief that we should budget according to a less pessimistic forecast.  He suggested that rather than the $300,000 estate tax revenue projection currently in the five-year projections, we base the projection on a 16 year average estate tax revenue of $1.4 million and project either $900,000 (which he wrote was "a still very conservative assumption") or $1.4 million (the actual 16 year average revenue of estate taxes he calculated).  By adjusting the projection in this way, it gives the City the appearance of having more projected revenue, allowing for more expenses to be projected and still show a balanced budget. 

In my opinion, the problem with that approach is that if $900,000 is then in the operating budget as the estimate for the estate tax revenue, and we do not receive $900,000, but in the prior year when we made the budget, we set expenses to that expectation, then what?  Last year was a year when the City budgeted $500,000 and that was not met.  Property tax and income tax revenues were also down.  I do not believe it is prudent in the least to suggest, at this time in the City's economy or the economy in general, that we want to increase how much we think we'll get in total revenues, then budget expenses based on that, and then risk that we will commit to expenses we then cannot pay.  I do not see how that matches with any concept of good planning or good decision-making.

In addition, if we budget for a higher amount, and we don't even reach that, not only have we then over-spent based on an estimate that was too high, we then also have no money to add to the rainy day fund. 

I think the city owes it to the taxpayers to budget conservatively, especially in these economic times.  We're a city providing services whose budgeting is based on whatever revenues are generated by property value, income, and who passes away.  We budget based on the fluctuation of those streams (examining what we need and what residents want to pay for is a whole other question that deserves attention too). And, we may contract our budget if those streams contract and we have no rainy day fund. 

However, up through now, surplus funds were never placed in a rainy day fund, so we cannot weather revenue contraction without making the kind of cuts we've had to make.  It is not good planning, in my opinion, to defer the funding of a rainy day fund or not budget for there to be a surplus.  It is not good planning, in my opinion, to divert estate taxes away from these important financial tool that we currently do not have.

For those looking for an example, I recommend this article about how Moreland Hills has suffered an 18.5% drop in its income tax receipts just in the first five months of this year.  Luckily, they had a surplus but in February 2010, they created an emergency expenditures fund.  So when people mention Moreland's lower tax rate, remember that they have no tax credit and be aware of Moreland's drop in revenue this year, its need to dig into its surplus and it's move to create a rainy day fund. All to protect the surplus, not spend it down.  We are not in the same shape they are in, since we do not have a surplus remotely near theirs (just over $3.8 million in surplus is predicted for the end of this year).

So, as I consider the arguments that the City doesn't need a tax rate increase because it's getting better than projected estate tax revenue this year, I see it as being completely opposite of what nearly everyone has been telling us in regard to estate taxes and what we believe as far as sound financial planning goes:

a. These arguments support the notion that the City should in fact disregard how the years of using estate taxes to fill in gaps got us to where we are now and instead, do exactly that - use the estate tax to fill in a gap and expand the ability to budget for expenses we might not be able to cover.

b. These arguments support making an operating budget with a higher amount of estate tax revenue than $500,000, even though we know that it does come in under that amount and that there are some distant but definite threats to the stream over the long term (a lot of states, ours included, want to completely eliminate the stream of revenue from estate taxes - just eliminate that tax - and so getting ourselves off the addiction to using estate taxes is a very healthy thing to work toward, in my opinion).  It also would encourage skipping committing those dollars to a rainy day fund, capital improvement or nearly anything else other than speculating on what we might have as an operating budget.

c. These arguments support what the mayor has told us is why he never asked for an increase in taxes during all the years that they were using the estate taxes to fill in the gap between revenues and expenses, and were not creating a rainy day fund - a time when I believe he should have looked to raise a road levy or some other revenue tool in order to eliminate a dangerous reliance on the estate taxes.  He has said that he never sought additional revenue from the taxpayers, so long as a surplus accrued with the help of the estate taxes, because residents could see we had a surplus and he felt who would want to have their taxes raised if they can see a surplus?

Likewise, the arguments now being offered read to me as saying, "I see you have a surplus because of the estate tax - so just use that - don't tax us more."  But on an annual budgeting basis, how is it responsible to craft service provision, in our operating budget, on a revenue stream being there at a higher amount than we can be nearly positive is going to come in? 

We would be and the former Council and mayor have been called irresponsible for having done that in the past.  Repeatedly residents have said this.  Now it seems that some residents want to take that back and are okay with us relying on something unreliable and risk the consequences (which is what this year has brought, since we have no rainy day fund).

I fail to see any wisdom or good planning in that. This estate tax argument (to increase our operating budget reliance on it, to use it to fill in gaps this year and next, to not use it to create and fund a rainy day fund that could then be used for capital needs) is, frankly, hypocritical, given how much guff the residents have given past treatment of the estate tax revenue.

2. Residents repeatedly have been on the record, since February, chastising the City for cutting the pay of personnel, whom they feel had nothing to do with the City getting into its current financial situation, by 25% since March 1.

Where arguments against the tax have asserted that city services can be maintained without a tax increase, there is a complete failure to reference in anyway the fact that since March, personnel have been employed at 2009 salaries, less 25%, except for the police, who chose to keep their pay at 100% and force five layoffs in order to get their department's 25% cut (yes, they forced the layoffs - they voted on what to do, and they voted to reject terms that, if supported, would have avoided the layoffs). Council approved the cuts specifically
to be responsible, to show that we knew we had to make extremely unpopular budget cuts and we hated doing it.

Since February, residents have lamented frequently, openly and through a variety of communications just how much they say that they, the residents, hate to see the people who work for the city and deliver the taxpayer's services suffer, since they weren't the ones making the decisions that led to the current situation.

And yet this assertion that services will remain the same without a tax increase fail to address how that's possible and what it means for the employees. Does it mean that we continue paying our personnel, in 2011, 2009 amounts less 25%?  Does it mean that despite the anger that residents expressed for cutting the pay in 2010, they're no longer angry and/or it is okay to continue the personnel cuts into and maybe through 2011?  If that's the case, okay - but at least residents who feel this way should speak to these points directly since they are in fact the choices that Council has to face.  It is not an abstract issue at all.

Then again, maybe residents who are advocating against the tax increase and also saying that services can be maintained as they are, are intending that we should use the estate tax money to give personnel appropriate salaries in 2011 and not maintain 2009 less 25%.  And if this is what they have in mind, then again we are faced with a contradiction to the cry for us to not rely on estate taxes again because we do not currently foresee revenues coming in, without a tax increase, that would be able to restore the pay cuts.  Again, my opinion is that to rely on estate taxes in this way would be a giant step back from where we're trying to go regarding good decision-making, good planning and responsible, healthy fiscal management.

Also, please know that assertions about how much our personnel make are based on 2009 payroll information (and is public; if you're interested in seeing it, let me know and I'll forward to you). It does not reflect who has left this year (and several have or will have by the end of the calendar year) and it doesn't reflect the 25% pay cuts in terms of the actual, total expense to the City in all of 2010 (budgeted).

The steps Council has taken so far have in fact yielded some of the reforms for which we aimed, most notably, permanently shrinking our payroll expenses by 10% - but this too isn't mentioned in any of the material I've seen advocating against the tax and saying that services can be maintained. This objective is one that we're getting close to meeting and was set in recognition of how large the personnel portion of our expenses are. 

The question as to whether the amount that any of these personnel make is too high is a separate issue that deserves specific examination, but it does not exist as a stand-alone fact. For example:

-The average pay quoted in one of the communications is for everyone - newer hires, 35+ year employees, non-union department heads, rank and file hourly workers.
-There's no mention that we're talking public sector versus private (i.e., there's no profit to be had by us that influences pay).
-There's no mention that a significant portion of the city's pension obligations are mandated by the state - we cannot choose to not pay them, and they must be budgeted. 

I hope you're still with me! :)

To conclude, as I've told many residents, I am not going to even try to disabuse anyone of their anger at the situation, or their anger at any one or more individuals or any one or more decisions.  No one will get an argument from me about the role poor decision-making, poor choices and poor planning have had in the current situation. 

But as a city council member elected by the voters to take care of this city, I feel I have an obligation to work on getting the city back to fiscal health. And I voted to place the two ballot issues before residents for their vote because I believe that they are reasonable requests and measures to take, in the overall planning.  It is now up to the voters - as it should be.

Thank you for reading this email and hopefully considering some of my thoughts on these two specific issues - planning for the use and budgeting of estate taxes and services - and how they relate to the tax ballot issue.  I love this city and I love what I've been elected to do. 

Feel free to pass this on and, again, I appreciate you considering my feelings on these two particular points.  Any questions, comments or concerns - please call, write or bump into me.  During these busy summer days, it's not hard!

Very truly yours,

Jill Miller Zimon


Jim said...

[LeMay Response – Part 1 of 4]

Fellow Pepper Pike Citizens:

My name is Jim LeMay and I am the author of the June 27, 2010 letter many of you have received in the mail opposing the proposed 100% Pepper Pike income tax increase.

This email is an update of events since my letter.

By this time many of you may have also received one or more flyers or letters from the Preserve Pepper Pike Committee associated with the Mayor and some City Council members which is advocating for the tax increase as well as an email from council member Jill Miller Zimon. My email addresses the arguments for the tax increase made in these communications.

Before I get to that I must address the recent campaign tactics by the Preserve Pepper Pike Committee. There is a saying in politics -- if you don’t have the facts -- then confuse them or scare them. Unfortunately, some of the advocates for the 100% tax increase are relying on both tactics.

The most recent flyer from this Preserve Pepper Pike Committee as it reaches a new low in local government politics. The flyer is a divisive effort to pit wage earners in the City (who will pay the tax) against mostly older non-wage earners who may not have to pay the new tax. The flyer pictures an elderly couple: “Retirees...will not pay.” “Only residents with earned income will pay”.

For good reason this flyer was not broadly distributed to those of us who are wage earners and will pay the new tax. The tactics of this Committee consist of scaring our older residents by implying (with words and pictures of ambulances and police cars) that services will be cut without the tax (not true) and advocating for the tax -- not because it’s just the right thing to do, but because -- well -- someone else will pay for it. This is shameful.

Jim said...

[LeMay Response – Part 2 of 4]

The City income tax already funds the biggest portion to the City’s annual budget. I have spoken with many retired citizens in our City who also take advantage of police, fire, trash and other services and who have told me that, were a new tax actually needed, they also should contribute because of the services they receive. Fortunately for all of us -- no new tax is needed.

So let’s be clear about what I said in my previous letter and what I am actually advocating to protect our fine City and your hard earned tax dollars.

Let’s start with the current situation:

Improved Financial Position. As I outlined in my previous letter, there can be no dispute that current tax collections, including the estate tax, are well above forecasts meaning that no cuts in city services are required. But this good news for those of us who actually pay the taxes is ignored by the politicians and the Mayor’s committee who continue to claim that unless THIS 100% tax increase is passed service cuts will be made. This is simply not true.

Spending. We all have household budgets and we know that the first step to a firm financial foundation is to spend responsibly. I outlined in my letter the many instances of imprudent and excessive spending by the City and none of the communications from the tax advocates have disputed this spending. I also outlined in my letter opportunities to maintain services and save costs through regionalism and other initiatives. But these opportunities have been rejected or not acted upon.

Damage to the City. Finally, as I outlined in my letter, this new tax may damage the City’s long term financial health by depressing home values and causing businesses in the City (and the tax dollars they generate) to leave the city. The $2.2 million coming from the new tax will also eliminate any incentive to reform city hall spending.

The key is this: poor planning and excessive spending got the city into this crisis and this same City Hall wants $2.2 million more (annually) of your tax dollars. How will this new money be spent? Strong tax collections have eliminated the current crisis, so before passing a 100% tax increase that is potentially destructive to the City’s long term financial health why not first take an earnest look at City spending and cost saving opportunities?

Jim said...

[LeMay Response -- Part 3 of 4]

The Estate Tax. The recent communications from those advocating the 100% tax increase have focused on the City’s estate tax collections and how the City cannot rely on this income source. This is an appropriate discussion as estate tax collections can and do vary from year to year.

I must first note that the flyer from the Preserve Pepper Pike Committee associated with the Mayor and some Council members has at least made some progress in acknowledging that the current administration’s past reliance on the estate tax was “irresponsible”. I couldn’t agree more. But it is only irresponsible to use the estate tax if you FAIL TO PLAN in advance for the variability in this tax which you know is certain to occur.

Simply because a source of revenue, such as the estate tax, is variable does not mean that you cannot plan for and use estate tax collections as part of a normal budgeting process. The key is HOW you plan for and address this variability. This is the point that the tax increase advocates are missing.

I reviewed a 16 year history of Pepper Pike revenue and spending. Estate tax collections do vary from occasionally very low ($400,000--1997) to occasionally very high ($3.9 million-- 2003 ) with an average over these 16 years of about $1.4 million per year.

So the answer to estate tax variability is not to “sequester” or stop using this source of funds any more than it is appropriate to “sequester” property taxes, incomes taxes or proceeds from the sale of burial plots (Yes, the City sells burial plots). After all, dollars are dollars and they all are spent the same way. The notion of “sequestering” a single source of funds is all about politics and not sound financial planning.

Instead, the answer to estate tax variability, as well as variability of any other revenue source, is to plan for it by establishing an ongoing surplus or rainy day fund to “fill in the gap” when we have a year in which the estate tax, or any other revenue source falls off. This is not rocket science – it is just common sense.

Jim said...

[LeMay Response -- Part 4 of 4]

Fortunately, the most recent projections show that the City will end the year with a CASH surplus of about $1.8 million with 5 months of additional estate tax collections still to go. A portion of this amount can be dedicated as a surplus or rainy day fund to be spent only if there is a fall off in other tax revenues during a year. More amounts can be added to the fund later particularly if the City undertakes a dedicated effort at efficiencies and cost savings. The proposed new tax, however, would produce a windfall of $2.2 million in new unrestricted cash for the City, which is, by any measure, excessive and potentially damaging to the City’s long term finances. Bear in mind that the Mayor has for many years (and continues to have) the City Council votes needed to have tax dollars spent as he directs.

As I said my June letter, if, after truly dedicated efforts by the City to reduce costs by embracing regionalism and other initiatives the City still needs (temporarily) more tax revenue, then a smaller and shorter tax increase could be placed on the ballot as soon as February of next year, or alternatively, a fee for services for all households (e.g. trash collections) could be put in place. But this new and very large 100% tax increase is not needed now.

Two other points: The pro-tax flyers list the Pepper Pike tax rate in comparison to the tax rate of other cites, but this is misleading as the flyers fail list the “tax credit” which is given by those cities. In Beachwood, for example, the tax rate is 1.5% but the credit given to residents for taxes paid to other cities is effectively 100%.- which completely offset the entire Beachwood tax for many residents. These pro-tax flyers also try to make a point of saying that Pepper Pike’s tax rate has not increased in 40 years, but the tax is a PERCENTAGE – as the income of residents has increased so have City income tax collections!

The Vote is August 3rd and it may be decided by only a handful of voters. Every vote will count.

I encourage you to also forward this email, with the attachments, to friends and family in Pepper Pike and ask them to read my prior letter as well as this email update. Please also ask them to send me an email at to receive future updates. Please note above that your email address is kept in the “blind copy” recipient section so that it is not disclosed.

Call the board of Elections at 216-443-3298 to get voting options if you cannot vote in person on August 3rd.

Thank you for your time and attention. Please mark your calendar and Vote NO on August 3rd.

Jim LeMay

Jill said...

Hi Jim,

Thanks for posting the content of your email from Wednesday, July 14th in this post's comments. I look forward to re-reading it and commenting. Have a great weekend - GORGEOUS outside.


Jill said...

Well - obviously I did not get around to commenting on this second set of thoughts from resident Jim LeMay which were posted here but sent to residents by email, from what I understand (I did receive a copy).

For those still following this thread (and remember, I can see that only less than 20 people a day are reading this, plus less than 20 who subscribe by email!), you can read a very detailed review of the first letter here: