For the past 5 months, I've been studying the financial condition of Hudson, Wisconsin. Why? Because this kind of stuff is interesting to me, that's why. I thought I'd share some of my observations since some readers might be interested in this kind of stuff.
Hudson is located on the border between Minnesota and Wisconsin, just across the St Croix River. Among the fastest growing areas in Wisconsin, Hudson has nearly doubled its population since 1990, reaching 11,700 in 2007. The adjusted gross income per return in Hudson was $64,675, based on income tax returns filed between July 1, 2006, and June 30, 2007; (9309 returns were filed).
In order to conduct this financial condition evaluation of Hudson, I drew data from the city of Hudson’s 2008 budget, the city of Hudson’s 2005 and 2006 Audited Financial Statements and Supplemental Information , and municipal information contained in the Graphing Revenues, Expenditures And Taxes - or G.R.E.A.T. - software, developed by the University of Wisconsin Extension. I employed Ken Brown’s 10-Point Test of Financial Condition* to conduct my assessment of Hudson’s financial condition. The test utilizes ten ratios for assessing four financial factors for a smaller city: revenues (ratios 1-3), expenditures (ratio 4), operating position (ratios 5-7) and debt structure (ratios 8-10). I have compared pieces of Hudson’s data to Baraboo and Cedarburg, cities of commensurate size in Wisconsin, to help contextualize that data.
Final Evaluation Summary-
-Hudson does have the ability to acquire additional revenue, but its potential to raise revenues has been lower than other cities of its size at this time. Therefore, Hudson should approach increasing expenditures with caution because its ability to raise additional revenue could be limited.
- Hudson will likely see a decrease in its property tax revenues in the coming years due to the housing crash. This could be problematic for Hudson, since it budgets more revenue from property taxes than cities of commensurate size.
-Hudson has been somewhat reliant on external governmental organizations. The downside of relying on outside funds is the lack of control over management of those funds. While most cities in Wisconsin tend to rank pretty low in this category, Hudson should continue to look to increase revenues from own sources.
-Hudson has not relied too heavily on operating transfers to finance general government operations in the general fund. Hudson should be cautious about any increases in operating transfers from enterprise funds. An increase of transfers coming in from enterprise funds for the general operating fund could put Hudson’s current bond rating at risk.
- Hudson’s expenditures for law enforcement have been higher than cities of commensurate size, and Hudson has devoted a significant portion of expenditures to Parks and Recreation over the past ten years. At this point, Hudson’s infrastructure may need to be maintained more adequately in order not to neglect its capital.
- Based on Brown’s ratios, Hudson will most likely not be able to easily service its short-term obligations by the normal flow of annual revenues, compared to other cities of similar size. Recently, Hudson has not been able to meet its current liabilities with current revenue.
- While some improvement has taken place since 2005, Hudson has been facing a concern regarding the ability to repay its long-term general debt. Bonding off some enterprise funds could help improve this ratio.
- Compared to cities of similar size, Hudson has been less likely to be able to pay its debt service requirements when due.
Hudson’s property tax revenue stream’s overall growth trend is building more rapidly than cities of commensurate size. This trend has been toward residential properties representing a greater share of total property in most municipalities. This is most likely the case in Hudson, which among the fastest growing areas in the state.
The recent housing crash could be a concern for Hudson, since it budgets more revenue from property taxes than other cities of commensurate size. According to Byron Lutz, “Institutional features of the property tax make it unlikely that changes in house prices will immediately influence tax revenues. The results suggest that the elasticity eventually equals 0.4 and that it takes three years for house price changes to impact tax revenues.” If this is the case, it will be likely that Hudson will see a decrease in its property tax revenues in the coming years.
It seems that Hudson will most likely continue to rely on property taxes as its major source of revenue for the time being. Ratio 1 suggests that, compared to other cities of similar size, Hudson’s potential to raise revenues has been low. Hudson should look to increase revenues from own sources. However, an increase of transfers coming in from enterprise funds for the general operating fund could put Hudson’s bond rating at risk.
Minnesota’s sales tax has just increased in Hennepin and Ramsey County (among others) to 7.125%. Wisconsin has a sales tax of 5 percent. St. Croix County has an additional sales tax of 0.5 percent. Being situated just minutes away from the Twin Cities, Hudson should continue to investigate methods for taking advantage of its proximity to the Twin Cities to generate sales tax revenues.
Hudson’s expenditures for law enforcement have been higher than cities of commensurate size, and Hudson has devoted a significant portion of expenditures to Parks and Recreation over the past ten years. Hudson’s expenditures in the general fund have not been balanced with equivalent revenues. At this point, Hudson’s infrastructure may need to be maintained more adequately in order not to neglect its capital.
Hudson has enjoyed a good bond rating, and has the ability to borrow. It should be noted that in Wisconsin long-term debt may not exceed 5% of the equalized property value of the jurisdiction’s taxable property, and Hudson’s applicable debt at the close of 2006 was only 12% of that maximum legal limit.
However, Brown’s ratios indicate that Hudson may not be able to service the debt in the long run if the current debt structure trend continues. Perhaps by regularly reporting on the city’s position relative to the debt issuance guidelines, management could help the city monitor debt and provide opportunities for further analysis and discussion of debt.
*It should be noted that Brown does not evaluate enterprise funds in his model, focusing specifically on governmental funds. In Brown’s defense, governmental funds pay for about 90% of operating funds, and policy-makers spend more time looking at operating funds and less time at enterprise funds, generally speaking.