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Weekly UpdatesOne of the realities of local government finance is that taxpayers are reluctant to increase tax rates to fund government operations. Another is that natural revenue growth often does not generate the resources needed to sustain existing programs or meet new needs. Consequently, policymakers and finance professionals must constantly look for new sources of revenue and find ways to enhance existing sources of revenue. Oftentimes, careful analysis of existing sources of revenue will reveal the potential for greater revenue yields without increasing rates or fees. This proved true in Little Rock after the city took a closer look at business license collections. This article describes how the City of Little Rock boosted business license collections by more than a quarter of a million dollars and enhanced its public image in the process.
A LITTLE BACKGROUND
With a population of 187,000, Little Rock is the largest city in Arkansas. It is also the state capital. General fund departments include police, fire, parks, planning, housing, and general government support operations. A mixture of sales tax (50 percent), franchise fees (20 percent), property tax (11 percent), and various other revenues, including business licenses, supports the general fund. The state constitution limits the general fund property tax levy to five mills, and the city levies the maximum. Larger utility franchises are also set at the highest rates allowed. Sales tax rates can be increased, but voters defeated a proposed rate increase in 1999. Accordingly, the city is highly dependent upon steady growth from these major revenue sources.
As 2001 progressed, these revenues were not growing at the rates anticipated in the 2001 budget. In early September, the Finance Department forecast a $3 million budget shortfall (on a $105 million budget) unless a combination of expenditure cuts, additional revenues, or other measures were made over the last three months of the year. These actions were taken to keep the budget in balance. Meanwhile, estimates for the 2002 budget revealed another significant gap between revenues and expenditures. To close the gap, the city reduced department budgets and increased the rates and fees for every possible revenue source, including a 35 percent increase in business license fees. Although these moves balanced the 2002 budget, there was a sense among city officials that some revenues, including business license fees, needed to be analyzed.
A CLOSER LOOK AT BUSINESS LICENSES
In the summer of 2002, Finance staff gathered historical information on business license collections (see Exhibit 1). Business license revenues and the number of businesses with business licenses had held steady or declined for several years. Economic conditions in Little Rock had improved over that same time period, making it reasonable to conclude that the number of business licenses should have increased. As another check, staff obtained information from nearby cities on the number of business licenses per capita. Little Rock fell below the average. Using the average number of business licenses per capita in nearby cities as the benchmark, Little Rock should have issued around 9,200 business licenses the previous year--far more than the 8,200 the city actually issued. With an average business license fee of about $250, the city concluded that it could potentially increase collections by as much as $250,000 per year.
At this time, two issues started driving the business collection effort. First, the 2003 budget process was well under way and revenue projections were once again flat. To balance the budget, the city was forced to reduce expenditures by 10 percent. For any business license collection program to be considered, positive payback was a must. Second, the city recognized that the failure of an estimated 1,000 local businesses to pay for a business license created an equity issue among businesses in the city.
Recognizing that the Finance Department did not have the human resources needed for a full-scale business license collection initiative, staff quickly began working on a proposal for the 2003 budget. Business license collections were already running two months behind schedule, and collection personnel needed to focus their efforts on the large number of delinquent businesses. There was no time to take on the additional burden of tracking down and collecting from unlicensed businesses. While a detailed work plan had yet to be created, staff believed an additional budget allocation of $50,000 would be needed to execute a comprehensive collection effort targeting unlicensed businesses. With anticipated new revenues estimated at $250,000, this meant a net revenue gain of $200,000. In spite of the city's budget challenges, the program was well received by the interim city manager and the mayor and board of directors, and it was ultimately included in the 2003 budget.
THE PLAN
Through the end of 2002, Finance Department staff solicited and catalogued ideas on how to identify businesses operating without a business license. In addition to internal suggestions, the city contacted collection and data information firms and the finance director attended a revenue collection session at GFOA's annual conference. The decision to seek out information and advice from a variety of sources enabled the city to build upon the successes of other entities and ultimately enhanced the effectiveness of the plan. Early in 2003, the project team settled on a plan that included the following actions:
* Hire a data information firm to electronically match their records of businesses within the city to the list of businesses that already had business licenses
* Manually check the telephone business listings against license records
* Hire two college students for the summer to contact unlicensed businesses
* Use the court system, when necessary
* Use police officers to deliver warrants to businesses
Even with advance planning, several modifications were made during the summer of 2003. For instance, one business owner wanted to make sure that all other businesses in her line of work had a business license. She provided a list from her state association of more than 40 businesses operating in Little Rock. The city incorporated this idea into its collection strategy and contacted other state associations to see if they would provide a list of their Little Rock members. Almost all of them did.
Another business owner wanted to make sure that weekend vendors--the ones who occupy a busy street corner on Saturday or Sunday--held a business license. Accordingly, the city adjusted work schedules so that at least one person was available on Saturdays to look for these businesses. Total collections from the first Saturday exceeded $2,000. Since it was their first business license, many of the business owners came to City Hall to complete paperwork or pay the fee. One city employee began asking if these business owners knew of any other new businesses that needed a license. This simple question worked so well that it became a standard question for all new business license applicants.
Little Rock is home to a well-known data information firm. When approached about lending assistance to the city, this firm was eager to be a part of the collection project. Because businesses can fit any one of 230 classifications, the firm first worked with city staff to understand the classification system. After several meetings and a few false starts, the firm took the city's existing business license database, compared it to theirs, and provided a list of 2,600 businesses. Rather than paying the firm for each potential business identified, the city negotiated an agreement to pay $9.50 for every new license issued.
MAKING CONTACT
With so many businesses to contact, a great amount of work had to be accomplished in a very short timeframe. Fulltime staff was dedicated to other pressing projects, so the city chose to hire two college students to telephone each of the businesses. The city contacted accounting departments at two universities in the central Arkansas area and asked for recommendations of top students seeking full-time work during the summer. As an enticement, the city offered an attractive hourly rate. Each university cooperated and provided the names of several excellent students. The two students selected started work in early May. After a crash course on business licenses, the students had less than 12 weeks to finish the project.
Handling a large influx of accounts was new territory for everyone, so tracking calls and reporting results to management was crucial. Staff settled on a weekly reporting system. Each student reported the number of calls made, applications sent, cases resolved, and cases outstanding (see Exhibit 2). These numbers were then totaled and reported to management. The students contacted all 2,600 businesses sooner than expected and began using the telephone business listings to identify additional unlicensed businesses. Surprisingly, even after working the list provided by the data information firm, the telephone business listings yielded an additional 500 businesses.
While the students were very successful in persuading businesses to obtain a license, some refused to do so. The city used the court system to deal with these business owners. The treasury manager met with court personnel to determine the information needed to file a formal citation. Starting in mid-summer, the treasury manager prepared citations and presented them to the court on a weekly basis. The court then issued a warrant for the business owners to appear in court. Anticipating this, the treasury manager had obtained approval to use a police officer, selected from among several who expressed an interest in working on the collection project, to serve these warrants. The treasury manager monitored the officer's workload and paid for the officer's overtime from the project budget.
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