As Bexley city officials waited for Gov. John Kasich's biennial budget to evolve, they feared the worst.

As Bexley city officials waited for Gov. John Kasich's biennial budget to evolve, they feared the worst.

The worst-case scenario would have been a significant reduction in Local Government Fund dollars from the state and elimination of Ohio's estate tax.

Under Kasich's proposal, the Local Government Fund will be cut by 25 percent in the first year of the budget and an additional 25 percent in the second year.

Over the past 10 years, estate tax revenues have accounted for approximately 17 percent of Bexley's annual operating revenue. That number has varied from a high of $4.3 million (33.6 percent of operating revenues) in 2009 to a low of $482,046 (5.4 percent) in 2007. Bexley received $1.9 million in estate tax revenue in 2010, according to finance director Beecher Hale.

Hale said the city's projected operating shortfall for 2011, when taking into account the reduced Local Government Fund revenue, is $1.4 million.

"The city received $807,000 in Local Government Fund revenue (in 2010) which represented 8 percent of our general fund revenue," Hale said. "In 2011, the Local Government Fund revenue will be reduced $106,00 from the 2010 level and in 2012, the reduction will be $281,000 from the 2010 level."

City officials said the loss of estate tax revenues on top of the Local Government Fund cuts would have been disastrous.

Today, it appears a push to immediately eliminate the estate tax has subsided, at least temporarily, as state legislators give local governments time to prepare for the eventual loss of those tax revenues if House Bill 3 is approved.

H.B. 3 would allow small business owners, farmers and homeowners to pass on their assets to their heirs without being taxed twice on their savings. Ohio currently has the lowest estate tax exemption in the United States, with a maximum of $338,333 of the taxable estate exempt from the estate tax. The average exemption for states with an estate tax is approximately $1.7 million.

State Rep. Cheryl Grossman (R-Grove City), who co-sponsored H.B. 3 along with state Rep. Jay Hottinger (R-Newark), said House Republicans remain committed to the bill but realize the immediate loss of estate tax revenue, combined with the local government fund reduction, would create a hardship for local government officials.

"Generally, the House Republican Caucus is supportive of eliminating the estate tax in its entirety," Grossman said. "The issue is not dead. It is important that we are being fiscally responsible and that we provide local governments time to prepare for this eventual loss in revenue from the estate tax.

"I am continuing to work with members of the House leadership team and Finance and Appropriations Committee to determine how quickly we can eliminate this unfair, double-tax that affects small business owners, farmers, and other hard-working Ohioans," she said.

Bexley city auditor Gary Qualmann said that based on the current political climate he has revised the city's five-year financial forecast to include estate tax revenues.

"It is my understanding that the legislature has delayed action on the estate tax reform and it is unlikely to pass in the immediate future, so we have included an estimate for future estate tax revenue in our projections," Qualmann said. "This situation is obviously subject to change at any time, so this always needs to be a factor in any decision council makes about additional revenue which may be needed by the city.

"Furthermore, the amount of estate tax revenue we might receive in any year is also an estimate which varies substantially from year to year," he said.

Qualmann explained that the projections contained in the five-year financial forecast are based on a most likely scenario.

"For this analysis, we assumed that the Local Government Fund would phase out over the next four years and that the estate tax would remain at $1.5 million going forward," Qualmann said. "These are extremely key assumptions. This is our most likely scenario right now - but that could change quickly if the legislature starts talking again about eliminating the estate tax.

"Also, our first half 2011 estate tax receipts appear to be pretty small so we may not reach our estimate of $1.5 million for 2011."

No matter what action is taken at the Statehouse, Qualmann said the city is still facing considerable deficits in the future.

"The estimated annual operating deficit for 2013 is $2.5 million. If capital expenditures were also included the total deficit would be $2.9 million,' Qualmann said. "Projected annual operating deficits (before any capital expenditures) are $1.4 million, $2 million, and $2.5 million for 2011, 2012 and 2013, respectively, which would result in year end balances (deficits) in the general fund of $2.1 million, ($.5) million, and ($3.4) million, respectively."

Ben Kessler, chairman of council's finance and judiciary committee, has indicated that a combination of cost reductions and new tax revenue will be needed to continue to provide existing city services at their current levels while balancing the city budget. Administration officials and city council members are reviewing various funding options.

No firm date has been set on when a proposal will be developed that can be presented to voters.