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City faces multi-million dollar revenue shortfall for 2009

Thursday, April 24, 2008 by Austin Monitor

The City of Austin is facing a budget shortfall in 2008-09 of anywhere between $20.6 million and $36.8 million if the Council plans to continue to provide city services at their current level. That assessment, delivered Wednesday by the city’s Budget Office, is based on a continued growth in city revenues but an even greater growth in the cost of providing those services to the city’s increasing population.


If the City Council decides to raise the city’s property tax rate to the rollback rate of 41.39 cents per $100 of property value, and the city’s sales tax revenues increase at a rate of 4 percent that will net the city a total of $620.7 million in the general fund. However, City Budget Officer Greg Canally told the Council that rising costs for health care, fuel, supplies, personnel and other cost drivers would increase the expenses from the general fund to $641.3 million. 


Council Members were not surprised to hear the news. “I think we had all anticipated that the revenues would be down. Everybody knew about the low sales tax revenue prediction, but still when you see it in black and white and you see that gap…it does get your attention,” said Council Member Lee Leffingwell.


Since expenditures on personnel account for about half of the city’s cost drivers, some Council Members are already discussing the possibility of a hiring freeze. “I would hope that it’s not anything like an across-the-board hiring freeze, I don’t think that really works,” said Leffingwell. “You hurt yourself more than you help yourself, and some places you’re actually going to have to have hiring increases.”


Council Member Brewster McCracken agreed that addressing personnel costs would be the first step toward closing the gap between projected revenues and expenditures. “The first thing you do is some kind of soft hiring freeze,” he said. “We went through a big downturn in the early part of this decade, and we developed some strategies for that severe downturn that we’re able to use on an easier scale right now.”


While the forecast from the Budget Office shows a consistent growth in general fund expenses of more than $40 million each year, revenue for the fund fluctuates from year to year based on property and sales tax revenues. Budget Officer Canally warned that compared to other cities, Austin had a disproportionate reliance on sales taxes. Those revenues, while still projected to increase, will grow at a slower rate than the growth in expenses.


One bright spot in the forecast came from economist Jon Hockenyos, who noted that hotel and motel bed tax revenue was continuing to increase despite the national economic downturn. “You can see a really sharp rise over the last three years, and we’ve been able to do this while slightly increasing our occupancy rate,” he said. “We may get tired of lots of folks running around town who don’t live here, but they do bring money to the community. The tourist industry is a pretty tax-intensive industry.”


The city so far this year has collected $21 million from the hotel-motel bed tax. The total for the 2007 fiscal year was $42.3 million, up from $36.6 million in FY 2006. Austin Mayor Will Wynn said he had spoken with executives in the hotel industry who stressed that demand remained strong, even as the city is increasing its capacity. “What it means is four nights a week, every room in the city is booked. Most of the days of the week you can not get a hotel room in Austin, especially in downtown,” he said. “So I think we are going to see robust opportunity for new hotels.”


Following the budget presentation, Council Members turned their attention on ways to address the on-going imbalance between general fund revenues and expenses. At the same time, they also began what could prove to be a protracted debate over ways to fund the proposed light rail line connecting downtown, UT, the Mueller neighborhoods, and ABIA.


Council Member Mike Martinez warned he would be reluctant to approve a tax-increment financing district to help cover the cost of the rail line, since he believed those property tax revenues would be better used in the general fund. “I see that we may be faced with more decisions that relate to creating more TIFs to fund different projects and infrastructure,” he said. “For me, it’s important that we remain mindful that if we continue to go down that road, we’re only hurting ourselves on the property tax side…which is the more sustainable revenue source.”


His concerns were echoed by Leffingwell, who said that “the big aggravating factor here in our budget process is our over-reliance on Tax Increment Financing. And I think it’s appropriate for certain community benefit projects like the Waller Creek Tunnel and Seaholm, but you’ve got to be careful about overdoing that process.”


Martinez indicated he did not believe the light rail line would be an appropriate project to fund with a TIF. “Now we’re talking about possibility financing a rail project with at least part of it being TIF financing, but I think it’s really a bad time to be talking about that,” he said. He suggested a Public Improvement District instead, in which the property owners voluntarily submit to an additional tax to pay for public benefits within the district.


But McCracken predicted the rail system could be built without additional taxes. “All you have to do is build in the assurances of two things—that you’re going to build the system and that you aren’t going to do new taxes to build it,” he said. “It may take a little longer to do it…but you don’t have to have all the answers by November. You just have to get the go-ahead from the voters that you’re going to embark on bringing these funds together.” He suggested a combination of funding sources for the rail line, including a TIF similar to the one used for the Waller Creek Tunnel Project and some hotel-motel bed tax funds.


McCracken said those hotel-motel bed tax funds could be used to fund projects at the Austin Convention Center, and that a rail line connecting the Convention Center and ABIA would qualify for those funds. He also suggested turning to Capital Metro as a potential source of funding for the line.


Council Member Sheryl Cole said that whichever method the Council chooses to fund the rail line, if it is approved by voters, that method should be disclosed up-front. “We can’t afford to not do something about transportation,” she said. “We just have to be willing to analyze how we’re going to pay for it and tell the taxpayer.”

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