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Austin’s economic outlook is grim, but better than nation

Thursday, April 23, 2009 by Austin Monitor

The city council got a look yesterday into how the economic downturn is likely to effect the city over the next five years, and it’s not good news. The city is likely to be around $30 million in the hole in 2010, even if property taxes are pegged the “rollback tax rate,” which is the most the city can raise taxes without triggering the possibility of a rollback election. In practical terms, most Austinites won’t see a huge increase in property taxes, because the model assumes that most houses in the city will be assessed at a lower value. State law also limits the amount a property’s assessed value can increase to 10 percent per year.


Jon Hockenyos of Texas Perspectives outlined Austin’s economic future, which, as bad as it might be, is looking better than the rest of the nation. This is largely due to the fact that Austin did not have the run-up in housing prices like many other cities, and has therefore avoided a catastrophic collapse. In fact, although home sales have slowed in Austin, prices have remained stable.  Hockenyos said he did expect prices to begin to soften, but that would depend largely on interest rates.


Hockenyos noted that Austin is the only metro area to show positive growth this year, even though job growth has halved. Austin’s high-tech employment is, by and large, doing well. Hockenyos said this was because Austin is mostly providing services, which are much more difficult than product manufacturing to send offshore. Likewise, the tourism industry remains strong, largely because Austin depends on cultural events, which remain popular, unlike corporate conferences that have fallen off dramatically. He said the economy will contract in all sectors over the next year, but not more than Austin experienced in 2002-2003. “Austin is the one-eyed person in the kingdom of the blind,” said Hockenyos.


Still, Austin’s sales tax revenues are expected to decline precipitously. Although Austin is unlikely to see unemployment rates like other areas of the country, some local businesses are cutting wages rather than jobs, which means people still have less money to spend shopping. Also, the housing boom gave people easy access to credit, which is no longer the case. So, even though job growth is expected to fall by only around 2.5 percent in 2009, sales tax revenues are likely to fall by 10 percent. The current year strategies to deal with the shortfall include holding non-civil service positions vacant, limit training and travel expenses and reducing general fund transfers to support service funds.


The city’s economic team gave an economic forecast through 2014. It shows property taxes staying relatively stable. Mayor Will Wynn noted that office buildings could fall faster than residential, although the city is not allowed to create two separate tax rates, which effectively leaves homeowners bearing more of the burden. Sales tax will be much more volatile over the next five years, with the projections showing it falling 15 percent by the end of 2011 before beginning to slowly climb back up.


The majority of the city’s expenditures are on personnel, with most going to public safety employees, who also have a contract that includes raises over the next couple years. Council Member Brewster McCracken once again suggested that the contract be renegotiated, and also suggested that all city employees, including council members, take a one percent pay cut. City Manager Marc Ott thanked him for the suggestion, but said he wasn’t going to go on record with any budget cutting proposals until he had heard from city departments.


Deputy CFO Greg Canally, under questioning from McCracken, made clear that the city has no “slack capacity” for bonds. In other words, given what the city’s financial planners now know, it would not be possible to issue any more bonds without raising taxes. Council Member Lee Leffingwell has said that, if elected Mayor, he would like to hold a bond election for transportation funding in 2010. McCracken has said the city can’t afford to do that.


At the end of the session, Leffingwell did a little cross-examination of his own on the bond question, forcing Canally to backtrack and land on a safer position. “Right now we haven’t done a detailed capacity analysis,” he said. There are a lot of factors to be considered. But “that work has not been done.” Of course, the city could do a bond election. The real question is what year could bonds be issued as a result of that election that would not raise property taxes. The city is currently in the midst of a 7-year cycle for bonds that were authorized in 2006.


Ott stressed that the big picture is that Austin relies too much on a volatile revenue stream – sales tax. He said that he would be proposing some structural changes to how the city collects revenue. The various departments will submit budget reduction proposals to the city manager on May 22, and the council will begin to discuss the options on June 11.


Council Member Laura Morrison said she was really struck by one of Hockenyos’ statements. “I think it was very significant the projection that personal income will drop by 6 percent because this says to me this is really hitting people’s pocketbooks—they’re having to change their habits, they’re having to change their lifestyle, they’re having to change their spending.”


That is something the Council will have to bear in mind as they ponder the tax rate, the budget cuts and the city’s future this summer.

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