Budget sessions begin with bleak forecast

The City Council got a less-than-rosy picture of the projected state of the city’s budget at yesterday’s Financial Forecast presentation. But there was hope on the horizon, with clear indications that the worst of the recession may be behind us and that the city of Austin may have escaped with fewer bruises than other municipalities around the country.

 

During a presentation to the Council, Budget Officer Ed van Eenoo said that the city is looking at an $11.4 million shortfall for the upcoming budget year. That’s if the Council decides to increase property taxes to the rollback rate. In the unlikely event that they stick with the effective rate, the result would be a $28 million deficit.

 

The budget office based its conclusions on what looks to be a dramatic drop in property taxes and revenue generated from new development projects, a conservative estimate of the impact of utility transfers on General Fund revenues, and sluggish projected sales tax income.

 

Contracts with the three public safety unions have obligated the city to give all uniformed personnel 3 percent raises. The city also has policies to maintain staffing of fire trucks and police ranks and plans an EMS station at Avery Ranch. Van Eenoo said the cost of all that is an additional $20.2 million.

 

Another major cost driver is the increased cost of medical insurance for rank-and-file city employees and a planned 2.5 percent raise. Employees have not gotten a raise for the past two years. Those costs plus pension funding are estimated to increase the General Fund budget by $7.8 million.

 

Two primary factors contribute to van Eenoo’s somewhat gloomy assessment of the city’s property tax situation. For starters, the Budget Office is projecting a drop in property taxes across all property categories from FY 2010 to 2011, with the biggest drops coming in commercial property, personal property, and land.

 

Van Eenoo said his team projects a 4 percent drop in the tax roll for single-family and multi-unit residential properties, a 6 percent drop for commercial properties, and a 14 percent drop for undeveloped land.

 

The second issue concerns those assessed property valuations. Van Eenoo told the Council that the Travis County assessor is projecting a 5 percent decline in assessed valuations for FY2011, bringing the total assessed valuation of city property down from $80.2 billion in FY2010 to $76.2 billion. He said the budget office believes those numbers will “flatten out” in FY2012 before returning to more normal growth rates of about two percent in FY2013.

 

Some of this, said van Eenoo, will be the result of an above-average number protests to the county appraisal district. Indeed, that office had already put his department on notice that certification of the tax roll could be delayed again this year, as it was last year. “I’m just mentioning that,” van Eenoo said, “because it could then affect the timing of the adoption of the tax rate and maybe create a disconnect between the adoption of the budget and the adoption of the tax rate.”

 

A precipitous fall in development projects looks as though it will have substantial impact on the city’s coffers, as well. According to van Eenoo, applications for new land development projects are down 39 percent. That’s on top of a 40 percent slide in applications for new residential construction, a 58 percent drop in new commercial applications, and a 48 percent decline in single-family building permits.  

 

He said that this decline would continue until 2011, flatten out, and then gradually return to a positive track. All told, city revenues drawn from development have dropped from $19.3 million in 2007 to a projected $7.5 million in 2010.

 

Currently, things are no better on the sales tax side. Here, van Eenoo predicts more negative growth to the tune of a 4 percent loss by the end of FY2010. However, fiduciary prognosticators are calling for the ship to be somewhat righted with a 2.5 percent growth rate by the end of FY2011. Then, from FY2012 to FY2015, staff is calling for steady 5 percent growth.  

 

Staff suggested that, despite appearances, these figures came in better than they’d expected. As a result, they are “helping to offset (the) shortfall in development revenue.”

 

In terms of straight sales tax revenue, van Eenoo said that the city couldn’t expect to return to 2008’s near $160 million mark until 2013. By 2015, he expects that figure to approach $180 million.

 

Even though he seemed to question staff’s sales tax projections during the meeting, Mayor Lee Leffingwell later told In Fact Daily that he agreed with their tactic. “I think they’re being very conservative, and I don’t have a problem with that,” he said. “I think it’s good at this stage of planning to be conservative. I made the same kind of remarks last year, that the budget was based on a minus 5 percent forecast; right now they’re still forecasting it to be minus 4 percent for the whole year. Remember (at this time) last year we were looking at a $30 million shortfall even going to the rollback rate.

 

“I still want to preserve the goal of staying as close to the effective tax rate as we can. As they go back and refine this process, I think we should be looking as hard as we can for structural changes that result in savings not only this year but next year, so if we can possibly reach that goal of the effective rate, or close to, we ought to do that.”

 

For the cash infusion that the city of Austin receives from Austin Water Utility (AWU) and Austin Energy, van Eenoo issued what he called a “conservative” estimate. AWU’s contribution, he said, would remain at a steady 8.2 percent. Austin Energy, however, could see a shift after 2012.

 

“Looking ahead with the energy utilities, there’s some uncertainty in regards to an anticipated rate case, there’s some uncertainty in regards to changes in fuel prices … the impacts of conservation efforts on their business model, and there’s some uncertainty in regards to the transfer calculation (currently, 9.1 percent) itself,” he said.

 

“So instead of making a guess as to what all that might look like … we’re trying to be a little conservative here, and we’re assuming that the transfer growth rate … in 2013-2015 will be equal to the growth in the base electric revenue of the utility.”

 

In other words, the relative percentage of General Fund revenue that the utility transfers will account for may dip in 2015 to 18 percent. That figure would represent a 15-year low. Last year, Austin Energy paid for more than 21 percent of General Fund expenditures.

 

In the end, van Eenoo told In Fact Daily, the city budget projections are something of a mixed bag. On the one hand, he said, “If you look at Austin, or even broader Texas, we’re clearly doing better than the rest of the country.” The city’s financial woes, for example, are minimal compared to those of San Diego, which is projecting a $180 million budget gap for FY2011; Los Angeles, which is projecting a $290 budget gap; or San Francisco, with a budget gap projection in excess of $400 million.

 

“I really think that’s a testament, not only to the vibrancy of the local economy, but also to how well the city’s finances have been managed over time,” van Eenoo said.

 

But the budget director also stressed that economic recovery is going to take time. Though there are clear indications that the city’s economy is improving, he said, “there typically is a lag between when those things happen and governments feel the impact.”

 

“It takes a little while before employment really starts to kick up,” he said. “It takes even longer before people who get re-employed start digging themselves out of debt. And then finally people start loosening up their pocketbooks, spending some more money, buying homes, moving up in homes. So it could be quite a while before this economic turnaround actually translates into additional sales tax and property tax revenues.”