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City financial forecast better than many

Wednesday, April 8, 2020 by Jo Clifton

According to the city’s economic consultant, Jon Hockenyos, a quarter of a million workers in the Austin area will lose their jobs as a result of the Covid-19 pandemic. “We’re just at the beginning of seeing the economic implications of the pandemic,” he told City Council at Tuesday’s work session.

Hotel occupancy is down to just 5 percent, compared with 75 to 80 percent earlier this year before the pandemic killed the tourism industry. Sales tax collections, which are strongly correlated with jobs, have also fallen significantly, Hockenyos said.

Nationally, between those who work in sales, production and food preparation and other workers whose occupations require close contact with the public, such as waiters and hairstylists, the disruption caused by the virus has resulted in 52.8 million Americans being laid off, Hockenyos said. “Given the assumption of a constant labor force, this resulted in an unemployment rate of 32.1 percent,” he said.

Consumer activity and hospitality were hit the hardest, but he added, “also, if you’re an orthodontist, you’re shut down.” The same is true of other unique transaction businesses, such as real estate. Hockenyos says he expects to see “downward pressure on property values,” although Travis County Chief Appraiser Marya Crigler said prior to the pandemic that her agency would assign property values at the same rate this year as it did in 2019.

In addition, Hockenyos said he expects lower revenues for Austin Energy as business activity declines. And the downturn will likely have some impact on fees the city collects. “We’re doing as good a job as we can do to get our arms around this … frankly unprecedented situation,” Hockenyos said.

On a brighter note, the economist said Austin is set to receive $150 million in funding through the federal CARES Act recently approved by Congress. He described the act as “a first of its kind effort to provide help to individuals and businesses,” while noting that the program has had a “rocky rollout.”

Veronica Briseño, director of the city’s Economic Development Department, described efforts by her department to help people and small businesses impacted by Covid-19. She said case managers in her department can help businesses and nonprofits gain access to federal loans.

The department is set up to help with several different types of loans. For example, the department has already created a website, trained staff and partnered with other departments to make sure the program is ready to launch once the federal Housing and Urban Development Department begins accepting loan applications.

One type of loan offers up to $35,000 with low interest rates payable in 12 months. Another loan program is envisioned to help small businesses meet payroll, mortgage, rent and utility obligations.

Deputy Chief Financial Officer Ed Van Eenoo described how the city’s financial decisions last year have left it in a relatively strong position to weather an economic downturn. Due in part to an anticipated cap of 3.5 percent on property tax increases, the city saved an extra $25.7 million above the 12 percent in reserves dictated by city policy, Van Eenoo said. The city currently has about $148 million in its combined General Fund reserves, or about 13.8 percent.

But Van Eenoo also noted that the city expects to spend an extra $8 million to $10 million for emergency services through the end of May.

Due to action by the Legislature last session, the city was anticipating a 3.5 percent cap on increases to property taxes, but because of the pandemic, that has now reverted to 8 percent. In response to a question from Council Member Alison Alter, Van Eenoo said each 1 percent is equal to about $5 million. The 8 percent cap will remain in effect for two years under the governor’s disaster declaration.

Van Eenoo said the Austin Convention Center has reserves for 336 days of expenses and Austin-Bergstrom International Airport has a balance of 608 days of operating expenses. Austin Energy and Austin Water also have what he called “extensive reserves.”

“We were $10 million ahead on sales tax collections through January,” he noted, adding that although sales tax will be impacted significantly this year, it only represents 23 percent of the city’s General Fund revenues. Covid-19 is not expected to impact 70 percent of the city’s revenues, Van Eenoo said.

In addition, the city has maintained a AAA credit rating on its general obligation bonds, with a certain portion of the property tax dedicated to servicing those bonds.

Mayor Pro Tem Delia Garza said it was her understanding that the city kept 12 percent of its funds in reserve in order to maintain the AAA rating. She wondered whether it would impact the credit rating if the city spent some of that money on residents’ emergency needs now and paid it back when the city received funding under the federal program.

Van Eenoo said, “I think as long as we’re prudent about it, as long as we’re staying within our financial policies – with the expectation that our reserves would be replenished by the federal stimulus package – as long as we have a plan, I think the impact on our ratings of that particular decision would be fairly minimal.”

Alter said, “Our reserves are there for just this kind of situation, but how we take other steps as we move forward will affect our fiscal health moving forward and we just have to keep that in mind. We came out of (the financial crisis of 2008-2009) with an upgrading of our bonds.” She said it was important that the city keep “the larger picture in mind” while navigating this crisis.

Council Member Pio Renteria recalled the city going through a somewhat similar crisis in the 1980s with the collapse of numerous savings and loans. “I noticed it took us a long time to recover. I’m really concerned about the whole process,” he said. Most urgently, Renteria said he is concerned about the possibility of having to lay off employees.

He urged his colleagues to really understand the rules from the Treasury Department, adding that he had already lived through three recessions and found it “very difficult to recover. We need to focus on how we’re going to do this.”

Hockenyos said he did not expect this recovery to be as slow as the recovery from the savings and loan crisis (roughly 1986-1995). “We’re in strong shape going into it. Also, there’s no systemic problem like 2008-2009, but I think you’re wise to caution us. It will probably be a couple of years before we are fully recovered.”

Photo made available through a Creative Commons license.

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