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Capital Metro budget talk raises concerns of a looming recession

Friday, July 15, 2022 by Samuel Stark

A potential recession has many industries feeling wary going into the 2023 financial year, which begins on Oct. 1.

At its finance committee meeting Wednesday, Capital Metropolitan Transportation Authority executives discussed the agency’s budget for the upcoming financial year and concerns they have about a recession affecting sales tax revenue, which funds 69 percent of the budget, over the next few years.

“June inflation was released today (and) it was much higher than expected. We’re guarded in our sales tax, and sales tax is the majority of our revenue for the agency,” Kevin Conlan, deputy finance chief, said in his presentation.

Capital Metro’s funding comes from a few different pools. In addition to sales tax revenue, 25 percent comes from grants, like the American Rescue Plan, 17 percent from fares, and just under 7 percent from freight transportation, which is the contracted use of Capital Metro-owned rails.

But sales tax sometimes is not easy to predict as it is tied to economic conditions, which have been volatile due to the Covid-19 pandemic among other reasons. Capital Metro receives 1 percent of sales tax levied from the sale of taxable goods and services within the Capital Metro service area. It will rely on a steady 3.5 percent increase in sales tax revenue each year through 2032 to complete all of its projects, including Project Connect.

In 2020, Capital Metro received around $4 million less in funding from sales taxes than it budgeted for that year because of the pandemic. But this quickly turned around in subsequent years when vaccinations became available and because people were keen to spend money they had been accumulating during the shutdown.

Since 2020, the sum of sales tax funding has increased about 26 percent each year, Conlan said. This includes the 2022 financial year in which Capital Metro budgeted $297.3 million in revenue, but is now forecasting to receive $358.5 million by September.

“Austin has recovered strong. We’re still concerned, though, with a looming recession and other negative economic indicators as well,” Conlan said. “We need to be extremely prudent with our funds over the next few years as we embark on these large expenditures.”

To hedge against economic turmoil, the transit agency can dip into excess sales tax funds from years when it received more than what was predicted, but a long-lasting financial crisis would obviously cause difficulties for the agency and its projects.

“Of course, the assumption ongoing through 2032 is 3.5 percent growth for sales tax with no decline inside (Capital Metro) or associated with everything that’s going on in the country right now, as far as inflation, recession, fuel pricing, etc.,” Conlan said.

If sales tax revenue does not continue to grow as needed, Capital Metro may consider a fare increase.

Compared to other systems in the country, “our fares are actually some of the lowest,” Conlan said. “We’ve also not had a fare increase for quite a number of years as well …. We’ve stood firm on our fares and that’s mainly because sales tax for Austin has done well,” he added.

“Hard to raise fares in the face of declining ridership, but in the next year or two for the reasons you were just illustrating … future boards are going to have to pay some more attention to that,” said Wade Cooper, chair of Capital Metro’s finance committee.

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