Taking Budget Mountain by Strategy

Attempting to "take the mystery out of city finances" has been an oft-declared goal of City Manager Marc Ott, one he reiterated once more at the city's sole town hall on this year's budget, held in a Convention Center ballroom in June.

The public budget process Ott has overseen has been a highlight of his two years in the top managerial slot and a vivid contrast to predecessor Toby Futrell's backstage number-crunching. Futrell's budget drafts were assembled largely behind the scenes and presented to City Council and the public as faits accomplis – and they usually left the council anywhere from a few hundred thousand dollars to a couple of million to quibble over.

But Ott's public process, like its predecessors, is entirely focused on the General Fund, which includes only tax-financed city services – a not inconsiderable amount at about $615 million (two-thirds of which is consumed by public safety costs) – and is only a fraction (22%) of the $2.75 billion overall size of the city's operating (or "all funds") budget. (For more on the details of the General Fund, see "Hitting the Budget Barbells," June 25.)

As council, coming off its summer hiatus, convenes July 28 to receive Ott's proposed fiscal year 2011 budget, it's worth examining the all-funds budget from a holistic perspective, including the General Fund's reliance on declining contributions from city-owned utilities; whether the city is shortchanging other revenue streams, like development fees; and whether, through our accumulated debt, Austin's been living beyond its means.

Shifting Paradigms: Enterprise Departments

"This city's involved in more service areas than most," Budget Officer Ed Van Eenoo said at the June forum. "We run the Austin Energy and Austin Water utilities. We run the Con­ven­tion Center; we run the airport."

Those areas, Eenoo elaborated, are known as "enterprise" operations, in that "they have their own dedicated source of resources to fund their operations." In comparison, the General Fund is largely funded through property taxes (currently $233.1 million, or 38.3%, but tax appraisals are down this year) and sales taxes ($134.2 million, 22%, and historically more volatile than property tax; updated sales tax figures are expected July 28). However, roughly a fifth of General Fund money comes from enterprise operation "transfers": For the current fiscal year, that was $101 million from Austin Energy and $29 million from Austin Water, plus an additional $1.2 million to the Planning and Development Review Department for water infrastructure inspection services.

The transfers play an important role, often filling budget gaps when the economy worsens. In dot-com-flush 2000, combined utility transfers accounted for 19.1% of General Fund revenue; Austin Energy, making the larger of the two transfers, contributed $61.2 million. By 2003, the peak of the post-9/11 economic bust locally, the percentage rose to 20.6% and AE's contribution to $72.9 million. Contri­bu­tions scaled down slightly while the economy improved but have shot up again since the recession began, with AE's most recent transfer at $101 million. AE also contributes to the city in other ways, funding nearly the $8.8 million entirety of the city's Economic Growth and Redevelopment Services Office, while its Customer Care division funds and oversees the city's 311 call center, both these services over and above the basic utility transfer.

However, with the utilities now facing a conservation-based culture change in their business models – one that looks, at least in the short term, financially self-defeating – the city's reliance on transfers will soon be tested. From its current high of more than 21% of General Fund revenues, the city projects that transfers will decrease to 20.8% in 2011 and trend steadily downward to 18% by 2015.

The utilities' own financial futures aren't especially rosy. AE faces a budget gap projection over the next five years, and there are similar dire warnings about Austin Water. In addition to a conservation-minded paradigm shift and the expense of implementing more renewable energy resources as part of the city's Climate Protection Plan, existing rate agreements are negatively impacting the utility. According to minutes of a meeting AE finance executives held with the Electric Utility Commission discussing the budget, a "major factor" in the gap is "contractual obligations to hold rates constant for 14 of the utility's largest customers" – information the utility considers competitive business information and therefore confidential. Along with cost reductions, "Customer rate increases are likely needed to maintain the utility's long-term financial stability," though raising rates solely on the residential class of customers (who, in fairness, have enjoyed rates effectively subsidized for years by heavier industrial users) may prove politically problematic.

Austin Water's revenue projections through 2015 project a 1.9% growth in the number of customer accounts but also predict a conservation-based decrease in usage of 4.4%. However, this spring AW – currently undergoing a rebranding from "Austin Water Utility" – surprised observers by estimating a $43.2 million shortfall this year in revenues.

Opponents of Water Treatment Plant No. 4 – currently slated to cost more than $500 million – warn the plant will make the utility's financial situation even more dire, with revenue-cutting conservation measures and the expense of the plant necessitating a raise in rates – leading to even less use and therefore less revenue. A report prepared by WTP4 opponents Save Our Springs Alliance considers the conditions affecting AW's bottom line – conservation measures, rain and drought unpredictability, and the recession – and argues that "some or all of these situations may continue for some time, making now the worst possible time for [AW] to take on large amounts of new, rate-secured debt." However, AW says the compounded rate impact of WTP4 from FY 2010 to FY 2016 is only a 13.2% increase – an estimated $3.50 increase to monthly bills by 2016.

As the city utilities face a less than certain financial future, their contributions to the General Fund have no choice but to decrease over time – raising the question of what will fill their place.

The Price of Everything: Fees, Fines, Etc.

Another $110.9 million – just over 18% – of the General Fund is collected from disparate fees, fines, and more. It's in this slice that you find building and development fees, which, combined, total only $18 million. (Building safety totals $8.8 million, development fees $4.2 million, and other licenses and permits come in at $5 million.) In keeping with the locally popular but structurally unheeded mythology that growth does or should "pay for itself," some are wondering why Austin's development fees aren't offsetting a larger portion of the budget.

Brian Rodgers, working with local agitators Change Austin, has been a vociferous critic of the city's budget process as too narrowly constricted to popular General Fund programs – emotionally fraught areas like public safety, afterschool programs, HIV services, and so forth – while proscribing broader budget discussions as outside the parameters of public debate.

Rodgers sees several ways to offset growth – and the additional strain it places on city resources – by raising development fees to more accurately reflect their actual cost to the city. He recently commissioned a report from Oregon-based planning consultants Fodor & Associates to examine whether development services offered in the Planning and Devel­op­ment Review Department's One-Stop Shop – review and processing applications for building plans, site plans, subdivisions, and the like – do in fact pay for themselves. The report notes the difficulty of ascertaining a completely accurate number, as supplemental positions and funding for the department are spread across budget areas like Support Services and elsewhere in bucket funds that benefit practically all General Fund departments. But after weighing development fees' $12.9 million in estimated revenue for 2010 against the $20.8 million cost of staffing and funding the One-Stop Shop, the report states, "Fee revenues will fund up to 62% of costs for development services, leaving $7.9 million (or 38%) to be funded through other sources."

Other ways Rodgers suggests to pay for growth include road impact fees for new homes. "Fort Worth charges a road impact fee of $2,000 per new home," Rodgers says. "The city of Austin added 21,493 single family homes over the last five years, according to [the Travis Central Appraisal District]. That would have put $42 million into a road fund and possibly prevented the need for the road portion of the new bond package." (Indeed, the question of which projects should be funded through bonds instead of ongoing maintenance expenses is always deserving of scrutiny. One take is that certain repairs, like road maintenance, can go unheeded temporarily to give the budget more breathing room, before deteriorating to the point they've become capital improvement projects – which would be covered via bond debt.) Rodgers also proposes raising other fees, such as AW's charges to run taps to new homes, which he considers below surrounding Central Texas prices. (Last August, Council Member Chris Riley appointed Rodgers to the city's Impact Fee Advisory Committee, which is considering these questions.)

That said, there are obvious limits to Rodgers' approach. Early this year, questioning City Council's economic incentives to attract employers here, Rodgers, extrapolating potential infrastructure costs an influx of new jobs could create, displayed some disdain for the very concept of job creation. "What is the solution to keep people from moving here? Well, I guess it's to let the unemployment rate drift up to about 6 percent. ... By getting our unemployment rate so low, we're inducing people to move here" – and in his eyes, further driving the unsustainable expenses that growth creates. Restricting growth by encouraging higher unemployment is an innovative solution to municipal budget crunches (and in fairness, Rodgers was speaking more theoretically than programmatically), but it's not one likely to initiate a groundswell of political or public support.

In any event, the city would likely disagree with Rodgers on development fees, pointing to the pronounced, measurable downturn in development revenue – with residential and commercial applications down across the board and expected to flatten in 2011 before rising again – as one example of the recession's cost. It's hard to raise the tab on fees nobody's currently paying. But it seems undeniable that the underlying philosophy behind subsidizing development by keeping permitting fees below actual cost – essentially a form of trickle-down economics by which the benefits of growth are ostensibly shared, eventually, across the city – hasn't been borne out. However, Planning and Development Review is in the midst of a cost-of-service study which may be used to update its permit fees.

In the Hole: How Much to Borrow?

Paralleling this fiscal year's budget talks have been discussions of the city's bonding capacity – and how much debt is too much. Mayor Lee Leffingwell's proposal to proceed with a (now) $90 million transportation bond vote this November, while holding off on an urban rail election until 2012 (when it would likely be bundled with a general public improvement bond election), allayed some official fears about a too-rapid accrual of bond debt. However, especially in light of a slowly recovering economy, questions remain about the elections – and whether voters will opt to take on more debt.

The $90 million cap on the transportation bond election coincides roughly with a policy from Leffingwell to use only half the city's total bonding capacity. In April, council learned that the city's total capacity over the next three years would be $170 million ($35 million in 2012, $55 million in 2013, $80 million in 2014). A recent $5 million addition to the proposed package, bringing it from $85 million to $90 million, raises it just over Leffingwell's working limit. In a bond election, all the debt's not issued at once; Budget Officer Eenoo writes, "The debt associated with 2010 Transportation Bond program would be issued over a 2-year window – FY12 and FY13" – taking up the entirety of both years' capacity. And with a combined general bond election and urban rail bond election on the drawing board in 2012, more bond debt is on the horizon.

The city's financial policy requires that the ratio of general obligation bond debt ($695.6 million) shall not exceed 2% of the city's total assessed property values. City financial literature compares the percentage of net debt to other Texas cities, showing Houston, Dallas, and Arlington as exceeding Austin's roughly 1.08%. However, the debt only covers remaining service payments on debt the city's already issued, not debt included in a new bond election, so additional debt is slated to be added, typically spread out over the course of six or seven years in a major bond election.

Austin's bond debt per capita, calculated by dividing the general obligation bond debt by population, currently sits at $1,034, a dip from projections in last year's budget of $1,208. However, factoring in the debt demands of Austin's other taxing jurisdictions – mainly Travis County, the Austin Independent School District, and Austin Com­munity College – that figure from last year's budget more than doubled, to $2,660. While projections for this year's overlapping debt aren't ready yet, dependent upon factors like updated property tax valuations, a rise in property tax rates is all but certain in order to cover a projected $11 million to $28 million budget deficit.

All Funds on Deck

While "austerity" has become the global political buzzword in response to the recession (witness the refusal of Congress to extend unemployment benefits and the enthusiasm for belt-tightening at this summer's G-20 global governments conference), progressive economists are arguing that cutting government spending (which serves to prime the economic pump) could lead to a "double dip" recession, relapsing in the wake of recent improvement – or worse, a Japanese-style "lost decade" of sluggish economic activity and protracted unemployment.

There's little immediate likelihood of anything like that happening here, as Austin's finances are faring better than most cities around the country; job creation and a stable real estate market, plus the economically insulating presence of state government and the University of Texas, have seen the city weather the recession better than most – which also argues for some degree of continued government spending. However, with declining transfers from formerly reliable moneymakers like the utilities, "growth" that arguably costs more than it gives, and escalating debt service on taxpayers, the city is due for a realignment and reprioritization of its financial goals.

At the forum last month, Ott recalled a moment from last year's budget discussions, when "someone stood up and said: 'Well, Mr. Manager, does all of this [public discussion] really matter? ... Is it going to have an impact on the decision that you make at the end of the day?' The answer I gave then is the one that I'm going to give now. The answer is absolutely – it makes a difference. Absolutely, it's going to impact the decisions that we make."

While Ott has done a laudable job of opening up the General Fund to greater discussion, it's also obvious that the challenges Austin faces – separating the city's needs from its wants and from what it can do without – is a challenge that does not stop at the limits of the General Fund.

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The Save Our Springs Alliance's report "The Perfect Storm," the Fodor & Associates report, and more are posted in the sidebar "Return to Budget Mountain."