Can City Manager Garza's Budget Cuts Squeeze the City Through the Latest Economic Crunch?
Suggest to Betty Dunkerley and John Stephens, the city's former and current CFOs, that citizens may be caught off guard by Austin's new fiscal austerity when the tightest city budget in recent memory is released this summer, and they scoff. "With headlines like the ones today?" asks an incredulous Dunkerley, now an assistant city manager. (The headline in question, "Dell to lay off another 4,000," was followed a day later by "Vignette abandons downtown plans.") Stephens just says, "I don't think that's true at all."
The city's budget director, Charles Curry, concurs. "We had more of a credibility problem last year, when we said we didn't have enough money and the economy was booming. Now that every major company in the country is trying to cut costs, I don't think [people] will be surprised that the city is cutting costs as well."
"But that doesn't mean they'll be happy about it," says Dunkerley. "They always want more than you have, no matter how much you have."
Which is to say that they -- you -- will be kinda bummed that the Boom Dividend, such as it was, has been spent. Austin's affluence grew exponentially this past decade, but so did Austin itself, and the fiscal tune at City Hall is still "Do more with less." About $6.6 million less, after City Manager Jesus Garza's recent emergency surgery on this year's General Fund budget. (The General Fund, where your taxes go, pays for public safety, public health, planning and public works, and parks and libraries. The utilities, airport, and other things that make money are in their own "enterprise funds.")
This bloodletting, or liposuction -- Garza refers to "savings," not "cuts" -- was prompted by a precipitous slide in sales tax revenue, back to where it should be on a civilized planet, growing by 5% a year instead of 12%. The city thought it prudent to project an 8% increase for the Fiscal Year 2001 (beginning last October) budget. Oops. Who knew?
Even with these savings in place, the FY2002 (starting this October) General Fund budget will be almost $20 million in the red, más o menos, as the city manager likes to say. The budget must be balanced, so this gap must be closed. Garza could levy a 5% across-the-board cut, except that we just granted the cops double-digit salary increases, among other reasons.
Twenty mil is real money, more than the annual budget of the library, or of EMS, or of the three planning departments combined. Still, it's not the fiscal meltdown the city suffered in the 1980s and for a time seemed doomed to repeat. And last summer, as Curry notes, Garza projected a shortfall of similar size in the FY2001 budget. But we got a windfall at the last minute, and the City Council got some pin money for its own initiatives.
That's not going to happen this year, and in fact, the $20 million gap may widen some if Austin slides further into the tank. Bad news keeps our money in our pockets, and the bad news just keeps coming. ("I think the Dell layoffs will have a dampening effect," says Dunkerley. "Two months from now you'll see another drop.") A $6.6 million cash crunch at City Hall is itself pretty depressing news, so the cuts happened with little fanfare, though not, as aggrieved citizens have charged, in secret.
The rest of the General Fund comes from property taxes, our dividend as municipal owners of Austin Energy, and various fees and fines and charges, and unless the City Council bites the bullet and raises property taxes, these won't fully offset the sales tax slowdown, inflation, and population growth. Which puts in question our current level of city service, which is, as Dunkerley says, never enough.
This means the ink is fast drying on a chapter of Austin's fiscal life: our first five years as a truly wealthy place, which just happened to be under Kirk Watson, our most popular mayor of all time. Funny. Garza is not so beloved, though he's been here long enough to show that, despite often turning a tin ear to Austin political nuance, he is trusted with the piggy bank.
The Nickel-and-Dime Era
Between them, Watson and Garza have herded the cats of Austin politics toward a fairly coherent fiscal policy: lots of capital investment, limited growth in services, keep the tax rate low. "We've attempted to be strategic in what we fund and how we've funded it," says the mayor. "We've been able to fund the needs we hear from the people, but as we move into what is without question a slowing economy, we're not really hung out there. We can continue to be strategic."
And do we have a choice? The clock is running out on the go-go days; inside Garza's City Hall office, it's been running since January. "When we got back from the holidays," says Garza, "we began to sense that 7.9% [the projected sales tax revenue increase] may not be met, so we asked [Curry and Stephens] to do an analysis based on what seemed more likely." Garza matched these estimates against General Fund spending and didn't like what he saw. "So we asked the [department] directors, as an exercise, to identify savings goals so we could catch up [and not enter] FY2002 without enough savings."
When the boss asks you to cut your budget as an "exercise," you know those reductions will not long be hypothetical. Quick to go were employee travel and training, consultant contracts, and anything else that wasn't nailed down, fiscally speaking. "You look at your discretionary expenditures, because you don't want to have midyear layoffs," Garza says. "What can I do on capital, contractuals, temporary employees, overtime? They all have consequences, but you look at the ones that have the least impact."
Adds Curry, "We were fortunate to be dealing with this at the end of the first quarter. The earlier in the [fiscal] year you do it, the less you have to do to get the same impact. If you wait until the middle of the year, you have to do some drastic things to save $6 million."
Now, "drastic" is in the eye of the beholder, and for the poorer city departments, Garza's exercise regimen took off not only fat but muscle. Take the Austin Public Library, which to meet its savings goals lost $250,000 (about one-quarter) of its FY2001 book budget, with attendant public outcry. (This has since been restored, but the library isn't spending it lest it need the funds later.) Health and Human Services hit its mark by delaying construction of the downtown homeless shelter. And, after many months of preparation, the Neighborhood Planning and Zoning department almost lost funds for the upcoming Austin Neighborhoods Conference, but for a clerical oversight at City Hall.
Garza has other, more typical, cases in mind when he describes the tonic effect of a little belt-tightening, though he seems to realize what most people think of their tight-fisted bosses. "People would say they need to buy a bunch of cars. And I'm the worst about this: 'Tell me why you need these cars. If I don't buy them, what's the worst that could happen? And why do you need a full-size car instead of a compact, or an SUV instead of a pickup?' I thought these were good exercises for us as managers and for the city," he concludes.
In the end, the biggest savings came from the citywide hiring freeze that has left more than 100 jobs vacant until at least October. Along with support and entry-level staff, the vacancy list includes the manager of the city's ambulance fleet, a first assistant city attorney (actually two, since another deputy will now fill in for departing City Attorney Andy Martin), the deputy director of PARD, engineers in Public Works, 15 people in Curry and Stephens' own Financial Services department, and librarians for the new Wired for Youth Centers, paid for by Michael and Susan Dell on condition that the city hire the staff. (As with the book budget, these positions have technically been restored but are still on hold.) The city also expects an unusual number of high-level staff retirements.
Some jobs will have to be filled, but since the $6.6 million is already gone from the FY2002 budget, hard staffing choices lie ahead. "We're now reviewing positions to see what can remain unfilled or eliminated," says Garza, "so we don't have to have a lot of dislocation of services and lay off a bunch of people. It'll be minimal if it does happen." He contrasts this with the Big Bust, when, in 1987, the city had to lay off hundreds of people as it cut the General Fund by more than 20%.
Some cuts have been restored (like the book budget) and positions unfrozen after the city's balance sheet perked up in the second quarter. So the worst was over before most Austinites knew it had begun, which was when media folks started hearing rumors and fielding calls about (in the callers' view) Garza's secret hiring freeze. The library cuts broke in the daily and got picked up by Sammy and Bob, to the city's undoubted chagrin. "If it was a secret," says Garza, "it was the worst-kept secret in town."
Curry notes that in the city's first-quarter financial report, "we included a note that we estimated shortfalls and were doing a review."
"I secretly put that in the report," Garza says. "And we secretly told the City Council in a public meeting what we were doing," Curry adds.
Dunkerley chimes in: "And I secretly told the library support groups they needed to prepare for tight budgets."
Point made. That doesn't mean details were shared freely. "The manager and others communicated that sales tax revenue was less than in past months," says Council Member Will Wynn. "We had sporadic knowledge that tax was beginning to fall short. But I wasn't specifically aware of any of the measures that were being taken.
"Now, it is a council-manager government," Wynn continues, "and [Garza] is our CEO. So he may be doing us a favor by buffering the mayor and council from individual line-item discussions and decisions. But I can't tell you how frustrating it is to read in the paper -- which is how I found out -- that we're cutting library books."
"I was talking to the council periodically, telling them what was going on, but there wasn't any decision the council needed to make," Garza says. "And I didn't want to draw a lot of attention to it, because it's government's responsibility to not further panic. When you have a headline like [the news of Dell layoffs], people really do notice. Economics is ultimately a social science."
This is the first time since taking the helm in 1993 that Garza has had to do this, but it's happened before. The run-up to "the Gulf War started in August" of 1990, Dunkerley says, "and by October we estimated we'd be $6 million down in sales tax, and we implemented savings. The war ended in January, and we saw sales tax gradually go up. So this is a matter of prudent management. We've got good financial staff that monitor the indicators. We get as much warning as anyone else when to go into a savings mode."
Not that there was much warning to get. Curry points to a chart showing the growth rate, since 1990, of the Metro Austin economy. It looks like you would if you climbed Mount Bonnell and then fell off the other side -- up, up, way up, way way down, flat. "To go from 22% growth [in 1999] to 5% growth [in 2000] ... I had a feeling for what was happening, but I'd not seen it illustrated so dramatically."
Says Stephens, the former city controller who now holds Dunkerley's old position of finance director, "People have gone along thinking things are great and this seems like an abrupt departure, and for us it doesn't seem so abrupt. But at just this time last year, the Federal Reserve was still increasing interest rates, because they thought the economy was overheated. So the turnaround has been very quick and fairly dramatic."
Curry's chart projects economic growth at around 3.5% for years to come, higher than the statewide projections but lower than we've experienced since before the Big Bust. Which means City Hall cost-cutting will not be a one-time exercise. While Garza describes this spring's effort as "fairly routine ... that doesn't mean our work won't be cut out for us. There's a level of economic austerity.
"Because of what's happened to demands for services across the board," Garza continues, "our expenditures this year grew at about 9% of the General Fund" -- nearly twice the expected growth in sales tax and three times the growth of the local economy itself. "So we have to figure out a way to slow down the growth of expenditures."
In the city's just-released five-year financial forecast -- the first document of each year's budget cycle -- General Fund spending is projected to grow just over 19% overall between now and FY2006, with a shortfall each year of $20 to $30 million. But these increases do not stretch across the board. Public Works and Municipal Court project no new spending at all; parks and libraries combined grow only 2.5%; and the three planning departments combined grow 6.5%. That's over the full five years, not annually.
Fiscal Forecast: Partly Sunny
However, public health costs are expected to go up 21% and public safety costs 25% over the same period. These two categories account for nearly two-thirds of the General Fund, and they are, sadly for Garza, the areas where his hands are tied the tightest. The city has a legal mandate (unique among Texas cities) to bear the cost of indigent health care, and the council just approved a very expensive new contract with its police officers, with more on the way for the firefighters.
Conversely, the rest of the General Fund will have little new money, but will be bringing new facilities online as the city builds out the 1998 bond list, which is supposed to be completed in FY2006. While the parks and libraries budgets shrink in real dollars, PARD will be adding thousands of acres of new parkland and greenways, two new (or virtually new) cultural facilities, and dozens of playscapes and other improvements, while the library will have new, bigger, and busier facilities at many of its most popular branch locations.
The list of transportation projects from the 1998 and 2000 bonds is even longer, but the transportation fee on your utility bill helps pay for road maintenance. There's no equivalent for parks and libraries, which is why those programs' friends are most concerned. Actually, library advocates were in the beginning stages of a campaign -- with Garza's respectful attention and cooperation -- to increase the APL budget by millions annually, to implement the ambitious recommendations of the city-appointed Austin Libraries for the Future Task Force. But that was before things changed.
Garza aims to further reduce General Fund spending by between $5 million and $10 million a year. "We may not be able to get there this year," he says, "so maybe we'll be doing this with an eye to FY2003, when we could be hit by a double whammy -- both less sales tax and less property tax revenue. We need to evaluate the savings goals for each department, and there may be some [reductions] that can't be done."
If Garza can't meet his savings goal, he probably won't be able to balance future budgets without "alternative revenue sources," he says. "But I can't say that's what we'll do, because that's the easy answer." Easy in that the City Council, not the city manager, will take the heat for raising taxes. "I need to make sure that the budget is the council's document -- to see where the council is, where their priorities are, where they want to look for reductions or revenue enhancements. I need to be mindful so as to not surprise them."
The options for "revenue enhancements" are particularly limited. Austin's sales tax rate -- 1% -- is set by state law, and the Austin Energy dividend can only take up some of the slack. That leaves our property taxes, which you may have heard are the lowest of major cities in Texas. Austin taxes have traditionally been on the low side because of our friends at Austin Energy, but throughout the boom, the Watson council has proudly let them sink, currently to 46.63 cents (per $100 assessed valuation), and Garza's forecasts presume that the rate will sink even further, to 44.6 cents.
That's the effective rate -- the rate at which the tax burden on existing property is supposed to remain unchanged -- plus one cent more to pay off the 1998 and 2000 bonds. Which makes our tax rate 23% less than in San Antonio, 32% less than in Houston, 33% less than in Dallas, and 49% less than in Fort Worth.
Which, says Watson, is part of the strategy. "We keep hearing about affordability, and one of our best tools -- maybe one of the only tools in a worldwide economy with a boom going on -- is what we've done with the tax rate. Now the county and AISD rates have gone up, so while there are [city] needs I might want to pay for, I've got to look at the total tax burden." He adds that while Austin's overlapping property tax burden is still the lowest of major cities in Texas, the margin of difference is much smaller.
Texas tax law makes it tough to reverse course; unless the council wanted to invite a legalized citizen riot, it would take decades to bring our rate in line with our urban sisterhood. Under the law, "even if you keep taxes at the current rate, our council gets told it's raised taxes," says Garza, because the effective rate drops as valuations go up. Other cities have kept their rates unchanged, and "I assume those mayors and councils have claimed they kept taxes constant, and I don't know how they get away with it."
But if anything but a property tax increase, minor though it might be -- one or two cents over a couple of years -- will help Garza bridge the looming General Fund gaps, it hasn't appeared yet on the horizon. As it discerns an acceptable balance of tax increases and spending cuts, the council will face plenty of those "tough choices" candidates talk about before they're elected. "I think we [the council] will be more involved" in this year's budget cycle, says Will Wynn.
"It'll be fair for the city manager to not like that, to protect his role," Wynn continues, "but this and future councils will continue to be quite frustrated by [having] a marginal and wholly reactive process in late summer." He means the usual budget cycle, when the Council has about six weeks to review what Garza has spent six months putting together. "It's frustrating that priorities are set long before the budget is presented to council."
On the other hand, Watson says, "It does feel different [this year], and it's important for us to get that it feels different, because that's part of being strategic. But the good news is that the way we've approached budgets in the past has positioned us well for a time of global slowdown." He means that the boom dividend got put into capital projects -- the laundry lists from the 1998 and 2000 bond elections -- that we will eventually pay off and find valuable for years, rather than into new services that increase the General Fund bottom line.
"If you're in this business long enough, these things occur fairly regularly," says Dunkerley. "When you've had good times, you try to get caught up on your capital projects, the things we can't do when there's a slowdown. So I've been proud at how Jesus has taken that good-time money and put it into infrastructure." That includes not only debt-supported projects from the bond list, but also cash-up-front capital spending -- $20 million last year alone.
"You can always go back and look at what's happened over the last two years and ask what we could have done differently," Garza says. "If we had raised taxes, I promise you we would have spent those dollars in ongoing expenditures, not on infrastructure. We'd have added more librarians or parks people and added costs to the budget."
But with a capital program the size of Austin's, the ongoing expenditures can't be avoided, simply delayed. "Next year, we have about $5 million in new operating requirements for new facilities," says Curry. "The money's going to have to come from somewhere." He notes that in 1998, the city fiscal staff raised a red flag over the scope of that year's bond package. "We knew we had more facilities than we could take care of. We were giving new facilities to the library even though they had another library with a leaky roof they couldn't fix."
And there's still political pressure for even more bonds, as you may remember from last summer, with the fight to put parks, affordable housing, and other stuff into a transportation package that was already straining at the edges of the city's financial policies and, by extension, its bond rating. (That's not to mention a new $80 million central library, which Garza himself proposed in 1998 -- again to public outcry.) Garza feels we shouldn't even talk about another bond package until 2003, with a vote in 2005 -- at the end of the six-year 1998 bond buildout schedule -- but word on the street has pegged a bond vote as early as 2002.
That might change when it's clear there's not enough money to run or care for these new toys. "In 1998, the community said 'Here are our priorities and here's how we're going to approach it in this economic climate," says Watson, adding that the backlog of capital investment not made during the Big Bust made it hard to avoid capital spending. "So fundamentally this policy has been tested.
"But if the people, through their leadership -- and it may be the leadership that's still here -- decides there needs to be a change in course, that can occur," the mayor continues. "It's similar to the life in a household. Sometimes you have a windfall and you may save some [and] also invest in new things. But you'll know when you need to stop. Many times, people will tell me 'I want more parks,' but they don't want to pay more taxes. They're balancing. In a big city, they recognize that we need to do that."