Happy Times ... in Moderation

Employment figures, like other indicators, reflect that Austin's recession was not as deep as the national recession, and the recovery has been quicker and more substantial. In his economic forecast, Jon Hocken­yos of TXP said, "Austin is clearly one of the brightest economic stars in the United States, a status that should be the case for some time." Total employment change in the Austin Metro­pol­itan Statistical Area (Bastrop, Caldwell, Hays, Travis, and Williamson Counties). (Source: TXP)

Everything's coming up roses.

And roses are expensive.

That was the more or less contradictory message transmitted last Thursday by the city of Austin's budget staff, kicking off the Fiscal Year 2014 budgeting process with a financial forecast and early budget preview. At City Council's morning work session, consultant Jon Hockenyos of TXP, Inc. painted an extremely rosy picture of the city and region's short-term economic prospects. He was followed by the budget staff, led by financial officers Elaine Hart and Ed Van Eenoo, who explained at length that ongoing expenses plus a brace of rising costs mean the city's finances remain quite constrained and that, even if Council adds nothing to existing services, it will still cost a bundle more, just to get by.

First, the good news. Hockenyos told Council that Austin is at the center of the best regional economy of all the major metropolitan areas in the country and that, while the city suffered as well from recession, it has recovered more quickly. "Austin is doing extremely well," said Hockenyos, citing a range of economic indicators – jobs, construction, investment, hotel revenue – in which the area is doing better than the national economy. He acknowledged that not all the jobs lost during the downturn have returned, and that cuts in government spending (particularly at the state level) remain a drag on the local economy. But in a series of slides comparing economic changes in the Austin region over the last few years to those in other U.S. cities – in median home prices, total employment, total personal income, per capita personal income – he described local results that have been persistently strong.

Property taxes have been steadily increasing as a percentage of total GF revenue. Some of that is due to changes in the tax rate, but more is due to the steady rise in property values during the same period, the relative volatility of sales taxes, and the fact that utility transfers have been capped by City Council at 12% of nonfuel revenue. Source: City of Austin (Source: City of Austin.)

Regional comparisons can somewhat mask conditions in the city itself. But in sum, said Hockenyos, "[w]e are the bright star" in a national economy still slowing trying to recover from a very deep recession. That good news should last for at least the next 18 months, he added, because "the economic fundamentals are solid enough that I don't see anything negative."

On the Other Hand ...

After that quite bullish introduction, one might think the city's budget staff would have begun passing out party favors and singing "Happy Days Are Here Again." Instead, their entire presentation was extremely cautious and conservative – partly in keeping with the Official Way of the Accountant, but more directly with a specific sense of the financial demands on the city budget and the structural limits on the city's ability to respond. The budget staff – primarily Deputy Chief Financial Officer Van Eenoo, tasked with the lion's share of the budget preview – seconded to a degree Hockenyos' cheerful perspective on the overall economy and its effects on the city's finances; however, they also said the numbers reflect that Austin will still need to do a whole lot of running just to stay in place.

Van Eenoo summarized the immediate circumstances by saying that just to fund existing programs within a projected $784* million General Funds budget (the GF represents the base operating budget, not including the profit-generating "enterprise" departments), the city will need an estimated additional $29.1 million in the coming year to make ends meet. That includes new public safety staff, some step raises, rising health insurance costs, some new technology, a few programs added at mid-year, and so on. But in what is a significant unknown this year, all three public safety union contracts – police, fire, EMS – are currently in negotiation, and no decision has been made whether there will be a more general raise for all city employees.

As a budget thought experiment, Van Eenoo presented a scenario in which nothing else changes, but employees received a 3% raise – the new money needed would jump to $42.7 million. It was a somewhat arbitrary exercise, but it allowed staff to show Council where things might stand in August – when contract negotiations presumably will have concluded and Council will be trying to come to overall decisions about what programs can and cannot be funded.

The projection had a sobering effect – Council members returned to it several times in later discussions, and it allowed for a corollary exercise: what the effect such projections might be on potential property tax rates. In several charts, the budget staff had projected what the city's income might be at the "nominal rate" (the current 50.29 cents per $100 of assessed value), against what it might be at the "rollback rate" (the highest rate council could adopt without a tax election: currently 51.57 cents/$100). The unhappy result was that even at the rollback rate, city revenues would not be able to pay for a 3% raise, and under current projections would not be able to meet the compounded effects of that raise until 2018.

FY 2013 will be the first year in which the "other" income category – various fees of all kinds, including development fees – is expected to surpass enterprise fund transfers (primarily from Austin Energy and Austin Water). (Source: City of Austin.)

The disparity was enough for Council members later to raise the question why the staff would even use the 3% example – "if we can't afford it" – but it also had the useful effect of demonstrating just how narrow is the window between already existing city services, inevitable cost drivers for those services, and any additional expenses Council might wish to take on.

Good Times, Cautious Optimism

It's worth noting that as a matter of course and policy, the budget staff uses "conservative" estimates and projections in its work. That's in part the meaning of the 3% wage increase projection – in budget terms, it's a "worst-case scenario" to let policy makers get a sense of the parameters they'll be working with. It was also paired with a "no-raise" scenario under which existing cost drivers would not require dramatic changes in the tax rate, and over time the current rate would accommodate anticipated growing costs.

The projections were similarly conservative regarding other variables in the city's income, notably sales tax collections, which at the moment have been rising steadily. Van Eenoo noted that, for the first time in quite a while, sales taxes had shown increases for 18 straight months (over the previous year), and recent months have been in the 10% positive range or better. But he cautioned that sales tax collections are inevitably volatile – the 20-year pattern is very much a roller-coaster – and therefore the city's near-term projections, for budgeting purposes, don't reach beyond a 3% annual increase (any sales tax income beyond that goes into reserve funds).

According to the budget preview, property taxes will represent 41.1% of the city's revenues, sales taxes 22.2%, and enterprise department transfers into the General Funds (primarily from Austin Energy and Austin Water) 18.3%. For the first time, "Other" sources – including all kinds of miscellaneous fees, but especially income from development – will slightly surpass the utility transfers at 18.4%. That development income is also a volatile source; Hockenyos noted the explosion of multifamily residential construction in recent years, and Van Eenoo noted more than once that construction cranes come and construction cranes go. For the foreseeable future, Austin's finances will rest primarily on the twin pillars of property taxes and our publicly owned utilities.

All in all, times may be happier for Austin than they were just two or three years ago – but we still have to figure out a way to pay for them.

Council Ponders

By far the greatest portion of the FY 2013 budget is allocated to public safety (police, fire, emergency medical services). Anticipated expenses include maintaining current services, maintaining current police-staffing ratios, some additional inflationary cost drivers – but none of the additionZal unmet service needs requested by the public and city departments. (Source: City of Austin.)

That was much of the burden of the brief Council discussion that followed the staff's initial presentation. On the tax side, Mayor Leffingwell was quick to point out that even the "nominal" property tax rate will be considered a tax increase under state law, because with Austin's rising property values it would raise more money than it did last year. (This preliminary budget preview didn't address the "effective" rate – the rate that would raise the same amount of money as in the previous fiscal year – although that will certainly become part of the subsequent tax discussions, even though it would not meet current expenses.) It's very early, but no Council member seemed eager to advocate for going to the rollback rate, so it's reasonable to expect that as matters proceed, the likeliest scenario is somewhere in the middle.

On the expense side, it was noted more than once that public safety continues to consume nearly two-thirds (63.5%) of the entire GF budget, with little prospect of that changing. The city's "2.0 officers per thousand residents" policy will structurally add 47 officers to the next budget, but that does not include another 45 positions requested by APD brass. The "2.0 formula" got a little workout in Council discussion; under questioning by CM Bill Spelman, Deputy City Manager Mike McDonald acknowledged that it remains a somewhat arbitrary standard, but it has the virtue of simplicity and indeed has been stoutly defended by Coun­cil policy decisions and by city management.

AISD represents a little over half of the total property tax rate; city and county are next at roughly 21% each, with the other jurisdictions represented respectively. (Source: City of Austin.)

Spelman has perennially argued that there are better metrics for police staffing needs, and that it might also be possible to slow cost growth by moving some police functions to non-sworn officer personnel. "This is the only department in the city," he said, "that automatically gets a staff increase with a rise in population." Lef­fing­well quickly responded that police services are specifically "population-driven" – only the first and very brief exchanges in a somewhat circular argument that will persist over the next several months.

Indeed, most of the Council trepidation was over the shortfalls reflected in that income/expense chart that projected the potential costs of a 3% wage increase. CMs Spelman, Laura Morrison, and especially Mike Martinez noted that any such increase was "simply unsustainable," and Martinez hoped that "the staff will see that [projection] slide just as we have" and comprehend its meaning for city finances. Spelman noted that the overall growth in the city's per capita income over the last year is likely not in the 3% range – "it might be half that or less" – and asked if the staff could research that number to get a better sense of the specific burden of any wage hike on city taxpayers.

Morrison asked about timing – when would management know the cost of those contracts-in-negotiation – and McDonald said that matters seemed to be proceeding well, and that staff certainly hoped the numbers will be available for Council's Aug­ust budget deliberations. We're still a long way from that discussion – there will be plenty more work sessions and departmental presentations in the meantime (for the first time to be presented and archived on video). For now, however, the first shots have been fired in the long season of budget skirmishes.

*Due to an editing error, this projected FY2013 GF budget total was incorrect; the correct projection is $784 million.

Tax rates, per $100 of assessed value

Source: City of Austin

This projection by the city budget office shows estimates of potential revenue and expenditures, within certain possible parameters yet to be considered by City Council. The bars show projected revenues at the current ("nominal") tax rate of 50.29 cents per $100, and at the projected "rollback" rates (the highest level available without an election). The lines project spending with or without annual 3% wage increases for city employees, matters to be determined by current contract negotiations and Council decisions over the next several months. (Source: City of Austin budget office)

Budget Timeline & Next Steps

April 25: Department forecast videos, presentations, and unmet service demands report available on city's website

May 2: Council discussion and Q&A related to department forecast presentations (9am-4:30pm)

May-July: Public engagement and budget development

Aug. 1: Proposed budget presented to Council

Aug. 8: Department budget videos and presentations available on city's website

Aug. 14: Budget work session

Aug. 22, 29: Budget, tax rate and utility rate public hearings

Sept. 9-11: Adoption of budget & tax rate

The April 18 "Economic Forecast and Financial Projections" is posted with this story online and also available with other budget documents on the city's Financial Services website (assets.austintexas.gov/budget/13-14/downloads/FY_2014_GF_Forecast_Presentation.pdf). The City Council work session presentation is available on the Channel 6 website. This year, the departmental presentations will be available on video, and city management plans to make "Budget in a Box" materials available for neighborhood associations and other groups.