This Is the Box We're In
City Council attempts to cut the city budget – before there is one
By Michael King, Fri., June 12, 2015
It may be a while before the city of Austin has a budget.
That was the message delivered by Deputy Chief Financial Officer Ed Van Eenoo in a recent Council work session, as he sketched out for Mayor Steve Adler and Council members the potential consequences of the challenge petition they were contemplating filing against the commercial property evaluations of the Travis Central Appraisal District. Austin may have a reasonable case – a consultant's report commissioned by the previous Council recently declared that, for various reasons, commercial properties may be undervalued by as much as 47% (see "Point Austin: The Appraisal Scam," May 22) – but the problem is one of timing.
Even should the challenge succeed, and the Appraisal Review Board conclude that the city is right and the appraisals need adjustment in favor of residential homeowners, it's possible the city won't learn that for several months, after the August-September cycle for adopting the budget. Property taxes represent roughly 42% of the city's total income, so the absence of precise figures is a difficult hole to fill. Budget writers would either have to draft the budget and set a tax rate while not knowing the city's potential property tax income – based on total property values not yet certified by TCAD – or else hang fire on the whole operation, pending resolution of the challenge.
Neither option is comforting, and even less reassuring would be Council actually voting to adopt a speculative budget with their collective fingers crossed. (TCAD Chief Appraiser Marya Crigler said that the challenge would move the certification from the end of July to at least mid-November, moving the city's tax deadline from Jan. 1 to March 1.) Yet that's the prospect contemplated in the city's TCAD challenge, which was approved in principle by Council May 28, although with the possibility of withdrawing the challenge after Council consults with its potential partners and completes due diligence on its evaluation research.
However, earlier this week Adler told the Chronicle that since the challenge "is not being done in an adversarial way" – and in fact TCAD has responded favorably to the possibility of more complete information – and he expects "that the appeal can be prosecuted in a way that does not delay the certification of the tax roll." He also said he is not overly alarmed by TCAD's initial, very skeptical response to the city's consultant report. "They're reacting to a report without any data," Adler said. "We're going to get that data to the chief appraiser, so she can put it in her own models, and help her decide if any modifications need to be made." The accelerated timeline might mean a certification based on existing values, but despite the mayor's optimism, it remains unclear how the properties can be re-evaluated without at least some delay to the TCAD certification.
Meanwhile, about those potential partners: Roughly 100 Travis County jurisdictions, most of them much smaller than Austin, also depend on TCAD's certified property valuations to set their tax rates and draft their budgets. Several of those – e.g., the cities of Round Rock, Cedar Park, and Leander, Austin Community College, Central Health Care District, etc. – reacted very nervously to the city's challenge. Unlike Austin, which has sizable reserve funds, the smaller taxing units tend to rely heavily on their annual property tax income to pay basic expenses – and while they are sympathetic to Austin's position, they don't want to be telling employees or creditors that the check is in the mail.
The city's two largest potential allies in this effort have diverged in their responses. The Austin Independent School District administration appears willing to back the city's effort, and Chief of Staff Mel Waxler told the group of officials meeting at City Hall May 27 that he believes that "a community solution" – either the direct challenge or some related joint maneuver – has a good chance of success. But a few days later – the Tuesday after Council had voted to file the challenge – Travis County Commissioners Court declined to concur. The Court voted instead, 3-2, to take no action, the dissenters being Judge Sarah Eckhardt and Pct. 2 Commissioner Brigid Shea. Commissioners Ron Davis (Pct. 1) and Margaret Gómez (Pct. 4) effectively washed their hands of the matter, repeating their previous insistence that the city should simply match the county's 20% property tax homestead exemption. Afterward, Shea commented, "The Council's bold action to seek justice for residents stands in contrast to the county's lack of action."
Because of official state deadlines, all of this activity is taking place before the city budget review begins in earnest, and a couple of months before the almost entirely rookie Council members begin to confront the spending decisions they will have to make for FY 2016. It's difficult enough to shape a budget when you have reliable estimates of your income; when those numbers are speculative, it's essentially impossible.
Yet that's also where things stood, until last week, with Council's other pressing budget question: whether, how, and how much to allow for a property tax homestead exemption. That process is also nearing a deadline, officially June 30 if the exemption is to take effect in FY 2016. However, in practice Council needed to make a decision immediately, because staff had requested sufficient lead time to enable budget preparation to proceed with at least a rough estimate of the size of any exemption.
That happened last Thursday, June 4, after weeks of discussions, as Council settled on a 6% homestead exemption, describing it as a first phase of an eventual 20%. It was a bumpy landing: An alternative proposal, as first laid out by Adler and D4 CM Greg Casar in the June 3 work session, included a 5% exemption and the equivalent of another 1% (about $700,000) to be dedicated "to programs that directly assist renters in our community." This hybrid version was expressly designed to respond to arguments that a percentage homestead exemption only benefits homeowners, and in direct proportion to the values of their homes. That outcome was also reflected in the district distribution of the exemption, which – although quite minimal in per-household impact – heavily favors wealthier western districts at the disadvantage of poorer, eastern ones, including Casar's (see "The Six Percent Bounty").
Laying out the new proposal to his colleagues, Adler spoke at length about the city's "affordability crisis" and the necessity to "use every tool available" to address the situation (he would repeat much of that commentary near midnight Thursday, in support of a straight 6% exemption). He said his work with Casar was an attempt to avoid "pitting one sector of the city against another," and insisted it was "not really a compromise at all – it's a statement of intent that one tool will not serve everybody." He and Casar sketched out their various objectives – initially targeting as a vehicle the city's Tenant-Based Rental Assistance Program – and their informal proposal mentioned several other initiatives (or "tools") that have been part of the public discussion since last fall's campaign: restructuring the drainage fee, the TCAD challenge, enabling homestead preservation districts (a sore tooth in city plans for some time), "increasing the supply of housing" (its own Sisyphean project), fixing the permitting process and land development code, and preserving existing affordable housing stock.
None of these efforts are entirely new, and all of them have their own costs and their own timelines. As the work session discussion grew more intense last week – a couple of Council members argued that 5 or 6% is much too small, and most wanted to see this first step as aspirational to a 20% exemption – D5 CM Ann Kitchen asked the mayor (for purposes of public understanding) to explain why Council found itself addressing a homestead exemption (and its potential cost to the overall city budget) long in advance of having any actual FY 2016 budget numbers. Under a comfortable circumstance, went the discussion, it would seem more rational to have the exemption conversation as part of the actual July-August budget discussions.
"That's the box in which we find ourselves," replied the mayor. State law, he explained, includes specific deadlines for local tax exemptions. "We have to do it this month [June 2015] if we want it to be effective for next year," he continued. "We couldn't implement it until 2017, if we waited until after the budget process."
There you have it – or we have it – an aspirational homestead property tax exemption of 6%, attached (in intention) to dedicated expenditures to benefit needy renters (the latter to be confirmed at the June 11 Council meeting), and a pending challenge petition to TCAD that might – or might not – succeed in shifting more of the property tax burden from residential homeowners to commercial property owners. Keep your fingers crossed.
The Politics of Taxes
Adler's "box" referred to the official deadlines dictating the timelines on both the upcoming challenge petition and the filing of the homestead exemption; in both instances, Council is working somewhat in the dark concerning the precise effects of any action they decide to take (or to defer), and they would be in a much stronger position if they had more precise budget numbers at the outset. But the "box" is also a political one, to an extent of the Council members' own making. The mayor and several of the 10-1 candidates campaigned last year both on "affordability" – writ large – and on the promise of a 20% homestead exemption – immediate if possible, phased-in if necessary. Having looked at staff's earlier budget forecast as well as the report on potential cuts Council requested from city staff ("Diminishing Returns," below), most (not all) appear ready to acknowledge that budget-balancing doesn't happen in a day, and are trying to come up with a plan that takes a step in that direction without – as they said again and again last week – "cutting basic services."
That's not to say they're all in agreement on how to proceed. D2 CM Delia Garza has been the strongest in flatly opposing the homestead exemption, calling it both inadequate and inequitable. Although still on maternity leave from Council attendance last week, she fired a salvo across the dais from the Statesman's op-ed page, describing the proposed 6% exemption – to be paid for by raising the tax rate – as "the wrong tool" for addressing affordability. Noting that the (estimated) $5.2 million total to be realized by the exemption would be divided unequally across the city from East to West, yet actually without substantial benefit for any homeowner, she decried the inevitable corollary cost in city services. "It's impossible to reconcile the need for better services while also supporting a homestead exemption," Garza wrote. "Dedicating $5.2 million to a 6 percent homestead exemption will prohibit the Council from funding any additional services outside of the city manager's proposed budget."
Making a quiet but dramatic return to the dais Thursday night, Garza firmly reiterated her objections to any exemption decision in advance of budget preparation. "How can we know whether we can afford it when we don't know what our expenses will be?" she asked. She objected to the disparate economic effects of the exemption, with the benefits proportional to the value of homes, and also opposed paying for any exemption by cutting city employee wages: "[Supporters] say stagnant wages are hurting affordability – but you want to cut wages," she said, referring to proposals by the conservative members to sharply reduce the proposed 3% wage increase for civilian city employees.
Beyond Garza, most of the other Council members were willing or eager to pursue some level of exemption. Adler campaigned on a "phase-in" of 20%, has stoutly objected to the notion that it is inequitable or regressive, and has instead looked for ways ("additional tools") that "take a multi-view approach" to affordability. D4 CM Casar joined the mayor in coming up with the hybrid version that would benefit homeowners slightly less, in the short term, while offering additional support to the most vulnerable renters. Ann Kitchen (D5) and Leslie Pool (D7) also supported the exemption – Kitchen was adamant that the Council "does not have to choose" between cutting taxes and cutting services, and Pool made a point of noting that she expects to hold parks harmless in the coming budget debate. Ora Houston (D1) tentatively supported an exemption, but when push came to shove Thursday night, said she couldn't see how it would help the elderly and disabled on fixed incomes, and finally voted no – along with Garza, Casar, and Mayor Pro Tem Kathie Tovo (D9).
As the most experienced Council member, Tovo declined to accept at the outset that an exemption would inevitably mean increasing the tax rate; like Pool, she pointed to the possibility of ending economic incentives in business recruitment as one source of potential funding. (That's a popular target, although a difficult financial case – existing incentive deals are under multi-year contracts, performance-based, and are supposed to be cash-positive for the city. The potential impact of ending good-faith, contractual incentive deals with major employers like Samsung or Apple is not entirely clear, although all such deals are formally subject "to future appropriations.")
It was left to D3's Pio Renteria – who initially welcomed the Adler/Casar proposal – to point out the obvious. "The real problem is the lack of housing," he said. "We [the city] have been lowering the tax rate [in response to rising property values]. If we had enough housing out there, you wouldn't see this drastic increase." While supporting the notion of rental assistance, Renteria eventually voted for the straight 6% option.
In addition to the direct assistance to renters suggested in the new proposal (which will have to be voted on separately), Adler's posted explication does contemplate various ways to increase the supply of housing – permitting and land code reform, preserving housing stock, incentivizing affordable housing – but all are mid- to long-term solutions far beyond the next fiscal year.
Adler and several other CMs grew defensive when the conversation turned to a choice between "tax cuts" and "service cuts," or "service cuts" and "tax rate increases." Kitchen blamed "the media" for creating these misleading dilemmas, and insisted no such choices would be necessary. Yet it had been her dais colleague Garza, in her op-ed, who had juxtaposed Council's upcoming budget decisions most sharply: "In order to maintain city services at their current level while also providing a 6 percent homestead exemption, the council will have to raise the tax rate to the highest level allowed under state law. Alternatively, we have the option to cut city services."
Those looming alternatives are much less troubling to the more conservative regions of the dais – Don Zimmerman (D6), Ellen Troxclair (D8), and Sheri Gallo (D10). Gallo has thus far tried to stand roughly in the center-right in the ongoing debate, willing to go along with the mayor's phased-in exemption but – citing her campaign promises – insisting upon language that would eventually target 20%. (Council can't bind future decisions, even its own, but in approving the 6% Council declared its "intentions" of annual increases to reach 20%.)
Zimmerman, by contrast, had posted a stern message-board response to the mayor, saying the city had already done quite enough to help renters – specifically through federally subsidized affordable housing that he strongly opposes as both wrong in principle and "unsustainable." He repeated that argument at the work session, and told his colleagues that they faced a "fundamental question": "We're either going to continue to expand the size of the city budget ... explosively ... in dramatic fashion, or not.... We need to cut spending or we don't." The apocalyptic rhetoric didn't end there; Zimmerman cited the fate of Detroit as the result of excessive government spending. "I want Austin to realize," he warned his colleagues, "that economic realities affect Austin just like they affect Detroit." (For some reason, he didn't mention the collapse of Detroit's auto industry.) Just prior to Thursday's vote, he concluded: "The city spends too much money, period."
Not quite as melodramatically – although she did conjure the image of homeowners in her Southwest district standing in food bank lines, presumably because of exorbitant city property taxes – Troxclair insisted that not only is a 20% exemption necessary, it's readily affordable with the dedication of new revenue and major cuts to city expenses. Within her 20% proposal – rejected by her colleagues 8-3 on Thursday – she claims to have found $60 million in cuts and additional revenues to readily pay for the estimated $32 to $36 million a full exemption would cost – without cutting any services. That $60 million, it's fair to say, is quite wobbly: Troxclair would dedicate all new estimated sales tax and property tax revenues ($25 million) to the exemption; eliminate all current city job vacancies ($8.6 million); cancel all 380 incentive agreements; and adopt a much smaller "tiered" wage increase for city employees instead of the currently proposed 3%. The latter move would, a couple of Council members pointed out, immediately make Austin less affordable for thousands of city employees (sparing, presumably, only public safety employees under contract). And Tovo noted that the 126 job vacancies Troxclair wants to defund include many new firefighter cadets awaiting hiring under the finally approved Austin Firefighters Association contract – ergo, no free money.
Like statistics, budget cuts are readily subject to rhetorical abuse. Troxclair's proposal repeats the tax-cutters' canard that the 20% exemption represents a trivial, less-than-1% of the entire budget – making that claim only by smuggling in all the enterprise, income-generating departments. In fact, the 20% exemption would represent at least 4% of all General Fund expenses, the equivalent of the entire library budget – which Zimmerman has repeatedly made clear he would like to eliminate altogether. Gallo, while initially speaking from some middle ground between the slice and whole loaf, followed Troxclair's Thursday presentation by declaring, "I agree with everything Ellen said."
Overall, first on the campaign trail and now on the dais, the exemption has effectively become the reflexive, official euphemism for "affordability" when – at whatever size or extent – it will have little substantive effect on Austinites' actual living expenses or quality of life. As CM Renteria reminded his colleagues, the core of the problem is explosive population growth and consequent rising housing prices, values, and valuations. City taxes, currently, are about 20% of the overall property tax bill; to the extent that property taxes are a substantial burden, it's due to the more than 50% represented by the school district. The Texas Legislature – also prioritizing tax cuts over public needs – just declined yet another opportunity to address that huge unfunded mandate, choosing instead to compound the problem for another biennium.
More broadly, the essentially conservative political focus on taxes as the primary source of Austin's affordability "crisis" – if that's what it is, in the most prosperous regional economy in the country – inevitably makes every expenditure appear unnecessary, every community need too expensive. Among all 11 Council members on the dais, there was not a single full-throated defense of taxation as public investment – pooling our respective portions of the common responsibility for undeniable community needs. Yet if we don't invest in the community, our neighbors, and our infrastructure in good times, how will we manage it in bad?
If you happen to be one of the luckier homeowners, you might ponder that question as you deposit your couple hundred bucks of "exempted" windfall in the bank.
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