The City Budget Deficit Is Finally Here

At City Hall, the current $33 million deficit looms (photo by John Anderson)

After years of city budget staff warning of impending budget deficits, the trouble has finally arrived, and City Council will have to confront it over the next four months leading up to their adoption of the city’s next budget.

It’s a worrisome situation for Council members and one that they have been anticipating for the past several years. It’s also a situation that Council exacerbated by approving – on a 10-1 vote with only CM Zo Qadri dissenting – the most expensive police contract in the city’s history. When they approved it in October, city budget officials said it would not significantly worsen the city’s financial footing.

But the city’s financial footing has worsened – and significantly, though not just because of the police contract (which ended up costing $2.1 million more than the city’s budget office initially calculated). Budget staff shared details on the city’s financial woes during a presentation at Council’s April 8 work session on the city’s five-year financial forecast.

The overall picture is gloomy, thanks to a combination of factors. They include a state law that, for the past five years, has limited the amount of tax revenue cities can collect; the expensive police contract that Council approved last fall; an uncertain national economy thanks to disruptive and potentially harmful trade policies enacted by President Donald Trump; and the expiration of federal stimulus money given directly to cities through the American Rescue Plan Act that Austin had been using to fund local programs.

Altogether, the city’s budget office is projecting a deficit of $33.4 million in the General Fund (the pot of money that funds services like parks, libraries, and public safety) beginning in Fiscal Year 2025-2026 (that’s the budget Council will adopt later this summer). They predict that a few years later, by FY 29-30, the deficit could grow to $79.9 million. That means the city will need to find or cut between $33 million and $80 million of General Fund dollars over the next five years just to maintain current levels of service (i.e., staffing for ambulances, operational hours for libraries, and maintenance of public parks).

The projected deficits are “deeply concerning,” Mayor Pro Tem Vanessa Fuentes told her colleagues, while also lamenting the recent loss of a $50 million Federal Emergency Management Agency grant that would have helped Austin prepare for natural disasters. “We are going to find ourselves in real financial pressure,” Fuentes continued, “as the needs in our community increase.”

The primary factor fueling the deficit, budget officials told Council during the work session, is a state law enacted in 2019 that has prevented the city from increasing its tax rate (without an election) at levels that would keep up with population growth. The full effect of that law has been masked in recent years due to strong sales tax revenues and ARPA dollars, but that’s changing now – sales tax revenues have been lower than the city projected and that could worsen if the nation descends into a recession as some financial experts predict is likely. Plus, all ARPA funds are expected to be spent by the end of this year.

Council is expected to ask voters to approve a higher tax rate in the near future. When and how much is still a subject of debate. But other factors at play will dampen the deficit relief even a higher tax rate will bring.

For one, the total value of taxable property in Austin is expected to fall about 10% below expectation over the next year, according to budget staff. That means there will be lower taxable values for the city to generate revenue from. The Travis Central Appraisal District says a growing number of property owners protesting their appraised property values is one reason why property values in Austin are decreasing, while property value growth is also slowing down compared to the explosive increases the Austin market saw from 2020-2023.

The city has also taken on other costs that are fueling the projected deficit, most of which stem from the budgets allocated for the city’s three public safety departments – police, fire, and EMS. Budget Officer Kerri Lang shared the staggering statistic that the three public safety departments, on their own, swallow up all of the city’s property tax revenue and two-thirds of its sales tax revenue. Other city departments are left to fight over the scraps. (The exception is revenue-based departments like Austin Energy and Water, which pay for themselves through service fees.)

Most significantly, the public safety expense is due to the five-year, $220 million police contract Council approved in October. The city’s medics and firefighters will also begin negotiating new labor contracts with the city soon, and while they are unlikely to win pay raises as large as that given to police officers, they will be a significant cost driver for the city. The city’s civilian employees are expected to get 3.5% raises in the next budget.

But even amid the financial turmoil, CM Ryan Alter told his colleagues that now is the time for local government to “invest in people.” Pointing to the success of ARPA as a potential roadmap, he made the argument that it helped spur such a stimulating effect on the economy that the nation exited the precarious post-pandemic period without experiencing financial calamity.

“The natural reaction is to hunker down, pull back,” Alter said. “But we have seen historically that this is the exact time we need to invest in people.” Acknowledging that the city should expect little help from the state and federal government, Alter continued: “It is incumbent on us to recognize that, yes, times are tough and we need to be responsible with our dollars, but we’re the last line and we had better recognize that.”