Budget deficit looms over city this year and beyond

The city of Austin is facing a $3.5 million deficit for the current year, with a much larger deficit – more than $13 million – projected for Fiscal Year 2025, which starts on Oct. 1, 2024. That’s the bad news as presented to City Council at Tuesday’s work session by longtime financial consultant Jon Hockenyos and city Budget Officer Kerri Lang. Much of that has to do with national trends, including high interest rates, with Hockenyos predicting the possibility of one rate cut this year. Perhaps the biggest problem he cited is that city sales tax collections are not nearly as robust as budget writers predicted they would be when the current budget was created. Inflation causes shoppers to buy less, he noted.

For city employees, there was good news, with financial staff recommending a 4 percent across-the-board wage increase. Employees, however, will be required to put an additional 1 percent of their salaries into the city retirement fund, starting in January. That means the increase is more like 3 percent, if Council accepts staff recommendations. Carol Guthrie – business manager for the local branch of the American Federation of State, County and Municipal Employees – told the Austin Monitor she thought the salary proposal was “a good start.”

“I understand that things are tight, but you’ve got to pay the people in order to bring the services to the citizens. … I hope if there’s any available funding, that would be prioritized for the workers,” she said.

City budget writers are projecting General Fund base expenditures for FY 2025 at more than $1.4 billion, which is 3.7 percent higher than the FY 2024 amended budget. Nearly 65 percent of that is allocated to the city’s public safety departments – police, fire, emergency medical services and forensic science. The community service departments – which include parks and recreation, Austin Public Health, library, animal services, housing, homeless strategy, municipal court and planning – represent about 30 percent of the General Fund budget.

The city may increase property taxes by only 3.5 percent without voter approval. As the budget document notes, legislators reduced the allowed increase without going to the voters from 8 percent to 3.5 percent. This has “placed significant constraints on the City’s ability to generate sufficient property tax revenue to maintain structural balance. Even at the voter approval property tax rate in each year, the General Fund is projected to experience increasing deficits, with the imbalance increasing from $13.2 million in FY 2025 to $59.9 million in FY 2029.”

After property taxes, the second-largest revenue source is sales tax collections. The number is now projected at $358.7 million this fiscal year, which is essentially flat and considerably lower than the budgeted amount of $375.6 million. Although recent collections were slightly better than expected, Hockenyos said he would not expect the city to collect as much as previously projected.

At one point in 2022, Hockenyos said single-family homes in Austin would stay on the market for an average of only 10 days. That number is now at about three months, he said. Historically, he said six months was considered a sign of a balanced market. What that means is, “You may actually not get into a bidding war” when you are trying to buy a house now, he said. However, he added that many people are still reluctant to sell their homes and search for a property they like better because they locked in a low interest rate before rates went up.

Although cranes are still constructing new office towers downtown, Hockenyos said he suspects a lot of those builders wish they were not building. The vacancy rate for offices in the city is now at 23 percent, he said.

The city’s budget document contains a stark warning about the work ahead for Council and staff alike, saying: “As the FY 2025 budget development process progresses, it is important to bear in mind that this Forecast reflects only baseline General Fund expenditures and does not assume or include any significant enhancements to current levels of General Fund staffing or services outside of the items described in the Expenditures section of this report.

“Even with the inclusion of only these baseline cost drivers, the General Fund is displaying a $13.2 million deficit that must be closed by the time the FY 2025 budget is adopted. Additional ongoing expenditures in FY 2025 for which offsetting reductions or new revenue sources are not identified will widen the projected General Fund deficits in FY 2025 and each subsequent year.

“Aggressive COVID-era federal stimulus and the associated spike in sales tax receipts allowed the City to weather the initial years of the 3.5% property tax revenue cap. However, in their aftermath, the City’s five-year outlook once again displays widening projected deficits and renews concerns about an underlying structural imbalance between the rising costs of providing the City’s core services and its ability to generate sufficient revenue to pay for them.”

Interim City Manager Jesús Garza, who is set to retire in early May, told Council he was looking forward to watching them deal with the budget – on the city’s channel, ATXN.

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