Council Readies for New Budget Realities

While City Council awaits a detailed budget presentation from City Manager Spencer Cronk, due when it returns from summer break in August, many members are forecasting a different approach to prioritizing city expenses under the state's new revenue caps. With Senate Bill 2 signed into law on June 12, this will be the last budget cycle in which Austin can set property tax rates that increase the city's raised revenue by up to 8% without holding a tax ratification election. After SB 2 kicks in, that threshold will be just 3.5% – a number that will make it difficult for Austin to keep up with its ongoing cost drivers, such as cost-of-living wage increases and health insurance contributions. Mayor Steve Adler estimates that under the 3.5% limit, Austin will carry a budget deficit of $52.6 million by fiscal year 2023, even with annual reductions in city services.

There aren't a lot of places to look for those cuts. Public safety costs (police, fire, and emergency medical services) account for about 70% of the city's current General Fund budget (where the property tax revenues go; city enterprises, such as Austin Energy and the airport, live elsewhere in the budget). Parks, public health, and the library system make up about 22% of the General Fund; other departments (such as Planning and Zoning or Animal Services) represent such a small fraction of the overall budget that they'd have to be eliminated entirely to achieve any meaningful savings.

Of course, these core General Fund services are often where the community wants to see increased spending. "No one says we should fund parks less or pay for fewer ambulances," Council Member Jimmy Flan­nigan told the Chronicle. "There are no easy answers here; we're damned if we do, damned if we don't." SB 2 also prevents municipalities from reducing first responder pay, so even if Austin's leaders wanted to, they couldn't go there to find savings.

Austin's economy is booming now, but the next big bust could always be just around the corner. One potential buffer against that inevitability is for Council to go to an 8% rate this budget cycle, while it still can, an idea supported by several Council members including both Adler and Flannigan, who told us going to 8% was "straightforward and necessary" to create a surplus that can be used to "bulk up reserves, so we have the time to adjust [to] the trajectory of a budget deficit."

Fear of a downturn may amplify the impact of a 3.5% cap – Council will be more reluctant to enter into long-term contracts with vendors, who in turn might be incentivized to charge more to compensate for increased short-term risk. A preview of how such decisions might play out came during Council's June 18 work session, as it discussed a relatively small budget item – a three-year agreement with Austin Community College to help fund the school's fashion incubator program for a total cost not to exceed $165,000. No one at the work session doubted the value of the program, but Flannigan pointed out ACC's revenue cap (as what SB 2 calls a "special district") will remain at 8%, so the college is better able to cover this cost than the city. CM Leslie Pool suggested approving the contract on an annual basis instead of a multi-year agreement, which is how the item passed on consent the following day (with Flannigan voting against).

Council members may also take a hard look at economic incentive packages enacted by prior Councils for companies such as Apple, Samsung, Visa, and Simon Property Group (owner of the Domain). Known as Chapter 380 agreements from their location in the state tax code, the deals provide tax rebates in exchange for job creation and future additions to the tax base; the agreements are monitored for compliance by a third party before rebates are awarded by Council action. However, in 2018, Council modified Austin's Chapter 380 program to focus more on helping small businesses; David Colligan, manager of the city's Global Business Expansion Division, explained that the shift responded to different economic needs. "The program change brings a very different approach from the 2003 era," he told us; during that major economic downturn, the program "was focused on recruiting businesses in Austin."

The Domain deal, in particular, came at a time when city leaders worried about losing sales tax revenue to such neighboring cities as Round Rock and Pflugerville as they landed retail outlets that could draw customers away from Austin stores. According to the most recent city data, in 2018 Apple was paid about $1.8 million, Samsung $6.3 million, and Visa $194,000. The last payment made to Simon was in 2017 for roughly $1.9 million; subsequent payments have been withheld pending the outcome of a lawsuit contesting the valuation of the Domain property.

It's unclear how much the city would save by discontinuing Chapter 380 payments, but Flannigan, Pool, and CMs Kathie Tovo, Pio Renteria, Delia Garza, and Alison Alter have all expressed interest. Proponents of the pre-2018 agreements argue that ending them now could send the wrong message to other businesses interested in moving to Austin, but Tovo told us, "I believe we'll have to look at them, just to meet the basic needs of our city."