October 3, 2017

The FY 2018 Budget Story, Epilogue:  Restoring Balance

The fiscal year 2018 budget went into effect on Sunday.  The story began with a proposed budget that was forced to cut back on non-recurring expenses to avoid breaching our 60-day minimum fund balance requirement.  It concludes with an adopted budget that goes even further than that, with deeper non-recurring expense cuts that will allow us to begin replenishing the ending fund balance instead of finishing the year right on the number.  Responsive to public input concerning the tax rate, Council proactively took this step to get things back on track for this and coming years.  The budget also sets aside some unallocated funds in anticipation of unreimbursed hurricane recovery expenses.

Hurricane Harvey’s unwelcome arrival in the middle of the FY 2018 budget story ultimately did not change the plot all that much.  That’s not to suggest the City’s priorities have not been affected; they most certainly have as nearly everything else is taking a back seat to disaster recovery and future flood prevention efforts.  But those less essential items, such as branding, Comprehensive Plan updates and new parks projects, weren’t in this year’s budget to begin with.

To satisfy our minimum ending fund balance requirement, the General Fund budget actually decreased, by 3.1% compared to last year’s, even as we’re contending with a 20% employee health insurance rate increase and market adjustments for competitiveness.  Among them as a recurring expense is our continued commitment to public safety compensation at the 75th percentile, which we began last year and has been a success in improving recruitment and retention.  We’ve offset those costs by reducing our contributions to the vehicle replacement fund and eliminating this year’s transfer out of the General Fund for our pavement management program.  Again, those aren’t frivolous throwaway expenses, but we can afford to skip them this year, in large part because of all the progress we’ve made on both fronts in recent years.

The worrying trend of consistently declining ending balances year after year had progressed to the point that without those cuts, we were projected to end FY 2018 below the minimum.  Maintaining a 60-day reserve is not only prudent fiscal management, it’s one of the key factors supporting our AAA bond rating.  So yeah, it’s important.

Our residents understand the relationship between the services they expect from the City and their property taxes that pay for them.  We rely on property taxes for 63% of our General Fund revenues, and as a “City of Homes” we are heavily dependent on residential taxpayers who pay 86% of those taxes.  As thin as our budgets are sliced, that also means we, as taxpayers, are more exposed to year-to-year changes in appraisal values and in the costs of providing services.

As growth in our tax base slowed this year, the nominal tax rate increase needed to support the budget is a bit higher than in recent years.  Of the proposed nominal rate of 41.59 cents, 14.81 cents represents the penny-and-a-half increase in the debt service rate overwhelmingly approved by the voters in the bond election last fall.  The remaining 26.78 cents for our general operations and maintenance is an increase of just under 5% over last year’s rate.

The cause of the problem, and its solution, are obvious.  A declining ending fund balance can result only from spending more each year than we’ve been bringing in.  It’s why we now find ourselves essentially having to subsidize past expenditures with current money.  To reverse the trend, we either need to cut expenses or increase revenues, or preferably do both.  Having carefully managed the balance through this fiscal year, we’re already planning ahead with an eye toward achieving both of these objectives in FY 2019 and beyond, taking into account the likely effects of Hurricane Harvey on our finances.