Austin Officials Downplay COVID-19 Budget Impacts

City staff and advisors told the Austin City Council April 7 that the fiscal impacts of COVID-19 would be limited to about $38 to $58 million, depending on how fast the outbreak resolves. 

But these estimates ignore the potential impact of a drop in property values, and they gloss over the fact that the city’s current budget was already built on highly optimistic forecasts for economic growth, which now are unlikely to be realized.

When these factors are taken into account, the city’s budget deficit could easily grow to over $200 million, even if the city increases tax rates.

Yet the city’s finance department opted not to dwell on the negative. “Austin is starting from a strong financial position,” it said in a budget presentation to the Council, which met by video. Deputy Chief Financial Officer Ed Van Eenoo, who presented the estimates, referred to the city’s “conservative budgeting practices and “healthy reserves” of $25.7 million. 

According to the staff forecast, the best-case scenario now is that the city’s general fund will lose $38.3 million in revenue, including sales taxes, mixed drink taxes, and fines (that number is for fiscal year 2020, relative to the budgeted amount). If the coronavirus outbreak takes longer to resolve, the impact will be up to $57.6 million. Similarly, an outside economics firm, TXP Inc, estimated $29.6 million to $40 million in lost sales tax revenue. 

Unmentioned in these estimates is the impact of changes in the real estate market. Most real estate investors and economists are anticipating a decline in property values nationwide, in contrast to the city’s approved 2020 fiscal budget, which forecast that “property values (will) continue to rise sharply resulting in a 9.4%, or $62.2 million, increase in property tax revenue.”

The current budget reflects a taxable valuation of $166.1 billion, which represents an increase of 8.8% over last year’s valuation. If that 8.8% increase doesn’t happen, as now seems likely, then the city will be about $60 million in the hole.

An actual decline in property values — let’s say by 5% — would slash the city’s taxable property valuation by about $8 billion. That would cut property tax revenues by a further $30 million or so. On average, home prices fell 13% in Texas during the last recession, and 33% nationwide.

Real Estate Outlook

Of course, no one knows yet how whether the coronavirus outbreak will impact real estate valuations by 5% or more. Because so many home sales are frozen, at a time that is normally peak selling season, there’s little to no data yet on how home values are being affected by the coronavirus. 

Typically, however, home prices rise when unemployment drops, and they fall when unemployment rises. With Austin-area layoffs already in the tens of thousands, home values are almost certain to fall. 

On the commercial side, real estate brokers have been reporting that Austin office and retail deals are on hold as tenants lay off staff, slash spending, and, in some cases, teeter on the edge of bankruptcy. U.S. banks are anticipating “crushing losses from commercial real-estate loans damaged by the COVID-19 economic crisis,” the Wall Street Journal reports

In the secondary market for mortgages, investors have sold off vast quantities of mortgage-backed securities in anticipation of a rash of loan defaults and foreclosures. Only intervention from the Federal Reserve, the nation’s central bank, has kept rates in mortgage securities markets from spiking to levels that would signal extreme distress. 

The Mortgage Bankers Association said April 7 that borrower requests to delay mortgage payments rose by 1,270% in the first half of March and another 1,895% in the second half. Federal intervention could help homeowners make payments in the short-term, but homeowners who have lost their jobs permanently may put their homes up for sale, driving up housing inventory and pushing down valuations.

“We definitely will have a slowdown, but the question is how much and how long,” says Scott Norman, executive director of the Texas Association of Builders.

Tourism and Travel

The cancellation of South By Southwest last month hit downtown hotels and restaurants hard, but it was just the start of the pain. Hotels and restaurants are now planning for months of coronavirus-induced lockdown, and they have laid of or furloughed thousands of staff in Austin alone.

The city budget presentation for the council meeting April 7 did not include numbers on the projected impact on hotel occupancy taxes, though it acknowledged that it would be “severe.”

Prior to the outbreak, city budgeters had counted on a huge jump in HOT collections this year, planning for a $26.8 million increase, or 28%. If instead HOT revenues decline by 25% compared to last year, reflecting the loss of SXSW bookings as well as months of empty hotels, the cost to the city would be $27.8 million, for a total hole in the budget of $54.6 million.

Additionally, the airport is expected to suffer “steep declines in parking fees, landing fees, and concession revenue,” according to the staff presentation, which put no number on the projected loss. A drop of 20% in revenue compared to last year would cost the city $40 million.

Altogether, the fiscal impacts of COVID-19 would include at least $60 million in unrealized property tax growth, $30 million in actual lost property tax revenue (assuming a 5% decline in property values), up to $57.6 million in lost sales tax revenue, $26.8 million in unrealized HOT growth, $27.8 million in actual HOT revenue declines, and $40 million in lost airport revenue, for a total of more than $240 million.

That number comes on top of a structural budget deficit that the city already had built into its plans for the next few years. The City Manager wrote in an overview of the current budget, “the General Fund is projected to begin experiencing structural imbalance beginning in fiscal year 2021-22. The City Council and City management  have already begun laying the groundwork for difficult conversations in future years aimed at flattening the organization’s cost curve…”

Tax Increases 

Some city officials are hoping that federal funds could help plug the city’s yawning budget deficit, and the city’s finance department thinks Austin’s allocation of federal coronavirus relief funds could exceed $150 million. 

But that money may only be used for “necessary expenditures incurred due to the public health emergency with respect to the Coronavirus Disease 2019,” and for expenses that “were not accounted for in the budget most recently approved” by the city, the federal law says.

Federal dollars therefore probably could be used to cover unbudgeted emergency management costs, totaling about $1.3 million in March, or a $3.6 million hotel lease for quarantine purposes.

But federal money couldn’t be used to plug gaps for things like budgeted staff salaries and benefits, existing programs, and city infrastructure and utility costs.

To date, the City Council has not seriously discussed spending cuts. City Council members instead discussed raising taxes and dipping into a reserve fund to actually increase spending rather than rein it in. “A lot of cities aren’t in the great financial position that we are in,” said Council Member Delia Garza, advocating for dipping into city reserve funds to provide economic assistance to city residents.  

Council Member Alison Alter said, “It’s really important that we convey a message to our community that we are starting from a very strong fiscal position. We have done a lot of things right as a city over the years. We have very strong fiscal policies.”

“We have to plot going forward how we can continue those policies,” she added. Alter suggested that she wanted the council to consider increasing property taxes by the maximum allowable amount of 8% to help cover any gap. 

State law caps annual property tax increases at 3.5% without voter approval, but that cap is adjusted to 8% in a disaster situation. 

The City of Austin’s expenditures grew from $4 billion in 2018 to $4.3 billion in 2019, according to the city’s consolidated financial statements.

Despite the Council’s reluctance to discuss spending cuts at this stage, finance department staff say they are reexamining certain spending items in light of COVID-19 budget impacts. These include plans for three new fire stations, 30 extra police officers, certain affordable housing funding, employee wage increases, and health benefit increases.

City departments also have identified $14.4 million in savings in discretionary spending, including a hiring freeze affecting over 590 vacancies.