Austin could see a budget deficit as tax revenue falls short of projections

The city of Austin is seeing a shortfall in its projected tax revenue, as well as the looming end of federal American Rescue Plan Act funding, which could leave the fate of some city programs uncertain and result in a budget deficit.

Sales and property tax largely make up the city's general fund, which includes funding for departments like fire, police, parks and more, Austin Mayor Kirk Watson said in a February newsletter that outlined some of the budget issues the city is facing.

The fiscal 2024 budget was built assuming a 4% sales tax growth, Ed Van Eenoo, the city's chief financial officer, said during a presentation Tuesday, but those revenues have fallen flat.

"For a long period of time, we had been seeing double-digit growth in our sales tax revenues," Van Eenoo said. "In the months leading up to the budget adoption, they had really seemed like they had plateaued and had flattened out."

The City Council last August approved a record $5.5 billion budget, which was implemented Oct. 1. The budget runs from Oct. 1 to Sept. 30.

More: Read more: Austin City Council passes largest-ever budget, up $500 million from current fiscal year

Currently, the city is behind $8.5 million in sales tax revenue, which could grow up to $15.4 million gap by the end of the fiscal year, according to the city presentation.

If sales tax revenues remain flat, there will be a budget deficit that will need to be dealt with before the end of the fiscal year, Van Eenoo said.

Watson said in his newsletter that, "the sales tax is our most dynamic and volatile source of revenue. It's our best real-time financial indicator — and it's signalling caution."

Property taxes and ARPA money

Property taxes, which were estimated to account for about 20% of the entirety of the city's annual billion-dollar budget revenue in the 2023-24 fiscal year, are one of many sticky subjects between the city of Austin and the state's Legislature.

According to Watson, "The City used to have a lot more flexibility with property taxes and could absorb additional spending."

That was until Gov. Greg Abbott in 2019 signed a law requiring cities, counties and other tax collecting entities to get voter approval for property tax rate increases above 3.5%.

More: Read more: Abbott OKs property tax limits

Prior to that, the city had the option to adopt a property tax rate up to 8% without having an election, Watson said, and the City Council regularly adopted a rate near that cap.

"Austin's economic prosperity along with some pandemic-related factors helped to paper over many of the challenges of budgeting over a tight property tax cap," Watson said in his newsletter. "Now, we're beginning to understand the fiscal reality of those caps at the same time sales tax growth slows."

As the COVID-19 pandemic hit, the federal government began sending out large checks to help cities, counties and states in a time of unprecedented need.

Austin received $188 million in federal funds, according to Van Eenoo, but that money is going to start dropping off over the next three years. Van Eenoo called it a "fiscal cliff."

The City Council approved a spending framework of more than $260 million that included ARPA money, some grant funding and some general fund reserves, Van Eenoo said.

"The ARPA funds have to be fully committed by the end of this fiscal year," Van Eenoo said. "And they have to be fully expended by the end of 2026."

A large portion of the federal money was earmarked for homelessness services.

More: Austin City Council commits to spending $95M in federal funds on homelessness

Tenant stabilization program could be at risk

During Tuesday's financial update to the City Council, the city staff noted that $9.6 million in local funds budgeted for a tenant stabilization program that serves about 1,500 households could run out by May.

"The need far outpaces the resources," Mandy DeMayo, interim director of the city's housing department, said Tuesday.

Council Member José “Chito” Vela voiced concern with the funding projections, saying "the stop-and-start nature is not good for the people receiving and asking for the funds."

Council Member Vanessa Fuentes shared similar sentiments, saying it's "incumbent on us to have a permanent fund dedicated for emergency rental assistance."

The city's financial office will be giving a more detailed five-year financial forecast presentation in April.

This article originally appeared on Austin American-Statesman: Austin could see budget deficit as sales tax revenue falls short