As Austin’s City Council approaches this year’s budget adoption season, the city is grappling with a significant structural deficit, a situation that has not been seen in the 21st century.
This fiscal challenge cannot be remedied by merely borrowing from emergency reserves or by implementing minor service cuts, prompting a need for a fundamental reassessment of budgeting strategies.
Traditionally, Council members could rely on a revenue surplus, enabling them to fund new initiatives or expand existing services.
However, a combination of external factors has created a fiscal environment that demands a transformative approach to budgeting.
In recent years, the City Council typically entered budget discussions equipped with surplus funds to cover essential services such as public safety, parks, and libraries while also being able to fund new programs that enhance the city’s appeal to its residents.
Past initiatives funded by surplus revenue included a rental assistance program, a guaranteed basic income initiative for low-income families, and the availability of mental health care responders for emergency calls.
As discussed with various Council Members (CMs), the era of readily available surplus funds seems to be drawing to a close due to multiple factors outside of the city’s control.
These factors include a state-imposed cap on revenue growth from property taxes, stagnant property values across Austin, declining sales tax revenues, the end of federal stimulus funding from the American Rescue Plan Act, and rising costs for necessary public services.
In April, the city’s budget office outlined the dire situation: Austin is projected to enter the next fiscal year with a deficit of $33.4 million, which could balloon to $80 million within four years.
Faced with these staggering figures, CMs have acknowledged that difficult decisions lay ahead, necessitating a blend of program cuts and potentially a tax rate election to exceed state limits.
City Manager T.C. Broadnax has already began preparations for budget cuts and has instructed all city departments to identify 5% of their budgets that could be eliminated in an effort to balance the budget he will present on July 15.
A recent example of potential budgetary cuts was the Parks and Recreation Department’s decision to end “night swim” at Barton Springs, a move that sparked immediate community backlash and was subsequently reversed, indicating the tougher budget conversations ahead.
Mayor Kirk Watson commented on the council’s fiscal situation, stating, “I don’t see us as in an emergency situation. I do see us in a different situation than in the past that requires us to develop a methodology and a new approach to how we’re going to budget.”
The changes facing Austin’s budget were anticipated following the 2019 passage of Senate Bill 2 by the Texas Legislature, which limited the revenue cities could generate from property taxes, the primary revenue source for local governments.
Before SB 2, Austin could increase its property tax rate by up to 8% each year, affording greater flexibility in funding city expenditures.
The new law lowered the maximum increase to 3.5%, a figure that has consistently lagged behind inflation rates, making it increasingly challenging for local governments to balance their budgets.
A study in 2022 confirmed that cities across Texas have experienced significant declines in tax revenue due to SB 2, translating to millions less for city services.
Austin’s budget office has thoroughly analyzed the impacts of SB 2, revealing that had the city maintained the former tax rate increase cap, it would have seen an additional $200 million by FY 25.
Council Member Ryan Alter expressed the severity of the situation, stating, “The property tax caps have killed us. It is a wholly different paradigm. We really have to find the money at the expense of something else.”
In addition to state restrictions, the ending of federal assistance has contributed to the budget deficit. The American Rescue Plan Act of 2021 temporarily shielded cities from the detrimental impacts of SB 2, providing Austin with approximately $188 million to support various initiatives targeting homelessness, food access, and childcare services.
However, that funding has now been exhausted, leading the city to confront ongoing financial obligations without the influx of additional federal resources.
Moreover, the relentless cuts to federal discretionary spending have further strained local budgets, particularly in public health initiatives, which have already been adversely affected by federal changes instigated under Trump’s administration.
Austin Public Health has reported potential cuts of up to $23 million in grants, risking the loss of around 100 jobs due to these federal funding cuts.
As Council faces looming fiscal challenges, concerns persist regarding the unpredictability of future federal funding, particularly as Congress remains under Republican control.
Local expenditures on public safety services—police, fire, and EMS—have also escalated to unsustainable levels, particularly following a costly labor contract with the Austin Police Association approved last fall.
The five-year, $220 million contract has raised alarms regarding the city’s ability to balance its budget while continuing to invest in public safety.
Additionally, state law under House Bill 1900 prevents reductions in police budgets, meaning every dollar invested in the Austin Police Department reduces the city’s flexibility in addressing budgetary deficits elsewhere.
While some CMs maintain support for the police contract, they acknowledge the immediate financial repercussions.
Watson defended the contract, stating, “We have the contract, and now we need to figure out how we’re going to budget and get all of the needs met, including a contract with the police union.”
Ultimately, the likely outcome of the budget discussions will be a tax rate election, although Watson has hesitated to definitively state this course of action.
Nevertheless, a consensus among council members indicates that balancing the budget through cuts alone will not suffice to maintain essential city services.
Council is beginning to lay the groundwork for a tax rate election, with a process already adopted to initiate this election.
First, the City Manager will propose a baseline budget, which will provide the framework for the city’s spending capacity for the fiscal year.
The manager or the Council can subsequently recommend a tax rate election to accommodate planned expenses.
To proceed with a tax rate election, the council must complete a comprehensive financial analysis.
This analysis will help identify any potential cost savings, clarify which services the new tax rates would fund, and ensure an appropriate balance between one-time costs and ongoing expenses.
Significantly, the new TRE framework indicates that attempts to raise taxes beyond the 3.5% cap should occur no more frequently than once every four years, suggesting that Council might need to establish a regular schedule for TREs similar to current practices for municipal bonds.
Council members are now deliberating on how much of a tax increase should be presented for voter approval to address substantial costs—potential cuts to public health programs and an escalating need for fire and EMS contracts are at the forefront of discussions.
“I am concerned about overburdening our families,” noted Vanessa Fuentes, “but I think we need a tax rate election that will stabilize us and allow local government to provide the safety net that the federal government is no longer providing.”
As members consider the upcoming tax increase, questions arise about the council’s ability to successfully garner public support for this unprecedented electoral action.
CM Mike Siegel emphasized the importance of coalition-building across various sectors, stating he aims to ensure all stakeholders, including labor and community organizations, are actively involved when approaching voters.
In light of the budget deficit, many have begun examining an issue that previously flew under the radar—the accuracy of budget forecasts developed by the city’s budget office.
Previously, the office had projected far smaller deficits than what is now anticipated, demonstrating a concerning lack of precision in financial forecasting.
This discrepancy was highlighted last October when staff indicated that the anticipated deficits would amount to just $2 million in FY 26 and $6 million in FY 29, forecasts that led many Council members to believe that minor budget adjustments would suffice.
However, less than six months later, the city faced a grim $33.4 million deficit for FY 26, a result of unforeseen declines in property tax values and city revenue.
Although financial forecasting will always be an imperfect science, the breakdown in communication and trust has raised eyebrows among local fiscal observers like Julio Gonzalez Altamirano.
He stresses that the city’s budget processes cannot afford any gaps in trust, especially in light of the growing constraints being placed on local revenues.
“Now we’re no longer in the world where blistering property taxes and red-hot sales tax can bail us out,” he stated. “There’s going to be a perception of budgetary chaos if we are not continuously improving the statistical calculations we use to forecast revenues and expenditures.”
CMs Fuentes and Alter concur that enhanced forecasting accuracy is pivotal in light of tight revenue constraints and rising service costs.
They assert that this will necessitate further inquiries, more in-depth analysis, and a clearer dialogue with both staff and the community regarding budgetary priorities.
As Austin braces for a challenging budget season ahead, strategies and methodologies under consideration will fundamentally reshape the landscape of the city’s financial management.
With the potential for cuts to essential services and a tax rate election on the horizon, the coming months will be crucial for determining Austin’s fiscal future.
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