The City’s financial outlook remains strong and stable, but there are opportunities and challenges that must be met to keep on solid fiscal footing, Chief Finance Officer Susan Morgan told the City Council on Tuesday, June 12.
Morgan presented a Long Range Financial Planning Five Year Overview to the City Council at its regular packet briefing. The goal was to provide a high-level overview as Councilmembers prepare to discuss the proposed fiscal 2019 budget and tax rate later this summer.
Round Rock’s recent business recruiting successes, an uptick in sales tax revenue overall and from Dell and the City’s long-term approach to strategic planning bode well for financial stability, Morgan said. Threats could include legislative limits to property tax revenue or a dramatic economic downturn; should those occur, the City is well-positioned to quickly shift priorities.
The assumptions going into the five-year forecast are:
- Population growth continues in the 2.5 percent to 2.8 percent range, which means a population of 128,000 by 2023
- Local development and economic growth continues, estimated at 20-25 percent over five years
- Stable state and national outlook
- Current Council goals continue as guiding direction (business friendly, family focused, sports tourism, strong public safety)
- Kalahari Resorts will open as expected in FY 2021
General Fund revenues are expected to grow by $21 million, or 20 percent, over five years to $132 million. Kalahari is projected to add $2.4 million in General Fund revenue by FY 2023.
The General Fund currently is comprised of 45 percent sales tax revenue, 32 percent property tax revenue, 16 percent other and 7 percent other taxes and franchise fees. By 2023, Morgan projects a balance of sales tax and property tax at 40 percent. The balance means more stability for the City, since sales tax is a more volatile source of revenue. The forecast assumes modest growth in sales tax revenue over the next five years. The projection still maintains the City’s position as having one of the area’s lowest city property tax rates.
Property tax rate assumptions include an increase to pay for voter-approved bonds for the Library, and increases for maintenance and operations of City services. New properties coming onto the tax rolls are expected to generate approximately $1.0 million to $1.2 million in additional revenue per year. Morgan noted scheduled increases to maintain competitive pay for Police and Fire personnel are expected to cost $1 million per year.
Revenue challenges facing the City include:
- Sales tax remaining the largest revenue source for the General Fund, though Dell sales tax collections are growing again
- Franchise fee revenue is changing, as more cable customers “cut the cord”
- The Texas Legislature is expected to cap property tax collections at a lower percentage than allowed today – the City’s average increases over the past 10 years have been limited, averaging 3.5 percent, even with the $123.6 million bond program approved by voters in 2013. A modest cap of 5 percent will not necessarily save local tax payers, but will limit the City’s flexibility and control.
- Balancing volatile sales tax against more stable property taxes and fees to meet the needs of population growth and new programs
Assumptions for the expense side of the ledger are:
- The FY 2019 budget will be balanced as proposed by the City Manager
- Base costs
- Salary increases of 3-4 percent per year to stay competitive
- No increase in health insurance costs for FY 2019; 10 percent per year thereafter
- Pension/retirement costs are stable
- Operating costs will grow 1 percent per year
- Staff will be added where required to meet demands of growing population, averaging 10-12 new employees per year
Major programs over the next five years include:
- Two new fire stations, requiring 21 new employees at a cost of a $2 million
- New library, requiring 14 new employees at a cost of $1 million
- New trails and other parks improvements, requiring 6 new employees at a cost of $365,000
- Adding 40 sworn and 7 civilians to police over five years, at a cost of $12 million
- Adding 35 employees across all other departments over five years, at a cost of $2 million a year by 2023
- Cost increases for existing programs and staff are estimated at $2.5 million to $3 million per year
The forecast for revenues and costs result in an estimated $600,000 deficit from 2021 to 2023, which Morgan said can be managed in a General Fund budget ranging from $120 million to $130 million.
Significant shifts expected to occur in the future include increasing Dell sales tax revenue, Kalahari revenues starting in FY 2021 and a strengthening local economy. In addition to Kalahari, other major employers expected to come online are UPS and ProPortion Foods.
Opportunities the City should take advantage of include one of the lowest property tax rates in Central Texas, a more stable revenue base and major developments on the horizon, including The District, a $200 million mixed-use project planned for southeast Round Rock near I-35 and SH 45.
Challenges are the volatility of sales tax, looming action by the Texas Legislature to limit property tax increases and major improvements to the roadway network that will require debt to fund.
To counter a potential legislative tax cap, which could reduce revenue by $6 million in 2023, the City should continue to recruit businesses that add significantly to the property tax base, like Kalahari, UPS and The District. If a 2.5 percent cap is enacted which would result in a $6 million revenue hit, there will be definite impacts to City services, Mayor Craig Morgan said. The 2.5 percent cap recently proposed by Governor Abbott will not allow the City to keep up with the rising cost of providing existing services to our local community when needed, particularly in areas like public safety, parks and street maintenance.
“It’s not just cutting pens and pencils,” Morgan said. “It’s cutting staff, it’s cutting programs. If a cap comes like this, there will be significant cuts.”