Long-term financial forecast sets stage for upcoming budget discussions

City faces tough choices in evolving fiscal environment

City CFO Susan Morgan told the City Council that Round Rock’s financial forecast is “strong and stable” but there are challenges that will require difficult decisions. “We are clever and resilient,” Morgan said, and well-poised to handle expected changes in the fiscal landscape.

The City of Round Rock’s long-term financial forecast is strong and stable, and the City is poised to meet the challenges posed by a legislative-imposed property tax cap and sales tax revenue volatility, according to Susan Morgan, Chief Financial Officer.

Morgan presented the annual Long Range Financial Planning Five Year Overview to the City Council on Tuesday, June 11. The big picture presentation is the unofficial kickoff for budget discussions with the City Council, which will approve the fiscal year 2020 budget and tax rate in September.

Providing Councilmembers with a view of the fiscal horizon assists in their annual budget decisions by helping them understand the current and future economic environment, identify challenges and opportunities and to start thinking about next steps.


Here are the overall assumptions built into the five-year forecast, which focused solely on the General Fund:

  • Population growth continues at 2.5% to 2.8%
    • 2024 population estimate – 131,500
  • Local development and economic growth continues
    • Estimated 20-25% growth over 5 years
  • Stable state and national outlook
  • Current Council goals continue as guiding direction
    • Business friendly; family-focused; Sports Capital of Texas
  • Kalahari Resorts and Conventions opens in early FY 2021

Major changes over the past year include two just imposed by the Texas Legislature: a 3.5 percent rollback limit on the property tax rate and a change in franchise fee collections that will reduce annual revenue to the City by $360,000.

When it comes to sales tax revenue, the changes are mixed. The good news is revenue from Dell is rising. Revenues from existing retailers and call centers, on the other hand, are declining.

A quick note regarding Dell sales tax revenue: by policy, the City caps the amount of sales tax revenue from Dell to ensure we do not become overly dependent on it for day-to-day operations. Revenue from Dell that comes in over the capped amount is used for one-time capital purchases that would otherwise require additional city debt.

Revenue projections


The City’s revenues are expected to rise 19 percent over the next five years, to $144 million from $121 million. By 2024, Kalahari will add an estimated $2.7 million in recurring revenues, and that sales tax and property tax revenue will be more balanced. In 2020, sales taxes will make up 43 percent of General Fund revenues and property taxes will make up 35 percent, according to Morgan. Those numbers are projected to balance out to 39 percent sales tax and 41 percent property tax by 2024. Although a strong sales tax base helps supplement property taxes paid by residents, less reliance on this volatile funding source will further stabilize the City’s finances.

Sales tax revenue will see moderate growth, Morgan said. Traditional brick and mortal retail is expected to remain flat or declining, partially due to retail “leakage” as new shopping centers open in the region, including the new IKEA in the San Antonio area.

Property tax revenues are set to increase due to voter-approved bonds for a new library and certificates of obligation for our five-year road improvement plan and an additional fire station. Currently, almost half of the City’s property tax revenues are generated by commercial properties, which helps offset costs to residential tax payers.

New development is expected to add $418 million to the City’s property tax rolls in FY 2020, with an additional $400 million anticipated on an annual basis for 2021-2024. That growth will generate around $1.5-2 million a year in property tax revenue. That’s significant, but bear in mind that maintaining competitive salaries and benefits for police and firefighters costs an additional  $1.5 million each year.

Challenges on the revenue side of the ledger include the following: Sales taxes remain the City’s largest source of General Fund revenue, and are a volatile source of funds, making over-dependency a risk; Franchise fee revenues will decline by $360,000 due to recent legislation; Dell revenue growth is strong, but limited in use by policy; and property tax rate increases will be limited to the 3.5 percent rollback provision.

Morgan stated that the City will need to consider increasing user fees to meet the demands of growth and for new programs.

Cost assumptions

One of the largest drivers of expenses for the City of Round Rock are salaries – people make up 70 percent of General Fund costs. Because of the healthy economy in Central Texas, the City has to compete for good employees and is anticipating a 4-5 percent growth in base salaries per year to stay competitive. Other operating costs are expected to grow by 1 percent annually. The good news is health care and retirement costs are stable.

Generally, additions to staff correlate with overall growth of the community and additional programs. Major programs over the next five years includes building a new fire station, which requires 12 full time employees to staff; adding 12 new employees for the new, expanded library, expected to open in fall 2023; adding staff to transportation as the City implements its five-year, $240 million improvement program; increasing staffing for police; and additional positions for parks and recreation and throughout the organization.

It all adds up to $5 million a year by the time 2024 rolls around.

Expense projections are currently outpacing revenue projections with the gap widening to $2.8 million by FY24, due to the property tax cap, sales tax volatility, and addition of staff.The City Council, by charter and state law, cannot approve anything other than a balanced budget. Morgan told the City Council the gaps are manageable, due in large part to an already low tax rate and major development projects on the horizon, such as Kalahari and The District, along with other economic development prospects.

Next steps

Strategically, Morgan recommended the following steps to keep the City’s fiscal house in order:

  • Keep evaluating the future – use information in this report as a problem-solving tool
  • Maintain conservative sales tax projections
  • Evaluate the use of other revenue sources where appropriate
  • Pursue grants, interlocal cooperation and other outside funding
  • Continue to deliberate and evaluate what should be considered core municipal services

Morgan also touched on the worst-case scenario: What would happen if there’s a major economic recession over the next five years? In that case, sales tax revenues could drop by 10 percent – similar to the recession in FY08/09. Growth pressures would be reduced, therefore reducing the need to grow City services. The addition of more staff would also be postponed. The City’s adopted financial policies include a budget contingency plan that would allow staff and council to take quick action, if needed.


Morgan concluded by stating Round Rock’s outlook is strong and stable. Closing the projected budget gap in FY21-FY24 is doable, but challenging. Increasing user fees will continue to be reviewed.

The City will have to continue to stay vigilant on its sales tax reliance. In addition to Dell, the City will continue to monitor changing economic indicators and trends carefully for potential impacts to local destination retailers like IKEA, Premium Outlets and Bass Pro Shops. While revenue surpluses are welcomed, they are not spent within the same fiscal year in order to hedge against changing conditions.

The City of Round Rock will continue efforts to diversify the Round Rock economy, ideally with businesses that are capital intensive and thus contribute significantly to the community’s property tax base. Morgan noted the City’s sports tourism efforts are well-founded in that, unlike brick and mortar retail, visitors are engaged in activities that won’t shift to online sales in coming years.

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