While the depth of the economic fallout from the new coronavirus and COVID-19 remains unknown, members of Asheville City Council heard the first troubling analysis of the city’s projected revenue losses during an April 14 budget work session.
“Our last budget work session was in mid-March. What a difference a month makes,” City Manager Debra Campbell said, referring to the March 13 City Council retreat in which the virus had only just begun taking a toll on the local economy.
Tony McDowell, the city’s assistant finance director, explained during a presentation at the meeting that 80% of revenue in the city’s general fund is generated from property taxes, sales taxes and utility taxes, while the remaining funds are made up of fees and charges. He noted that while all of the general fund’s revenue sources are likely to see reductions as a result of COVID-19, sales taxes — which make up the second largest portion of revenue production — may experience up to a 35% decline in the final quarter of the year as a result of widespread business closures aimed at reducing the spread of the virus. By comparison, he continued, the city experienced a 10% quarterly drop in sales tax revenue at the height of the Great Recession.
“This is the revenue we’re most concerned about. It’s the one that we think is going to be most impacted by the current crisis and we think that it’s going to come in substantially under budget in the current year,” McDowell said.
The city’s finance department doesn’t currently know the full impact of the business closures on sales tax revenue due to a three-month delay for the data, he explained. Sales tax data for the months of March and April, when most businesses were forced to temporarily shutter, won’t be available until June and July, respectively, leaving Council members and city staff with little concrete information to plan for the upcoming 2020-21 budget.
“One of the challenges of making these estimates is that we don’t really have any real time information to evaluate where we’re at,” he said.
“We’re operating in the gray,” Campbell added.
McDowell also explained that Asheville’s Development Services department, which oversees construction activity, saw a 46% decline in revenue from over the three week period between March 19 and April 8. The decision to suspend on-street and garage parking enforcement March 19 is also expected to leave the city’s enterprise fund roughly $1.5 million under budget, while an additional shortfall of $575,000 is anticipated should the Harrah’s Cherokee Center Asheville remain closed through June 30. The total financial impact to the city’s general fund is projected at between $2.8 – $5.5 million.
McDowell noted that the city has taken several steps to reduce spending without cutting core services, such as implementing a hiring freeze for currently vacant positions and eliminating 2% yearly pay increases for city employees. He also pointed out that some priorities discussed during the March 13 Council retreat, such as bringing roughly 120 employees up to a $15 per hour minimum and expansions to the city’s transit system, are currently in the 2020-21 budget. Campbell added that the city had no plans to lay off or furlough any city staff during the crisis.
Despite reductions in spending, McDowell explained that the 2020-21 budget expenditures are expected to outpace revenues by $1.5 million.
Campbell is scheduled to present the proposed 2020-21 budget on Tuesday, May 12, and a public hearing on the budget is planned for Tuesday, May 26. Council members are expected to vote whether to adopt the budget Tuesday, June 9. But in light of the economic uncertainty, McDowell told the Council that it had the option to delay the city’s budget adoption schedule by two weeks, which would allow more time to receive updated information about the city’s sales tax and other revenue sources instead of relying on projections alone.
The city also has the option of adopting an interim budget which could remain in effect for only a few months. McDowell explained that Asheville utilized a two-month interim budget in 2003 after state funding was delayed. If implemented, the city is required by state statute to adopt an annual budget by August in order to set the property tax rate. He recommended that the Council consider an interim budget only if other municipalities in the state were also taking similar action to protect the city’s credit rating.
Council members will have the opportunity to vote on whether to delay the city’s budget planning process during their next formal meeting, which is scheduled for May 12. In the meantime, McDowell said that city staff plan to continue monitoring the impact of the virus on the local economy and trying to plan amid financial anxieties.
“Typically there’s a lag with local governments of when the recession happens and when it really hits. With the Great Recession 10 years ago, it was really not the initial year that it happened, but it was the year after and even the year after that when we saw the biggest financial pinch,” he said. “This may be different this time. Obviously we’ve never experienced this kind of crisis before, so we may make a quicker recovery. It’s just really impossible to say at this point how quickly the economy is going to recover after all this is over.”