Decision Points

City prepares for $5 million revenue shortfall; considers new long-term measures for changing economic model

As the recession continues to negatively impact City of Round Rock sales tax revenues – we anticipate a $5 million shortfall this fiscal year – we will aggressively reduce expenses in the short term, while retooling operations and our financial management program to deal with what we expect are long-term changes to our revenue model.

As of February, we anticipate sales tax revenue will total $37 million this year instead of the $42 million we budgeted for last September. We plan to make up the difference with $1.8 million in savings from a hiring slowdown and operational efficiencies, $1.6 million reduction in sales tax sharing with Dell, and by cutting $2.7 million slated for street maintenance.

We will not forego street maintenance this year. Instead, we’ll use a portion of the $6 million budgeted over the past two years but not spent as we developed a pavement management system to target those roads most in need of maintenance.

The reduction in sales tax sharing with Dell results from decreased sales tax revenue from the company. As part of the economic development agreement the City and Dell entered into in 1994 when the company announced its move to Round Rock, the City makes monthly program payments to Dell based on the amount of sales tax revenue the company generates. The payment rises and falls based on revenue performance.

If all goes to plan, our austerity program could actually result in a slight budget surplus by the end of the fiscal year, Sept. 30.

Because we expect a continued softening of the economy next year, as well as continued long-term reductions in sales tax revenue from Dell as a result of its changing business model, the City Council is considering additional measures to sustain Round Rock’s solid financial status next fiscal year and beyond.

Among the new measures being considered are:

  • Shift approximately $1.5 million in general fund expenses that pay for our drainage system to a new utility. This drainage utility would charge a fee to properties based on the amount of stormwater runoff they generate
  • Increase parks and recreation user fees to generate an additional $600,000 in annual revenue (the plan is to increase our cost recovery to 70 percent from 60 percent of operational expenses)
  • Use $500,000 a year of revenue generated by our half-cent sales tax for transportation improvements to help pay for the street maintenance program to lessen the impact on the general fund, which pays for basic city services like police, fire, library and parks and recreation
  • Increase the transfer from the water-wastewater utility to the general fund by $400,000 to cover actual expenses provided by the general fund.
  • Begin charging for some fire and emergency response services, a move that could generate $100,000 a year

We anticipate being able to balance the budget for fiscal year 2011 using these measures. At this point – six months before the City Council finalizes the 2011 budget – we are projecting a balanced budget without an increase in the effective property tax rate as well as no performance-based pay increases for employees. It also assumes no increase in police staffing, even though we expect our population to continue to grow.

These far-reaching changes are being considered because property values are expected to decrease or remain flat, while sales tax revenue continues to decline.

While Dell remains a global leader in technology, changes to its business model have a significant long-term impact on our revenue. Here’s why: When Dell sells a computer or other product via the web or catalog in the state of Texas, that produces local sales tax revenue to the City. As the company’s business model has evolved and it has begun selling more products in retail stores in recent years, sales tax revenue from the company has been steadily dropping.

To put the changes to Dell’s sales tax revenue in perspective, consider that from its peak of $24.9 million in 2006, we are projecting it to be $13.3 million this fiscal year. We are planning for it to continue to slide to $5.4 million in 2016.

That conservative use of Dell revenue has resulted in $49 million for capital projects in recent years. Had we borrowed that money instead of using the cash on hand, our property tax rate would be 10 cents higher than it is today.

These changes to our financial model could well result in changes to service levels. Our goal is to deliver the services citizens say are most important while sustaining the City’s strong financial standing.

Posted: Feb 23 2010, 01:30 PM by Will Hampton | with no comments
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