The pandemic response shut down the economy just as local governments were making budget plans for next year. That has left them scrambling.
by jesse fox mayshark and scott barker • april 9, 2020
knox county mayor glenn jacobs makes his first budget presentation on May 1, 2019.
For Chris Caldwell, this budget year was moving along like any other right through February, with numbers looking a little better than expected.
Trying to guess how deep the economic hole will go, and how long the slowdown will last.
“We were probably trending 5 to 6 percent above budget, we were trending to have a good year,” said Caldwell, finance director for Knox County government. “Then COVID-19 hits.”
In mid-March, right in the heart of the annual budget planning cycle, a series of governmental mandates and cautionary changes in consumer behavior precipitated an economic freeze unlike any Caldwell and his counterparts in other governmental bodies have ever experienced.
“There’s never a good time for a pandemic to hit, obviously,” said Ron McPherson, chief financial officer for Knox County Schools. “But this is the absolute worst time when you’re trying to develop a budget.”
Longtime City of Knoxville finance director Jim York retired on Dec. 31, the day Chinese officials announced they were treating patients for a disease caused by what would become known as the novel coronavirus. Boyce Evans, York’s successor on an interim basis, began crunching numbers as the outbreak spread across the globe and to the United States. He’s been trying to hit moving targets ever since.
“It’s a real challenge,” Evans said.
The city had been in pretty good shape for the short term, though Evans had told City Council members and other city officials during a February budget retreat that expenditures would increasingly outpace revenues in future years. Still, the projections for next year were healthy until the coronavirus hit.
“We’re seeing some pretty significant revenue losses right now,” Evans said.
In a normal year, the Knox County school board would be voting on a proposed 2020-21 budget within the next week, to be followed by budget presentations from the City of Knoxville and Knox County government between now and early May.
Instead, all of those agencies are still trying to figure out how much revenue they’ll receive in this fiscal year, never mind the next one.
Knoxville Mayor Indya Kincannon is still aiming to announce the city’s budget for next fiscal year on April 24, but chances are slim she will deliver the annual State of the City address before a large gathering as mayors have done in years past.
The school board voted last night to suspend its policy that requires a budget to be approved by April 15. Superintendent Bob Thomas told board members they would see a budget proposal in May, and there’s a good chance the county won’t adopt a 2020-21 plan until sometime in June.
It is unclear where anyone’s budget estimates will wind up, but it is all but certain that spending plans for next year will be cautious at best.
“I think we’re looking at a flat budget,” Caldwell said.
Sales Tax Trouble
The revenue source most affected by the sudden slowdown will be sales taxes, a direct reflection of less consumer spending on dining out and discretionary purchases at local stores. How much exactly that will fall off for the second half of March and the last quarter of the fiscal year — April through June — is impossible to know at the moment, but state and local officials are expecting the numbers to be well under original budget estimates.
Caldwell has run projections estimating declines from 20 to 50 percent for revenues from local-option sales tax, the 2.25 percent that both the city and county add on top of the 7 percent state sales tax.
That could produce a gap in the current county budget of anywhere from $7 to $18 million; the most likely scenario is that it will fall somewhere in the middle.
Any shortfall will disproportionately hit the Knox County Schools budget, both because schools make up the majority of the overall county budget — about 60 percent — and by ordinance they receive 72 percent of both city and county local-option taxes.
Sales tax revenues account for 31 percent of the school system’s funding, the second-largest source after the state’s Basic Education Program.
And since sales taxes are also the largest source of state funding, the slowdown will affect those revenues too. Gov. Bill Lee had proposed a 4 percent salary increase for Tennessee teachers in his original 2020-21 budget, but that was cut in half in the substitute budget the Legislature adopted before its pandemic-induced recess in March.
“Obviously the dilemma we’re in is the uncertainty of all of this,” McPherson said.
Still, he said, state funding numbers don’t look terrible at the moment. “It’s going to be less than what we thought, but it’s not going to be catastrophic at this point,” he said.
Another budget line certain to be affected is the county’s hotel-motel tax, a 3 percent surcharge on room rentals that supports Visit Knoxville and other tourism-related spending. That was budgeted at $8.6 million for the current year, but with hotels across the county essentially shut down for what is normally a busy spring season, the receipts will be considerably less.
The city is facing the same challenges. Sales taxes account for a little more than one-fourth of the city’s operating budget, and the sudden halt to most economic activity has been a severe blow. “We estimate revenue losses due to the coronavirus right at $4.4 million in the last quarter,” Evans said. “One of the big unknowns is how long it will last.”
The city’s undesignated fund balance, which can help cushion the blow during economic emergencies, is healthy for now. “We’re looking at making some cuts. Not letting people go, but curtailing or deferring nonessential spending,” Evans said.
“The big piece we’re trying to wrap our hands around is how much we’re going to have to siphon off from the general fund to support the Convention Center, golf courses, Civic Coliseum,” he continued. “You can’t just mothball those facilities.”
Another increase in expenditures is likely to come from social services agencies the city supports such as the Community Action Committee that are scrambling to respond to the pandemic, Evans said.
After receiving the school board’s proposed spending plan, the county mayor typically presents a comprehensive budget in the first week of May. Caldwell said it’s likely that will move back to provide more time to assess the situation and see how numbers from the state look.
Kelly Cortesi, communications director for the state Department of Revenue, said the state would do what it could to expedite revenue information. “The Department of Revenue’s Research Office is able to provide, on request, industry specific sales tax data to local governments for use in their forecasting,” she said in an email.
Both the city and county will get some extra help with next year’s budgets from $200 million in local government grants Lee included in his budget. Knoxville and Knox County should receive more than $4.1 million each from the fund.
Caldwell said the other big unknown beyond the immediate impact is how long it will take the state’s economy to recover once life returns to something like normal.
“It doesn’t just bounce back,” he said. “How many people will be unemployed, how many jobs won’t come back?”
Evans said the city is planning on the economic turmoil not subsiding until September or even October. Next year’s budget will be based on projections for a dismal first quarter. “Compared to previous budgets, it’s going to be austere, but we have a decent-sized fund balance and will be able to provide services to the citizens,” he said.
Evans said the Kincannon administration is not even considering a property tax increase to shore up revenues next year. “That’s not an option now,” he said. “That’s off the table.”
No one expects a tax increase proposal from Jacobs, either. Most likely, Caldwell said, the county will adopt a conservative budget as well, with the expectation that some adjustments might need to be made over the course of the coming year depending on circumstances.
“We’re going to monitor this thing closely,” he said. “We can come back and do a budget amendment at any time.”