City’s recommended budget includes possibility of multimillion-dollar budget gap if revenues don’t increase

photo by: City of Lawrence

A slide from a city presentation on the 2022 recommended budget illustrates the gap in the general fund that the city could face come 2024, if revenues don't increase. The budget proposes using part of the $19.3 million the city will receive from the American Rescue Plan Act to fill that gap in 2022.

The City of Lawrence could be facing a multimillion-dollar budget gap in two years, forcing the city to either cut services or increase property taxes to make up the difference. However, city officials are hopeful that a third option — growth in revenues as the economy picks up — will bring spending and revenue back in balance before such measures are necessary.

City Manager Craig Owens’ recommended budget for 2022 includes almost $8 million more in spending than the city is projected to collect in normal revenues, a gap that the proposed budget would offset next year with the first installment of $19.3 million in federal relief funding from the American Rescue Plan Act. Much of the $8 million represents ongoing rather than one-time expenses, meaning that the city would face a similar budget gap in 2023, which the second and final installment of ARPA funds could again cover. However, come 2024, if revenues have not grown on par with the new spending — projected to be as much as $21 million over the two-year period — the city will have to cut services or increase taxes or service rates, such as utility rates, to make up the difference.

Owens is optimistic that revenue increases, from sources such as rising property values and sales tax collections, will come, but he said the city should be prepared to face those difficult decisions if rising revenue is not enough to cover the projected budget gap.

“So there is a pretty reasonable basis to be optimistic on what we’re going to see over the next few years, in the period of time that we have to close this structural deficit,” Owens said. “But it is my opinion that we need to have contingency plans that will give us options if those optimistic projections aren’t fully realized.”

Those contingency plans could be painful for taxpayers should city revenues not grow as projected. For example, if the city were to replace the entire $8 million with new property taxes, it would take about a 6.78 mill increase to do it, or about a $156 increase in the amount of taxes the owner of a $200,000 home pays each year. Another option would be for the city to cut $8 million worth of services — how noticeable that would be would depend on which services were cut. The city’s hope is that revenue will rise enough that none of that would be needed.

City commissioners, who will be asked to approve the budget next month, don’t have to figure any of that out right now. Instead, they have to determine a couple of things. First, are they comfortable betting that revenues will improve significantly in future years as the economy continues to rebound? Second, are they convinced that spending a one-time federal grant on items such as salary increases or new City Hall employees is the best use of those funds, or should they be spent on more traditional grant-like projects such as new infrastructure?

Budget gap

Owens’ recommended budget includes a $7.9 million gap in the general fund, which the budget proposes covering by using federal relief funding from ARPA. Those funds will only be available for two years, and the budget proposal states that this arrangement “will not be sustainable long-term and some combination of service reductions, increased tax rates, or stronger growth in property values and sales tax will be required to sustain our direction.”

Though the city has yet to designate exactly how the ARPA funds will be spent, the city’s budget presentation states that despite slower revenue due to the pandemic, the ARPA funding made it possible for the city to stay on track with capital investments, maintain service levels and implement plans to address competitive pay issues. The recommended budget includes millions toward employee raises, as well as several new staff positions at City Hall — all of which are new expenses that would be ongoing.

More specifically, the $383.87 million budget includes $5 million total in pay raises for all employees and eight new staff positions, four of which would initially be grant funded. The budget also calls for a new division to address homelessness, which is described as budget neutral since it reallocates existing resources and $117 million for infrastructure and maintenance. The budget does not propose an increase in the city’s property tax rate, but does call for increasing all three city utility rates.

There are also a few key one-time purchases in the budget. Budget and Strategic Initiatives Administrator Danielle Buschkoetter said some examples are included in the city’s capital improvement and other maintenance plans. She said notable items included $400,000 for a land development code update, $200,000 toward public art for the new bus station and $400,000 in 2022 toward a records management system, with another $400,000 toward that system the following year.

Though capital investments, maintaining service levels and the $5 million are mentioned as ways the federal grant funding will be spent, the budget does not have a more specific list of exactly how each ARPA dollar will be allocated. Finance Director Jeremy Willmoth said the city is still waiting for additional guidance from the U.S. Treasury Department regarding how the ARPA money can be spent, and though the city has various expenses that will qualify, it is waiting to designate those funds until guidance is clear.

“So we need to make sure that the budget is earmarking but not designating (those dollars) until we know what those final rules are,” Willmoth said.

The recommended budget is clear, though, that the city is facing a “structurally imbalanced” budget because of the gap in the general fund, which is projected to be $21 million over two years, according to budget presentation materials.

Raises and new positions

The $5 million in pay increases proposed for 2022 will provide a 2.5% general wage increase for both union and nonunion employees, fund all employee pay schedules and begin funding a two-year plan to bring all compensation to market rates.

The city had an outside study conducted on employee compensation in 2018, and Owens said the city has yet to meet the study’s recommendations regarding wages. Similar to providing funding for the city’s physical infrastructure — which city officials have long said suffers from underinvestment — Owens said the city has to invest in the human infrastructure of its workforce by getting pay to market-competitive rates. He said that if the city failed to do so, it would lose valuable staff.

“There is a talent war on, and we need to maintain this top talent to do the extraordinary work that’s ahead of us in Lawrence,” Owens said.

The eight new positions proposed include four that are funded with general fund dollars and tied to goals in the commission’s strategic plan: a sustainability analyst, an equity and inclusion coordinator, a budget analyst and an economic development analyst. The four other positions would be grant funded, at least initially, with one being funded by federal coronavirus relief funds and the other three funded by state and federal grants that could potentially be renewed into the future. Those eight proposed positions would join about 20 others recently added as part of a 2021 budget adjustment made this spring. The commission voted unanimously in April to add 20.5 new staff positions at an estimated cost of about $2.25 million annually. Of those positions, 9.5 are administrative positions, four are planning positions, and seven are in the Municipal Services & Operations Department.

Owens said that most of the 20.5 positions recently added and the eight new positions proposed for 2022 would go to support the five “strategic outcomes” established by the city’s new strategic plan, which was based on input from the community.

“Most of the midyear budget adjustments, the new positions that we authorized, as well as the handful that we were able to add in this budget proposal, really are going to build that capacity so that we can do the outcome work appropriately,” Owens said.

The strategic plan outcomes include goals related to arts and culture, welcoming neighborhoods, safety, economic security and infrastructure.

In reference to some of the new analyst positions proposed for 2022, Owens said having data analytics was essential to strategic planning. He said without more data analytics throughout the departments, the city can’t measure its performance, set goals as part of the strategic plan or track progress on those goals.

Willmoth also said the additional positions, both those added this year and proposed for next year, were needed. He said that there was a lot of data but not enough people to adequately track and analyze that information. He said that if the city was going to be committed to sound fiscal stewardship in a timely way, it needed to track information more quickly instead of having a lag of 45 to 90 days for its reports.

“That type of timing delay really hinders our ability to be nimble and react, but quite frankly we don’t have the staff to do it any faster,” Willmoth said.

Filling the gap

Ultimately, it will be up to city commissioners to decide whether they want to go forward with a budget that could set the city up for a multimillion-dollar gap in the general fund if revenue does not increase.

Given the utility rate increases in the recommended budget, which the city says will help support infrastructure improvements, the Journal-World asked why the city didn’t seem to be committing a more substantial portion of ARPA funds to infrastructure improvements that could help offset those rate increases. Owens said that the proposed utility rate increases are part of a multiyear rate plan model to catch the city up on deferred infrastructure maintenance, and that it was expected that additional federal funding specifically for infrastructure could be approved.

“We expect that there will be more federal assistance in infrastructure that will be a much better and tighter fit than the emergency relief funds that were really to keep cities in business,” Owens said, in reference to the ARPA funds. “And that’s how we’re using this, to keep the city in business.”

When it comes to filling the gap, Owens said there are a lot of signs that property valuations are going to be going up significantly and that sales tax collections will be higher. He said sales tax revenue could increase even without an expansion of sales-tax-producing businesses because of price inflation and increases in consumption.

Still, the recommended budget is clear that commissioners could face difficult decisions if revenues have not increased enough by the time the ARPA funding runs out in 2024. The budget states there are “looming challenges” that must be addressed structurally and systematically over the next two years. It goes on to say it’s important that policy leaders and the community understand that some combination of service reductions, increased tax rates and stronger growth in property values and sales tax will be required to “sustain direction.”

Owens said that while there are reasons to be optimistic about the city’s revenue projections, the city should be prepared to make those difficult decisions.

“That’s a community decision, and that is ultimately a commission decision,” Owens said. “But I think we’ve got some really important perspectives that will determine what we decide to do and what mix of these three options is right for us.”

Contact reporter Rochelle Valverde

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