‘Cuts are going to be necessary’: Lawrence leaders prepare for tough budget choices amid falling revenue projections

photo by: Mike Yoder

Lawrence City Hall, 6 E. Sixth St., is pictured Thursday, July 7, 2016

With revenue projections predicting multimillion-dollar losses, city leaders are facing tough budget choices, including potential city service reductions, staff layoffs and pay cuts.

The City Commission recently received updated 2020 revenue projections to account for the pandemic and resulting economic slowdown. The projections estimate the city will lose more than $8 million in the most optimistic scenario and many millions more should the economic slowdown continue for the rest of the year. Commissioners have said they favor budget cuts over tax increases, which could call for scaling back city services, cutting personnel or reducing staff salaries.

Mayor Jennifer Ananda said the city’s upcoming budget is full of uncertainty, and, like her fellow commissioners, she thinks the best strategy is to plan for the worst case scenario. Ananda said the budget decisions that have to be made will be difficult for all involved.

“My fellow commissioners, our city manager, our financial staff — we have so much really difficult work ahead of us and we have some really difficult decisions to make,” Ananda said. “None of us want to be in this position, but we are.”

Planning for the worst

The largest impact to city coffers are sales tax collections, which were previously projected to grow by 2% over last year and provide the city $42.3 million in revenue for 2020, or 20% of the city’s annual revenue. But other revenue sources, such as franchise fees, service charges, transient guest tax and potentially property taxes, if residents can’t afford to make payments, could also be affected, according to the new projections.

Finance Director Jeremy Willmoth told the commission at its most recent meeting that the city’s budget outlook is very nebulous, with many variables that could change revenue projections significantly either way. Willmoth said one of the biggest unknown variables is the duration of the economic slowdown, but that he personally thinks the economic recovery will by slow and gradual — or an L-shaped rather than a V-shaped trend line — because of the high unemployment rate and the impact that will have on peoples’ disposable income into the future.

The projections currently include three potential scenarios, based on an economic slowdown that lasts either three, six or nine months, with the three-month duration meaning conditions return to normal June 1, according to Willmoth. The projected hit to general fund revenue is about $7.8 million for a three-month slowdown, $9.8 million for a six-month slowdown and about $12 million for a nine-month slowdown. Nine other funds — including the recreation, gasoline tax and public parking funds — could also incur significant revenue losses, depending on the duration.

The commission has generally agreed that it should plan for the most severe scenario, meaning a nine-month economic impact and a L-shaped recovery. Commissioner Stuart Boley, a retired tax auditor, told the Journal-World that strategy would allow the commission to more easily adjust.

“(In that scenario) you’d have this gap between revenues and expenditures that would persist,” Boley said. “And if that’s the worst-case scenario, then that’s what we have to really plan to be able to deal with.”

Cuts to service, city staff and salaries

The commission as a whole said it would favor making budget reductions over increasing property taxes or service fees, as the Journal-World previously reported. Budget cuts could affect both city services and city staff.

Commissioner Lisa Larsen said she thought potential budget reductions would be considered across the board.

“I think everything is in the mix, from programs themselves to every aspect of our budget,” Larsen said. “There is no stone that should be left unturned when we’re trying to determine what’s the best way to make the cuts that are going to be necessary.”

If salary cuts are to be made, Larsen, who previously operated an environmental consulting firm, said that, as a former business owner, she thinks the place to start is at the top. Larsen said the city’s strategic plan, priority based budgeting process and recently adopted prioritization guidelines for capital improvement projects will be a guide in determining the city’s budget priorities.

One of the priorities of the strategic plan was a commitment to core services — such as water, sewer, infrastructure, police and fire, and medical — which both Larsen and Boley emphasized. For him, Boley said core services also included maintaining multimodal transportation, streets and parks, which he said people need right now.

“Those are what I see as the basic priorities for the city,” Boley said.

Ananda acknowledged that any reduction in city services or programing, including programs that can’t safely operate due to the pandemic, will likely mean cuts to corresponding staffing. However, she said the city could look at options besides permanent layoffs, such as furloughs or other forms of temporary staff reductions. When it comes to pay cuts, like Larsen, Ananda said she would start with the highest salaries.

“For me, I would prefer a top down approach so that we are impacting our hourly employees last, without creating too much salary compression,” Ananda said.

Boley said he would also consider personnel reductions and pay cuts, but said he hadn’t gotten as far as deciding what form those cuts should take.

Property taxes

Though the commission agreed at its last meeting that it did not favor a property tax increase, commissioners said they do not want to take any options off the table at this point.

Larsen and Boley said there were not particular circumstances where they would consider increasing the property tax rate, but that they could not eliminate that option before more definite revenue numbers were known and the city manager makes his budget recommendations. Still, Boley said raising property taxes at a time when people are out of work and some businesses have had to shut their doors would be a tough predicament to put people in.

Larsen said she thinks in the initial phase of the crisis, the city could address revenue loss by other means, but that the decision should be based on the actual revenue data, once it’s available.

“My ultimate goal is to not raise property taxes at this time, because I think we’re just at the beginning of this crisis and I don’t want to overplay anything at this point,” Larsen said.

Like her fellow commissioners, Ananda also does not favor raising taxes, but said she would consider a property tax increase if it were needed to preserve social support programs or to prevent the city from falling significantly behind on infrastructure maintenance. She said infrastructure projects could contribute toward economic recovery by providing jobs and that letting infrastructure fall into disrepair would cost the city more in the long run.

“I do not want to fall further behind, because then we are just putting a cost burden on our future,” Ananda said. “And we can’t afford to borrow against that future any more.”

Reserve funds

Cuts and property tax increase are not the only way to address revenue shortages, as the city has millions of dollars in its general fund balance, which essentially functions as the city’s savings account. However, maintaining a certain level of reserves affects the city’s debt ratings, and Willmoth told the commission that better debt ratings lead to better interest rates and ultimately save the city money.

The commission agreed that given the projections they currently have, it was willing to reduce the city’s general fund balance down to 15% of expenditures, or the equivalent of about $12.3 million. The city’s policy regarding its savings level in the general fund aims to keep reserves equal to approximately 25% of its expenditures, but they can be spent in the event of a prolonged economic downturn.

The 2020 budget originally projected general fund reserves of about $20 million, or about 24% of expenditures, and that balance is projected fall to about $17.6 million after a three-month economic slowdown. The city also has reserves in other funds, most significantly the capital improvement reserve fund, which the 2020 budget originally projected to be about $9.7 million and projections estimate would fall to about $8 million after a three-month economic slowdown.

Boley said he’d be willing to talk about spending the general fund balance down farther, potentially to about 12.5% of expenditures, but that he would be uncomfortable going beyond that at this point.

“I don’t know how long this thing is going to last,” Boley said. “So I don’t want to go through all of our reserves in the next year and half and then not have anything if we have to continue to try to align decreased revenues with expenditures.”

The projections are the best information city leaders have to go on for now, as the state distributes sales tax revenues to cities about two months after they are collected, meaning that collections from April — the first full month where business was widely impacted — will not be received until the end of June. The city manager’s recommended budget will be presented to the commission July 14.

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