Last week the City Council was updated on 2022 city spending and the latest projections for revenues and expenditures for the next few years. The news was not good.
In short: inflation has driven up expenses quickly, and the economic recovery is slower than prior forecasts predicted. So revenues are coming in low, and “baseline expenditures” — carrying forward into future years only the financial commitments already made — are coming in high. Currently the city is projecting a deficit of $117 million for next year’s General Fund.
At the end of September Mayor Harrell will unveil his proposed 2023 city budget, which will need to find a way to close that gap. The easiest solution, which has already been raised by some elected officials, would be to continue to use revenues from the recently-enacted payroll tax to supplement the General Fund. The Council has ringfenced those revenues so the Mayor can only use them for specific purposes, but it can change its mind at any time. However, that will take money away from other programs that were promised payroll tax revenues, such as affordable housing projects.
The other problem with raiding the payroll tax revenues is that as better data has come in on actual payroll tax payments, there was little good news and more bad news. The good news is that the initial revenues from 2021 have come in higher than originally forecast. The bad news is that 2022 revenues are trending lower so far. The city is learning that 88% of the revenues are coming from three sectors: Trade, Information and Business Services; that is not a diversified base and means that revenues are likely to be volatile. Those industries have been heavily affected by employees’ slower return to the office, which will negatively affect payroll tax revenues (since they are based on where the employees is working from). Also, the city has observed that since stock grants are a major portion of compensation for tech company employees, there is even more volatility.
Even after the Mayor submits his proposed 2023 budget, the Council will have the unenviable task of writing the real budget for next year. And it will be painful: with a deficit to close,there will be no windfalls to fund the Councilmembers’ pet projects. Let’s not forget that 2023 is an election year for seven of the nine Councilmembers, so this budget will be the last one before the primary election.
Some documents worth reading:
- The presentation on the economic and revenue update;
- A memo on the general fund financial issues;
- A presentation with options for how to close the budget gap.
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