Grappling with budget shortfalls, Texas cities prepare for hard choices

The economic impact from the coronavirus pandemic has left some of Texas’ biggest cities facing a difficult choice: cutting services like libraries, pools and parks, or raising taxes on their residents in the middle of the worst economy in a generation.

“For example, this summer you’ll see swimming pools not opening. I think you'll see branch libraries not opening,” said Bennett Sandlin, executive director of the Texas Municipal League, which represents city governments around the state. “I can't speak for any particular city, but I think it’s going to be a deeper, far deeper recession than what we saw 12 years ago.”

The temporary closure of businesses and high levels of unemployment due to the pandemic have caused sales tax revenues — which make up a significant portion of cities’ budgets — to plummet. On Wednesday, Texas Comptroller Glenn Hegar announced that local sales tax allocations for cities in June dropped by 11.1% in comparison with the same month last year.

And although the federal government has pledged assistance to cities through the CARES Act, experts say it won’t be enough to fill a void they expect to last for years.

“This is not going to go away very quickly,” Sandlin said. “You’ll see the biggest hit next [fiscal] year. And then I think you’ll see a continued hit to the budget the following year, so it will be at least two to two and a half years.”

In the past month, Texas’ most populous cities have been tallying their losses. Dallas’ analysts are predicting that the current year’s revenue will be at least $33 million below previous estimates; the city has already furloughed library and parks department workers as a result. San Antonio’s current budget is predicted to drop by $200 million.

And in Houston, an original analysis projected a $169 million budget deficit for the upcoming fiscal year because of COVID-19.

“It’s the toughest budget we’ve had to put together since I’ve been mayor in January of 2016,” Houston Mayor Sylvester Turner said in May. On Wednesday, the city approved a budget without major cuts. It is redistributing funds and using CARES Act money to fill some of the holes left by the economic crisis.

While some cities — including Austin and Dallas — are reconsidering their public safety funding amid recent protests against police brutality, this line item normally avoids major cuts during a crisis. Experts said that city leaders prefer to cut other areas like road maintenance, parks and libraries in order to protect fire, emergency service and police departments from layoffs.

“Public safety is probably the No. 1 service that people expect from their city, and so that’s the last thing to go,” Sandlin said. “But if sales tax drops dramatically enough and if property taxes drop dramatically, there may be no other choice.”

Bill Fulton, director of the Kinder Institute for Urban Research, which just published a report analyzing the fiscal scenarios for Dallas, Houston and San Antonio, said the lesson of previous recessions is that police and fire services “get cut back a little bit, but most everything else that the cities do is likely to get cut back a lot.”

Cities and counties throughout the state will receive money through the Coronavirus Aid, Relief and Economic Security Act, but many believe that it won’t be enough. The U.S. House of Representatives has approved a Democratic plan to provide $3 trillion in aid, which would include $1 trillion for local governments, but unlike the CARES Act, the proposal hasn’t received bipartisan support and has stalled in the Republican-controlled Senate.

“These three cities, like most local governments, are going to be in enormously difficult financial trouble if they don’t get a bailout from the feds, which right now looks like they’re not going to,” Fulton said. “I think we’re staring down the barrel of two or three years at least of very, very difficult and hard times for cities in Texas.”

Property tax hikes unlikely during recession

The two main sources of revenue for cities are property taxes and sales taxes. While the pandemic’s impact on property taxes is not clear yet, sales taxes tend to be more volatile and began falling the moment the shutdowns started.

“The cities that ... suffer the worst are the ones that have a larger percentage of their revenue tied to sales taxes,” Sandlin said, adding that most cities get around 25% to 28% of their revenue from sales taxes, but for others it’s as high as 50% to 60%.

Arlington, for example, had projected that sales taxes would contribute 25.4% of its general fund in the 2020 fiscal year. During the pandemic, the Six Flags theme park had to shut down, live events in the Texas Rangers’ park and AT&T Stadium were canceled, and students stopped going to the University of Texas at Arlington campus for classes.

“Tourism is a big part of our economy,” said Arlington Mayor Jeff Williams. “And then, of course, when you also add to that most of our businesses and restaurants have been closed, it’s a big hit. We’re projecting a $20 million shortfall here just from sales tax.”

This problem affects cities large and small. On the Texas-Mexico border, the city of Pharr has felt the shutdown not only of retail, but also of the border.

“We are in the frontera, so we have a lot of shoppers, not only domestic but international,” said Pharr Mayor Ambrosio Hernandez. But during the pandemic, the border has been closed to nonessential travel, effectively stopping most visitors from Mexico.

Hernandez said 40% of the city’s revenue comes from sales taxes, fees from border bridge crossings and building permits. Most of the other 60% comes from property taxes, which are the most important source of revenue for cities in Texas.

Cities could increase property taxes to avoid revenue shortfalls, but few have indicated they are planning to do so. During the last legislative session, lawmakers passed a bill requiring voter approval before cities could hike property taxes by more than 3.5% in a given year.

According to the Texas Municipal League, cities could waive this limit under a disaster declaration, but Gov. Greg Abbott has disputed that conclusion.

“I’m hearing very few cities interested in exceeding that [3.5% limit],” Sandlin said. “Many cities that don’t even want to approach [the topic] because they know that next year is going to be really brutal on their citizens and the whole economy is going down.”

Federal aid comes with conditions

The CARES Act allocated $150 billion for state, local and tribal governments, including $11.24 billion for Texas. Almost half of that is going to cities and counties in the state. The money can only be used to reimburse local governments for expenses related to COVID-19 between March 1 and Dec. 30.

Houston will be able to receive up to $404 million; San Antonio, around $270 million; and Dallas, $234 million.

“When you’re talking about Houston, $400 million sounds like a lot of money, it’s 15% of the general fund,” Fulton said. “But if you can only spend that money on certain things and spend it in a short period of time, you’re probably not going to solve all your budget problems, and what do you do the next fiscal year?”

Fulton said many cities have begun to “pivot their employees toward COVID-related work” so that work can be covered by CARES Act money.

“It will help some and it will help in the short run, but it won't solve the problem,” he said.

In San Antonio, for example, the fire department has been trained in transportation of COVID-19 patients, decontamination of equipment used in COVID-19 responses and surveillance of health-related data. In Houston, the city is planning to avoid furloughs by redirecting employees to tasks like taking the temperature of workers at municipal offices to identify those who might be infected.

“We are still facing some tough challenges. We had to scale back a bunch of things that we are doing, but [with the federal funds] it is a better picture that we had originally,” said Houston City Council member Dave Martin.

Disclosure: The Texas Comptroller of Public Accounts, the Texas Municipal League and the University of Texas at Arlington have been financial supporters of The Texas Tribune, a nonprofit, nonpartisan news organization that is funded in part by donations from members, foundations and corporate sponsors. Financial supporters play no role in the Tribune's journalism. Find a complete list of them here.