Expecting final approval of the FY23 operating budget on June 21
The Council will decide the FY23 operating budget on June 21. The Mayor proposed a $2.97 billion budget. The final approved budget will be slightly smaller at $2.95 or $2.96 billion. This post will give a roadmap for what Budget & Finance Committee Chair Burkley Allen has proposed in her substitute budget, what other Council members are proposing as amendments, and the major remaining issues.
A quick word about the process first
The Metro Charter requires the Mayor to propose an annual operating budget by May 1. The Council is required to pass its own budget by June 30 or else the Mayor’s budget automatically goes into effect. This built-in priority for the Mayor’s proposed budget is the core of Nashville’s “strong mayor” form of government.
To get the budget to the finish line, the Chair of the Council’s Budget & Finance Committee proposes a “substitute budget” and then other Council members are allowed to propose amendments to the Chair’s substitute budget.
Before 2021, in a typical year, the Council would move around a few million dollars in the budget. Let that sink in – the history of Metro is that the Council has changed the Mayor’s proposed budget by amounts as small as one-tenth of 1% of the budget.
In the last few years, the Council has made more changes in its budget – but those still have amounted to less than 1% of the operating budget.
High level summary of CM Allen’s proposed substitute and other amendments
CM Allen’s proposed substitute budget is here. It shows the original numbers proposed by the Mayor and the changes she proposes. CM Allen has provided several summary resources. Here are links to how she proposes to fix the $22.6 million hole in the MNPS budget, a list of an additional $8.6 million in other changes to the budget, and a letter with her description of the changes. And today, the Council Office provided its summary of the changes. For more information, here’s my April 30 post about what’s in the Mayor’s original proposed budget.
In addition to CM Allen’s substitute, 14 Council members have proposed 15 additional amendments that the Council will have to work through when we meet on June 21. It looks like the total value of the proposed additional amendments is over $20 million.
I am not going to list out the many proposed changes here. You can skim through CM Allen’s resources and the 15 additional amendments to get a sense of what’s on the table.
Since we just got the substitute budget after the close of business on June 16, and received the 15 additional amendments at 4:59 pm on June 17 (a Friday), I am not completely sure yet how I’ll vote on all 15 amendments. That said, I have a working approach for the large dollar amendments. In the rest of this post, I will run through the general principles that will drive my decisions.
The MNPS $22.6 million hole
Most of you know this story by now. A few days after the Mayor’s budget was released, MNPS found out that its subsidy from the State was going to be $22.6 million lower than shown in the Mayor’s budget. MNPS says this was a total surprise. The Mayor’s Office tells people quietly that MNPS should have known and therefore they initially wanted MNPS to fix the problem alone. After a few weeks of finger-pointing, a solution was found by MNPS, the Mayor’s Office, the Finance Department, and Chair Allen. Basically, MNPS is covering about one-third of the gap from its budget, the rest of the Metro government is covering about one-third, and the last third is coming from Metro’s “fund balance.” More about fund balance later.
With these groups having worked together to fill the $22.6 million hole, this part of the substitute budget should sail through the Council.
HOWEVER – to understand the rest of the proposed changes to the budget, it is important to understand that Metro Finance historically likes to tuck several million dollars of cushion around the budget. Call it sandbagging. Call it prudent financial management. Call it whatever you want, but Metro Finance is adept at tucking an extra half-million or million dollars here and there in the budget to help make the city’s finances work through the course of the full fiscal year.
These little jars of money usually get raided mildly every year by the Council in passing a final budget. But this year, these jars of money were substantially raided to solve the MNPS $22.6 million problem. In turn, this means that the usual stashes of cash aren’t available for the extra spending that Council members would like to add to the final budget.
One final point about MNPS – my message to them would be that I am willing to give them the benefit of the doubt that the $22.6 million revenue projection miss this year was not their fault. I am willing to have the general government and MNPS share the pain in fixing the miss this year. But going forward – now we know this can happen and MNPS needs to plan for it. In the future, if there is the slightest uncertainty about the final amount coming from the State, MNPS should low-ball the estimate and budget accordingly. If they get caught surprised again, MNPS should fix it entirely in their part of the budget.
4% funds
Some background first about 4% funds:
The Metro Charter requires setting aside 4% of all general government appropriations for needed capital expenses. This money doesn’t get used for large projects like new buildings or roads or bridges. These funds instead are used for recurring large expenses like vehicles, other equipment, building repairs, etc.
Metro departments and Metro Finance have learned over the years that 4% isn’t quite enough to pay for these types of purchases. The need is closer to 5%.
For many years, Metro has relied on the continued growth of the city to help pay for the actual need. In other words, the budget typically has reflected the 4% required by the Charter. But then, when it gets to be the second half of the fiscal year, if it is clear that revenue is coming in better than projected, some of the additional revenue is used to close the gap between the 4% that was set aside and the actual need, which is higher.
Finance Director Flannery attempted this year to set aside 5% in the budget for these expenses. This is good financial management. This would recognize that the 4% required by the Charter is not quite adequate. Setting aside 5% in the budget would be more accurate and not rely on budget surpluses for buying things the city knows it will need.
At this point, please remember our discussion above about the solution for the $22.6 million MNPS problem. Because the usual “extra” cash stashed in the budget is being used to fix the $22.6 million problem, Council members started eying the extra 1% percent that Director Flannery was wanting to set aside for typical “4% fund” equipment and repair purchases.
CM Allen’s proposed additional $8.6 million in new spending relies on spending $4.1 million of these new extra “4% funds” that Director Flannery was attempting to set aside. This represents the substitute budget grabbing about half of Director Flannery’s extra capital purchase set aside.
I don’t love this solution. It is true that for years Metro typically has done better than budgeted on revenue and still has been able to buy needed equipment. But I really liked that Director Flannery was trying to move the city toward a more honest budget where we set aside the amount that we actually anticipate spending rather than relying on collecting more revenue than budgeted to buy needed equipment.
For CM Allen’s substitute, while I don’t love the solution, I appreciate that she is only using about half of the newly set aside funds. On balance, CM’s Allen’s substitute budget would represent progress toward more realistically planning for these annual capital expenses. Most likely, I will vote against any amendment that raids 4% funds beyond what is in her substitute.
Fund balance
Over the last 4 years, as Mayors and Finance Directors and Legal Directors have come and gone, I have been the loudest voice in the city about having an appropriate fund balance. There are different ways to explain fund balance. I view it as similar to a family’s emergency reserve or a company’s working capital.
The early warning sign that made me start talking about a property tax rate increase back in 2018 was the city’s terribly low fund balance coupled with budgets that sold assets to make ends meet, along with years of stagnant employee pay and squeezing residents on services.
Entering COVID in 2020, Nashville had the worst fund balance among the 25 biggest cities in America – the equivalent of just a few weeks of expenses. Since the tax rate increase in 2020, the city has improved and fund balances should soon begin to approach minimum best practices for a government our size. If Nashville were to follow best practices for good government, it is 100% clear that the city government should continue to build fund balance and not spend it for this year’s budget.
Unfortunately, the surprise MNPS problem shows us where theory and best practices meet reality. As mentioned above, one-third of the MNPS problem -- $8 million – is being solved by spending fund balance. While this is contrary to best practices, because I’m willing to give MNPS the benefit of the doubt about the $22.6 million hit being a surprise, I am willing to use fund balance to address the problem this year. But again – now we know the State can change the number at the last minute. Future MNPS forecasting needs to bake in the risk the final State number may be different than what they anticipate. Using fund balance can’t be an every year solution.
On top of this $8 million use of fund balance, CM Allen is using another $1.7 million of fund balance to help pay for her $8.6 million in budget changes. I dislike this. To be honest, this is the sort of budgeting that got Metro to where it was financially a few years ago. There’s an argument that using fund balance in this way demonstrates either a lack of financial discipline or a lack of understanding the importance of having an appropriate fund balance.
This is perhaps too harsh of me. On the plus side, I believe CM Allen understands the issue, but has concluded that an additional $1.7 million was tolerable. And to that end, it appears that Director Flannery is okay with this additional $1.7 million use of fund balance.
But once the door to using fund balance is cracked, it is hard to keep others from doing the same thing. There are three amendments that would use an additional $8 million of fund balance ($1 million for transit, $2 million for Nashville General Hospital, and $5 million for employee pay). I’m still mulling it over, but I don’t think I can support the additional amendments that use fund balance.
If we were to pass CM Allen’s substitute and all three of the additional amendments, Nashville would be spending $17.7 million of fund balance in the FY23 operating budget. That means the city would be spending $17.7 million more than its projected revenue for the year. As we enter a period of high inflation and a recession, that’s just not smart.
When the Council meets on June 21, we are going to hear arguments about how the additional amendments are for righteous and worthwhile causes. I agree completely. I really do. But if the city wants to fund those things this year, it would need to cut back on other new spending or positions. That would be a better solution than using even more fund balance.
All the other amendments
There are other amendments that don’t touch on the issues I have raised here. Most of these are worth $350,000 or less. They are important and I will have to decide my votes on those. Given the relatively low dollar amounts involved, these other amendments do not have a material impact on the city’s finances.
Looking forward
While the Council is working out the rest of the FY23 operating budget, the Mayor is rapidly working on spending the last of the Nashville’s federal COVID relief dollars – over $100 million. As the rest of this year unfolds, there will be important questions about this spending. One question at the forefront is whether the city is using this money for expenses that really should be recurring expenses paid for in the Metro budget.
As an example, if you spend $25 million of federal relief dollars to address chronic homelessness, what happens next year? Are those recurring expenses being moved into the Metro government budget? To continue services, they’ll have to be. I’ll want to hear about the game plan for making those services survive into future years after federal relief dollars are gone. I’ll want to know that it is not an election year gimmick to give the appearance of doing something, while knowing it is not sustainable.
And then, I assume that the Titans stadium deal will soak up a lot of civic bandwidth later this year. Conventional wisdom is that the team and the Mayor will announce terms sometime in the 90 days after the Council approves the budget next week. We are all staying tuned to hear what they propose.
(written in a few hours on a weekend — please forgive typos…)