Mayor Cooper will deliver his State of Metro address on April 29 and he is required by the Charter to propose a budget by May 1. I’ll share with you what I’ll be looking for first in his budget.

Before I get into it, let me make several general observations.

First, in property reappraisal years like this one, the budget process is always crunched for time because the Finance Department can’t complete the budget until the reappraisal information is available. With COVID chaos over the last year, it would not surprise me if we hear this year that the administration will still be working on some budget details when we hit their May 1 deadline to propose a budget. Hopefully not, but it wouldn’t surprise me to see them reserve the right to change some details after May 1.

Second, since the day we passed last year’s budget in June 2020, I’ve believed that this year’s budget process has the potential to be even more challenging. To be blunt, last year’s budget process was unpleasant due to lots of bad news, but the property tax rate increase was always the inevitable conclusion. Despite honest questions from some and grandstanding by others, the rate increase was long overdue and the only alternative would have been dramatic cuts to core government services. By contrast, this year, the city’s finances are on the way toward recovery and there’s more room for argument about what to prioritize.

Third, one factor pushing in the other direction — toward a potentially smoother process this year — is that I believe the Finance Department intends this year to prepare only two budget ordinances, one for the Mayor and one for the Budget & Finance Committee Chair CM Toombs. This is the historic norm for Metro and, while other Council Members can certainly propose a budget this year if they’d like, I suspect that they’ll need to do it without the Finance Department preparing it for them. This has the potential to limit the budget choices to two.

On to what I’ll be looking for first in the Mayor’s proposed budget —

Revenue

There are a series of unanswered questions on the revenue side of the upcoming budget. They include:

• Will the Mayor propose to increase or lower the tax rate? We already know that the tax rate will automatically go down as a result of the every-four-year countywide property reappraisal process. But State law doesn’t allow Metro to make more money from the reappraisal process. The Mayor has not yet said whether he will change the property tax rate after the automatic adjustment due to the property reappraisal process.

• What assumptions are being used for reappraisal appeals? Every time there is a reappraisal year, some property owners appeal the amount of their reappraisal. This always makes Metro lose some revenue due to successful appeals. I suspect that the appeals season will be more active than usual due to COVID. This point is extremely important — if the Mayor does not change the tax rate after the adjustment due to the reappraisal process, Metro’s revenue will go down in some amount. It might be less than a 1% decrease, but revenue from existing properties will go down due to appeals and I’ll want to see what the assumptions are for that.

• What one-time revenue is being used in the budget? In 2018 and 2019, the former Mayor was using one-time asset sales to make the budget balance. Mayor Cooper ran on a promise to stop doing that. The State Comptroller criticized this practice also. Then COVID happened and Metro did use some one-time federal relief funds to balance the budget last year. Most notably, $20+ million of federal one-time relief money was used to balance WeGo’s transit budget. I very much want to see a budget this year that does not rely on one-time money from federal relief dollars or from the sale of assets.

• What is the sales tax collection assumption in the budget? Last year’s budget estimated sales tax conservatively due to COVID. The city will definitely do better than the conservative projections. Thank goodness. With all the uncertainly early last summer as the second wave of COVID was just starting, it would have been horrible if the budget had over-estimated revenue. I assume that we’ll be back to a “normal” or close to normal sales tax assumption in the upcoming budget.

• What does the budget plan to do with “Fund Balances”? This is related to the last point. Because sales tax revenue will be better than anticipated for the current year, Metro will end the current FY21 with higher “Fund Balances” than budgeted. Will the Mayor want to continue to grow those (he should!!!!), keep them flat, or spend them down? The answer to this will have a large impact on the budget process this year. For more context:

  • The terms “Fund Balance” and “Rainy Day Fund” are confusing. The State, for example, has substantial Fund Balance assets and separately maintains a large Rainy Day Fund of about $1.5 billion. When Mayor Cooper took office in 2019, Metro had the worst Fund Balance (as a percent of operating budget) out of the 25 largest cities in America and no Rainy Day Fund at all. This very poor position is why raising the tax rate last year was inevitable.

  • The budget the Mayor proposed last year suggested increasing the Fund Balance to $100 million. Sounds like a lot — but that’s basically equal to about two weeks of cash for Metro, or about 4% of the operating budget. Not impressive at all. The average for the 25 biggest cities in America heading into COVID was more than 30% of their operating budgets.

  • The Council’s budget ended up approving a lower budgeted Fund Balance — around $90 million. Again, I can’t even call this minimal. A $90 million Fund Balance for a city our size is inadequate by a lot.

  • Due to the sales tax numbers being better than projected, Metro might end the fiscal year with $200 million or more of Fund Balance. Again — thank goodness the city is doing better than the budget during this uncertain year.

  • At $200 million, the Fund Balance would end up being around 8% of the operating budget. Again, this is great compared to the dumpster fire of a Fund Balance that existed a few years ago, but it is not adequate for a city our size. The smart thing to do is to continue to grow Fund Balance for at least a few more years.

• How much can the Convention Center Authority (CCA) contribute to the budget? Many of you will remember that, over the last three years, the CCA has “voluntarily” agreed to contribute some of its revenue to help Metro pay for downtown expenses. With this last year being brutal on the convention industry and maybe a change coming to state law, will the CCA still be contributing at the same level? I don’t know what to expect with this.

This will be my sixth Metro budget cycle since I was elected in 2015. This year is easily the most complex in terms of figuring out what the revenue will be and how much is available to spend on government services. When I get the budget, this swirl of issues is where I’ll be looking first.

Expenses

The list of expense items I’ll be immediately interested in is shorter. Frankly, I have been unwilling to invest much energy into figuring out what new expenses should be a priority until the complicated mix of revenue questions are resolved and I know whether there is any money to invest in expanded services.

Metro issued some new long term bonds for capital spending this year, and refinanced others at a lower interest rate. I expect the debt service number to be higher for the upcoming year than this year, but I don’t know how much higher. The first new revenue that Metro has must pay any increased debt service first.

Next, I will look at the WeGo budget. As mentioned, WeGo’s budget was balanced last year with a $20+ million chunk of federal one-time stimulus money. I expect that Metro once again will need to pay for that itself. In my mind, after new debt service expenses, the next approximately $25 million of new revenue must go to maintaining current levels of transit service.

I’ll also be interest to see if the Mayor proposes investing in any expanded bus service. Anyone who read the transportation plan presented to the Council in late 2020 would get the impression that investing in expanded bus service is high on the Mayor’s priority list. But I can tell you right now, if the Mayor proposes any significant expansion of bus service, he’ll have to either propose a property tax rate increase or he’ll have to reduce (instead of grow) the Fund Balance. I have a hard time imagining that bus service could expand AND the Mayor could keep the tax rate flat AND not retreat on the Fund Balance numbers.

Employee compensation is a similar issue. There are lots of problems with Metro’s compensation system. For most parts of the city government, the starting salaries are competitive or at least close to competitive. But for employees with 8-15 years of experience, the compensation structure is so flat that these valuable employees can actually lose ground to inflation as they continue to gain experience. Before COVID struck, I believe that Mayor Cooper intended to fix this problem for the school system. I never saw the actual numbers, but my sense was that the Mayor was going to propose something like a $50 million or more increase to the MNPS budget last year — but that was all before COVID. Like the last issue though, I expect that it will be hard to raise compensation meaningfully and keep the tax rate flat (after the reappraisal process) and not raid the Fund Balance. I am curious to see what the Mayor does with this. (I’ve focused on schools here, but other Metro employees have the same problem with their comp structures.)

On affordable housing, I’ll be watching to see whether the Mayor increases the Barnes Fund spending, moves to provide more direct support for MDHA, both, or neither. Since late 2019, more and more people are coming to understand that, without a large outside investment, MDHA will need at least a generation to complete their Envision projects to rebuild their housing stock. MDHA has said that its cumulative need might be as much as a billion dollars. For me, this acknowledgement tends to make the Barnes Fund a lower priority. To be more direct — if MDHA’s need to rebuild its aging stock of very low income housing is really a billion dollars, then I am not sure putting money into higher income levels of housing is the best way to invest resources. I don’t have a conclusion about any of this, but I am curious to see what direction the Mayor proposes in his budget.

Spending federal stimulus money

Last year, the budget ordinance did not include or appropriate any federal stimulus money. But the budget ordinance did create the public, transparent process for deciding how to spend Metro’s $121 million of federal stimulus money. I expect that the Mayor’s proposed budget and/or Chair Toombs’ substitute budget will take a similar approach. No stimulus money should be appropriated in the budget, but the ordinance should propose a process for Metro to decide how to spend the next round of stimulus money, which should be about $267 million over two years.

I’m sure other issues will come up. But these are the things I am planning to check out first when the Mayor’s budget is proposed sometime in the next week.