Asheville wrestles with grim COVID-19 budget projections

In the words of Asheville City Manager Debra Campbell: “What a difference a month makes.”

On March 13, when Asheville City Council last met to discuss its budget for next year, the city was just one day into its COVID-19 state of emergency, and staff members still anticipated $6.8 million in general fund revenue growth for fiscal 2020-21. At a budget work session on April 14, when Campbell made her remarks, that growth estimate had been revised downward to just $2 million — leaving $4.8 million of previously planned spending with no money to back it.

Tony McDowell, the city’s budget manager, explained that the biggest hit to next year’s revenue expectations came from sales tax shortfalls. As restrictions on business operations meant to slow the spread of COVID-19 also restrict consumer spending, he said, the city now anticipates sales tax receipts in the next fiscal year to be about $2.8 million less than projected in March.

But McDowell cautioned that the true impact of the economic downturn on Asheville’s finances could be even greater. The city’s projections follow the “moderate” forecast of the N.C. League of Municipalities, a nonpartisan organization representing cities and towns throughout the state, which still calls for a 1.5% growth in annual sales tax revenue compared to fiscal year 2019-20.

By comparison, the league’s “severe” projection anticipates a 2.3% decline in sales tax receipts next year, while the “most conservative” scenario models a drop of 3.2%. McDowell did not explain why the city was using the most optimistic league model in its planning for fiscal 2021.

Other areas where Asheville expects to see less money next year than previously projected include property taxes ($600,000), investment earnings ($1.1 million) and service fees ($300,000). The city’s remaining revenue categories are currently anticipated to stay on par with fiscal 2020, although Campbell noted that the situation was changing daily.

“Some of the numbers just aren’t here yet for us to be able to make some very definitive decisions,” Campbell said, adding that sales tax data for March wouldn’t be available until June. “We’re operating in the gray.”

That uncertainty, Campbell argued, means Asheville’s government must cut back on its projected spending for the next fiscal year. Since March, the city has trimmed $3.4 million from its first-pass fiscal 2021 expenditure budget of $139.1 million, including $1.6 million for an employee cost-of-living raise, $588,000 to finance additional capital projects and $500,000 toward the employee health fund.

Still included in the remaining $3.4 million of new spending is more than $1.7 million to continue expansions of the Asheville Rides Transit system that were implemented in January, as well a mandatory $700,000 increase in Asheville’s contribution to the state employee retirement fund. McDowell said the city has yet to identify funding for $1.5 million of these expenditures; by state law, all cities must pass balanced budgets.

The city does have roughly $24 million in reserve through its general fund balance, which could be used to fill the budgetary gap. McDowell noted that up to $5.5 million of that money may be needed to make up for coronavirus-related revenue shortfalls in the current fiscal year, which would take the fund balance below the amount recommended by city policy (15% of general fund revenues, or about $20 million) going into fiscal 2021.

McDowell continued that COVID-19 may make Council consider an exception to the rule. “This is really the classic textbook type of situation where you would want to use fund balance to get you through the short term, so you don’t have to make substantial reductions on the operating side,” he said.

Council member Gwen Wisler expressed concern that the use of reserves might impact the city’s AAA credit rating, which lowers its borrowing costs for capital projects. However, as Xpress reported in March, the benefit of a high credit rating is currently minimal due to the extremely low federal funds rate set by the Federal Reserve. At that time, Matt Fabian, a partner with Massachusetts-based research firm Municipal Market Analytics, said some local governments suffer opportunity costs in pursuit of the AAA label.

“If you’re working hard, not spending your money, and your kids are going hungry because you want to get that higher credit score, well, maybe your priorities are not correctly aligned,” Fabian said.

Off the table for now are many of the “strategic investment requests” — items above and beyond what Campbell called a “continuation budget with no new services or enhancements” — previously under consideration for the fiscal 2021 budget. Those include support for urban forestry planning and staff, an overhaul of the city’s Unified Development Ordinance, rooftop solar projects, participatory budgeting and staff compensation increases.

“This could be a catastrophic change in revenue year over year,” said Mayor Esther Manheimer. “Before we start spending new money, I want to know if we’re going to see a little bit of a normalization on the horizon. I don’t want to be sitting here with a $20 million deficit in the next fiscal year.”