Proposed FY2024 operating budget
Here’s what I’m watching in the Mayor’s proposed FY2024 operating budget…
You can find the administration’s description of the proposed budget here. And Finance Director Flannery’s slide deck is here. And the detailed budget book is here.
Some preliminaries
I’ll apologize in advance for the length of these “preliminaries.” If you want the TL;DR version, it is: (1) before COVID, the city’s revenue projections were pretty accurate, the previous accuracy has not returned yet, and it’s fair to ask why; (2) this Mayor’s Office has never indicated how long it is trying to go until the next property tax rate increase, and that makes it hard to interpret the budget; (3) Nashville’s recent history of having an inappropriately low Fund Balance is still echoing into current decision-making; and (4) there’s a new Fund Balance policy in place that will change how the budget process will work this year.
If you want to skip the details on these preliminary background points, scroll to the “Revenue” discussion below.
If you want a one paragraph summary of this entire post, skip now to the last paragraph.
Before COVID, revenue projections were more accurate
I have a down-and-dirty way to test the accuracy of revenue projections. In the 2015-19 Council term, they were largely accurate. Then COVID happened and they became conservative as the Finance Department was cautious to not assume too fast of a recovery. Accuracy is getting better, but is still not back to pre-COVID levels of accuracy. As an example, my approach showed that the revenue projected in June 2018 for FY2019 turned out to be low by about 1%.
During the height of COVID, revenue projections became conservative. Nobody knew what the economy would do and it was better to plan for low revenue and be pleasantly surprised than to miss high and have to lay off employees or reduce services mid-year. My approach tells me that the revenue projected in June 2019 for FY2020 was about 11% lower than was collected. In any situation other than COVID, being off by 11% on your revenue projection would be unhelpful and unacceptable.
If I apply this method to the budget ordinance we passed last year and what is proposed this year, I see projections getting more accurate but still not nearly as accurate as before COVID. I approximate that the city will collect about 6-7% more revenue in the current fiscal year than the budget passed last year predicted. This level of accuracy in revenue projection is better than during the height of COVID, but is not good enough outside of COVID.
It is fair to wonder whether the continued level of inaccuracy is a hangover from COVID still. Or is the Finance Department directly or indirectly feeling an urge to lowball revenue projections in order to drive budget surpluses than can help pay for the new East Bank neighborhood? I think it is a fair question.
Side trip back to 2020
I was the Budget & Finance Committee Chair for the 2020 budget process. It was a few month after COVID started. We had just experienced a tornado. It was only 8 months after the State Comptroller rejected the unbalanced budget passed in June 2019. It was about 5 months after the State ordered Nashville to raise its water utility rates. Nashville had received the first $125 million of federal relief dollars and was required to spend it all before the end of 2020. Nobody knew how the Presidential election would go or whether any more relief dollars would ever be approved by Congress.
I felt fortunate to have had a nearly 20 year professional working relationship with then-Finance Director Kevin Crumbo. Our shared experience in restructuring distressed companies and non-profits helped us get and stay on the same page. My sense at that time was that it would be difficult to make the property tax rate increase we passed in 2020 last for 5 years.
The increase we passed in 2020 was already steep because the city waited too long to do it and it was painful because we were in the middle of COVID. I can’t speak for the current Mayor, but I can tell you that I never anticipated that the 2020 tax rate would be sufficient to build adequate Fund Balance, provide the services needed by a city our size, and pay employees fairly for 5 years. I was concerned then that the budget would start to get tight this year, in 2023.
Arguably, if the Mayor’s Office had delivered transit service improvements at the pace they originally promised in 2019-2020, the operating budget would already be difficult this year. Arguably, if the Mayor were offering employees both raises and a cost of living increase to match inflation this year, the operating budget would be difficult this year.
Since transit improvements have been thin over these last several years, and Nashville received (and is still spending) substantial additional federal one-time COVID relief dollars, and employees are not getting both raises and cost of living increases to match inflation, this year’s budget is manageable. With inflation still a problem, the state still squeezing our schools funding, and the federal one-time money running out, the budget will get more challenging in the next few years.
Another side trip into Fund Balance
Heading into COVID, Nashville had the worst Fund Balance among the top 25 cities in America. With the equivalent of only a few weeks of expenses saved when COVID started, the tax rate increase that was inevitable in 2020 felt even worse.
Three years later, the city has pushed its Fund Balance from about $100 million to around $600 million. These numbers are large, but remember that with a $3.2 billion budget, $100 million is a few weeks of expenses and $600 million is several months. Nashville’s current Fund Balance is consistent with minimum best practices for a city our size.
The good news is that the 2020 tax rate increase achieved one of its primary goals — to improve Nashville’s ability to deal with a fiscal crisis. The cautionary note is that Fund Balance comes and Fund Balance goes. We expect fund balance to grow strongly in the few years after a rate increase. Ideally, a city has a minimally adequate Fund Balance BEFORE a rate increase. That would let Fund Balance to surge to become very strong in the few years after a rate increase, and then the city could spend some of those gains back down to a “minimally adequate” Fund Balance for a few more years before having another rate change.
Because Nashville had a horrible fund balance in 2020, the rate increase brought the city up from “horrible” to the “minimally adequate.” Because of that, as the revenue surge from the 2020 rate increase subsides, Nashville is faced with the choice of letting Fund Balance again fall below minimum best practices, or have another rate increase, or to start squeezing employees on pay and constituents on services. As discussed above, this year’s proposed budget is another year without expanding transit services and will barely keep employees even with inflation. I’d argue that the proposed budget is choosing the path of beginning to squeeze employees on pay and constituents on services.
Last side trip — you need to know about the new Fund Balance policy
Former Finance Director Crumbo and I were focused on growing Fund Balance. Current Finance Director Flannery is too. She worked with the Council in 2022 and early 2023 to pass a new Fund Balance policy.
Passed in January 2023, the new policy limits how the city can use its operating budget surpluses. The policy requires surpluses first to be saved to Fund Balance up a certain best practices threshold. After that threshold is met, the Council can decide whether to set even more aside in Fund Balance or other reserves, or to spend it on one-time expenses. The policy prohibits using an operating budget surplus to pay for recurring expenses.
The policy treats the established minimum Fund Balance as untouchable, and also prohibits using surpluses for recurring annual expenses, like employee wages. This will change the way the Council handles the annual budget process. In each of the last three years, the Council (led by the Minority Caucus) has used Fund Balance to increase the amount of recurring expenses in the budget. The new policy prohibits that approach.
(Of course, the new policy is just an ordinance and can be overruled by a subsequent budget ordinance. I suspect that if the Council were to attempt to modify the Fund Balance policy through the budget process, the Finance Department would have a significant meltdown.)
You can read Cassie Stephenson’s tweets about the Council discussion about the new policy here.
Let’s talk about this year’s proposed budget
I know that was a lot of background, but I think it’s important to help understand what’s on the table for this year’s proposed budget.
Revenue
The proposed budget includes $3.22 billion of operating and debt service expenses. There is $45 million of new revenue from property tax and $137.2 million in new revenue from sales tax.
It is unusual to have sales tax growth outpacing property tax growth. For comparison, since the FY2017 proposed budget, property tax revenue has increased by $540 million. During that time, sales tax revenue has increased by $342 million. I am not sure what to make of this being flipped so that sales taxes now are projected to grow much more than property tax. Is this post-COVID normalization, or is this as aspect of potentially lowballing revenue projections for FY2024?
Spending
Here are the main budget improvements this year:
$100 million to Metro Nashville Public Schools
$55 million for Metro (non-schools) employee pay
$8.25 million for Barnes fund
$9.9 from Metro Transit Agency
$8.8 million for the Nashville Department of Transportation
The administration is talking about the Metro pay increases being the most ever and the increase in school funding being the most ever. These claims are technically true, but not necessarily a good thing.
On the pay increases, Nashville experienced inflation of 7 to 9% for most of last year. For the full year from 12/31/21 to 12/31/22, the consumer price index was 7%. With the 3% raises and 4% cost of living increase proposed in the budget, employees are not seeing their buying power increase. And especially with housing costs rising faster than the overall consumer price index, it’s hard to say employees will be in better shape next fiscal year than they are now. If insurance premiums go up, they may be behind inflation slightly. This “most ever” spending is a reflection of the national economy and not a reflection that Metro employees are better off.
On MNPS, hitting a “most ever” budget increase is driven by inflation and the fact that the State is keeping its contribution flat. In the coming years, we should be prepared to continue to need large annual increases in order to maintain current services. To put a fine point on this, of the $100 million in new school spending, the Mayor’s press release identifies pay increases, $10.8 million to expand the substitute teacher system and $8 million for no-cost lunches. It looks like a majority of the $100 million “most ever” is all going toward trying to maintain pay in an inflationary environment.
For the Barnes Fund, keep in mind that last year the operating budget had $15 million and a second $15 million came from federal relief funds. The Mayor’s Office is talking now about how they have the full $30 million in the budget this year. Yes, BUT…they still don’t have $30 million of recurring funding. This year, they have $23.25 million in the part of the budget that is recurring (see Budget Ordinance at page 18), and then they have an additional $6.75 million included as part of the $125 million of one-time surplus spending (see Budget Ordinance at page 26). The Cooper administration is not funding the full $30 million through the recurring part of the budget.
How the new Fund Balance policy impacts this budget
Remember, the new Fund Balance policy requires budget surpluses to be used first for Fund Balance up a certain point. After that, the Council decides whether to save more or spend on one-time expenses. The policy prohibits using that money for recurring expenses.
In this budget, there is $65.9 million in surplus for the Schools Fund, and another $59.6 million of surplus for the General Fund. At page 26 of the budget ordinance, the Mayor’s Office proposes which one-time projects should receive these funds. These surplus funds and how they are spent will generate a ton of conversation and debate. Some of the factors at play are:
The Mayor’s Office is getting $6.75 million of the $30 million for the Barnes Fund from these funds. The Mayor’s Office on the one-hand brags about annually funding Barnes at $30 million…and at the same time is getting $6.75 million from funds that are, by definition, not allowed to be used for recurring annual expenses.
I think there are some Council members who will want to take all or most of the $59.6 million surplus in the General Fund and split it up among the 35 districts.
I think there are some Council members who will want to take some of this money and improve the employee pay plan. This would require amending the new Fund Balance policy to allow using this money for recurring expenses.
I think there are some Council members who will want to take some of this money and improve transit opportunities now. This would require amending the new Fund Balance policy too.
Deciding whether it is advisable to amend the Fund Balance policy to allow some of these uses should depend on how you feel about the “preliminary” topics I discussed. Are the revenue projections low? How long is the city trying to go before the next tax rate increase? How flexible are we willing to be in maintaining a minimally adequate practices Fund Balance?
What would I do?
I suspect that the revenue projections are being lowballed somewhat. That would mean that the expected revenue is somewhat higher than shown in the proposed budget. In turn, that would mean that Metro can afford to improve employee pay and transit more this year. The city has a strong interest in having its employees be able to afford living in Nashville, and the city has a strong interest in everyone being able to move more easily around the city. Funding more pay and transit would require a modification to the new Fund Balance policy to allow some amount of surplus funds to be used for recurring operating expenses. I think the Finance Department and a majority of the Council will resist that, but we’ll see. We are relatively early in the budget process. I’ll provide an update later in the process.