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A Budget of Resiliency (5-5)
A Budget of Resiliency, Presentation to the Memphis City Council, May 5, 2020
Posted on 05/05/2020
Thank you, Chairwoman Robinson and members of the  Council. The last time we were together I presented you with an operating budget for Fiscal Year 2021 that would have drastically reduced our core services or wiped out our unassigned fund balance in the process.  I told you then that I would come back when I had a better picture of what our numbers are going to be like.  

I also wanted more time to research the applicable uses of Federal CARES Act Funding and how that might impact our ability to deliver a budget for FY21. We have completed that work, and more. Today, I am presenting to you a budget that I believe balances the challenges we face in what still remains a very uncertain year.   

One of the uncertainties is the extent to which our revenues will be negatively affected. In a normal year, we estimate our revenue for the upcoming year based on past history, and those estimates come very close to the actual receipts. As you know, these are not normal times. There is a lot of uncertainty—how long will it be before we have a vaccine for COVID-19; how long can commerce be open in any of the phases of the Back-to-Business plan; how will the economic shutdown affect our tax collections and for how long; will there be a spike in cases in the Fall requiring more restrictions to commerce? All of these uncertainties have made estimating our revenue three to fifteen months from now very difficult. We need to be aware that the hit to our revenues may be worse than we expect or last into the 2022 budget year. 

Another of the uncertainties is the use of federal stimulus money by cities and states.  I am disappointed to tell you that, as it stands right now, we cannot use the CARES Act funding to replace what we expect to be a substantial loss in revenue.  We are not giving up on the potential for that to happen in the future, and hoping to find out for sure sometime this month. The way I see it, Congress will do one of three things: 

1. They will do nothing, and we cannot use the CARES Act money to replace lost revenue in our budget. 
2. They will issue new guidance allowing us to use the current stimulus money for replacement of lost revenue, or more discretion on what expenses are allowed. 
3. They will pass another stimulus bill with additional funds to help alleviate the shortfalls that thousands of local governments across the country are seeing right now. But for now, we are not counting on federal assistance for lost revenue, and our team has moved forward with what we know today to create a budget that at its core preserves most of the essential functions of government with limitations on new hires outside public safety, reduction in materials and supplies, no layoffs, no raises, and no tax increase.   

We have done this in two ways:  First—by taking a measured approach to reducing expenditures, particularly in materials and supplies—things that can be replaced during the year should we get federal relief,  and second, by making use of new sources of revenue to match a reduction in the level of expenditures from the current budget.   

As you well know, these are hard choices that balance our ability to maintain our creditworthiness, deliver core services and preserve some ability to respond to any future economic downturn or natural disaster.  
Now, I want to take just a minute to talk about each of those.  Let’s start with the reduction of expenditures which can largely be classified as materials and supplies, a targeted hiring freeze, and grants.  Collectively, our divisions were able to identify $18.4 million of reductions in materials and supplies and attrition of part-time positions for next year.  They will impact our ability to replace equipment and procure services but represent a short-term risk that we can handle.   

Also, our plan is to not fill all vacancies in part-time positions in the Parks Division and Public Works Division. We will work to minimize any impact on our level of services to the public. 

Additionally, we have taken the opportunity to dramatically reduce the amount of grant funding that we 
expend.  For example, our partners at MATA recently received a large grant from the federal government that will allow us to reduce support for this year but without sacrificing service.  It does forgo the opportunity to implement improvements, but at the very least we can retain our core level of service.  In all, we have reduced grant expenditures by $14.7 million in this budget.  Again, should we get federal relief, we will immediately seek to restore these grant funds that so many agencies rely upon. 
Next, I’d like to talk to you about additional sources of revenue that we can use to balance our budget.  First, the CARES Act.  We cannot use these funds for direct replacement of revenue, but we may use it for the payment of “payroll expenses for public sector workers whose services are substantially dedicated to mitigating or responding to the COVID-19 crisis”.  We estimate that amount for next year to be approximately $14.7M.  Next, we will make use of the $14M grant from the State of Tennessee to supplement what would have been dramatically reduced budgets for things like street paving, street maintenance and information systems so that we can deliver essentially a flat level of services in those areas.  

Also, thanks to the great collaboration between the Memphis Police Association, Memphis Fire Fighters Association, and our administration, we will be able to reduce the impact on the general fund for healthcare expenses by allocating a portion of the sales tax referendum revenues to cover active police and fire healthcare costs.  We are forecasting $12 million of those revenues for that purpose.  And finally, though it is always a last resort, we will have to use a portion of our fund balance or reserves to make up the balance of our budget.     
We had accumulated and preserved $20 million in assigned fund balance for the purpose of potential intergovernmental liabilities that have not yet materialized, and so, we will use these funds to help fill the gap.  Use of these assigned funds will not have any effect on our credit worthiness.  What will have an impact on our credit rating is the use of unassigned fund balance, commonly referred to as our “reserves” or rainy-day fund.   To make this budget balance, we have little choice but to make a one-time allocation of $19.3 million from unassigned fund balance (reserves).  We have carefully considered every other option available to us before contemplating this allocation.  Having balanced all factors, we believe that this is prudent and will be an expected measure by those agencies that monitor municipal finances.  

We may also have to use the reserves to fill gaps in our current (FY20) budget due to reduced tax collections, and we will give you our proposal to balance this year’s budget in two weeks.   

Taken together: $2.7 million of net expense reductions (which we hope to replace if we are relieved of constraints on federal funding) and $79.7 million of new revenue allocations (several of those “one time” allocations) our team has been able to assemble a budget that bridges what was an $82 million gap, and preserve our ability to deliver core services.   

 I do want to strongly emphasize—we will have very slim margins of error in executing this year’s budget, and our revenue collections could be worse than what we have projected. I hope that all of us will remember that as we go through the year.   

When I was with you here two weeks ago, I did not mention the Capital Improvement Program (CIP) budget development. In the last couple of years, we have been on a growth trajectory, and we have proposed to you a CIP spending budget that aligned with and supported our City’s capital needs for successful improved operations and continued to promote economic and community development. 

This year is a different story. We will continue to maintain our mission critical projects—maintenance, major modifications coverlines, necessary vehicles, and projects mandated by law. I propose  we move forward on those pivotal projects that we have already committed to funding—such as the Frayser Library, Ed Rice Community Center, and City fire stations—that are essential to the health and welfare of our communities. 

This year I am not proposing any new capital projects, and where it makes sense to do so, we are pushing some projects out into fiscal year 2022, when we hope our economy has recovered enough to pick back up and continue. 

For fiscal year 2021, I am proposing a CIP budget for general obligation bond support of $77 million. This is roughly $10 million dollars less than FY20.  We must be vigilant in regard to our financial obligations and commitments. If we are fortunate enough to see a quick economic recovery, I would be happy to submit a revised CIP budget for you to consider. 

With respect to the federal CARES Act, I would like to work with you over the next 30-45 days to develop a plan to spend those funds. Remember, we received over $113 million, and $10 million was allocated to the Memphis City Council Relief Fund. The remaining $103 million is about equal to our projected revenue loss for this year’s and next year’s budget. 

I would like to see if Congress will allow us, over the next few weeks, to use the funds for revenue loss. If not, we will work with you on a plan to fund COVID-19 related expenses— all things we have discussed publicly, such as: 
1. Large increase in coronavirus testing. 
2. Large increase in contact tracing. 
3. Hazard pay for our great city employees. 
4. More economic assistance to small businesses. 
5. Grants to local nonprofits who have lost revenue due to the virus and/or who are assisting those who have been negatively affected. 

Together, we can use these funds to make a significant impact in our city. Thank you again for your time today. Stay well.

Click here to view the FY2021 Proposed Operating Budget
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