Council Recap: The Case of the Missing Sales Tax

On May 13, 2024, the Richardson City Council held a worksession in which they reviewed the 2023-2024 Second Quarter Financial Report. "It's going to hurt." That's how Richardson Budget Officer Bob Clymire described the impact of a significant sales tax decline. What was the City Council's reaction to this bad news? Therein lies a tale of institutional memory loss. Or self-gaslighting. Say something often enough and you start to believe it inherently. We'll get to that. Bear with me.

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2024

First, the numbers. From the City's report:

Since the end of the Second Quarter, we have received the April and May sale tax remittances. With seven months of remittance, Sales Tax is...($1.84 million) below the budget target.

As of the time of this report, General Fund revenues in total are projected to finish the year roughly ($560,000) below the original budget of $179.6 million.

Source: City of Richardson.

Was this a surprise? Maybe to some. Mayor Pro Tem Arefin puzzled if maybe "prices [were] going down or some stabilizing". City Manager Don Magner explained what's really going on.

It's highly consistent with what we're seeing in office optimization. I mean, we've been, I've been talking, you know, kind of nonstop about our office, the state of our office real estate market and if the rentals for things that people utilize when they're in an office have dried up. It's no surprise because occupancy has dried up and so I think that's a big driver on this. It's really just another consequence associated with either a hybrid work setting or completely remote work setting and I think it's so, it's just, you know, the office market and the issues we're having there and kind of rearing its head in another way in terms of sales tax.

Source: City of Richardson.

Probably not coincidentally, in time or in cause/effect, Richardson's massive CityLine office complex was sold in late 2023. The Dallas Morning News reported that "One of North Texas' biggest corporate campuses has sold in one of the largest U.S. property trades of 2023." In the report was this detail: "by some estimates the CityLine properties sold for more than a 25% discount." That discount is consistent with Magner's explanation that office occupancy has "dried up", leading to declining sales tax revenues from office equipment and furniture rentals. CityLine gets the headlines, but the story is the same up and down the commercial real estate market rolls.

What was the City Council's reaction to this bad news? That's where the institutional memory loss set in.

Councilmember Jennifer Justice: "I think you've always done a really good job in building the budget about being very conservative in that area and not really making our budget reliant on it."

Mayor Pro Tem Arefin: "I'm not too concerned about just this, you know $500 to $600,000. You know that you are conservative on the overall budget anyway."

2023

Was this budget very conservative, really, as Justice and Arefin assumed matter-of-factly? Let's rewind the tape to July 24-25, 2023, when City Manager Don Magner proposed the 2023-2024 budget. In that proposal to the City Council, Magner included "Merit-Based Market Adjustment: Up to a 5% pay adjustment" for all City employees. 5%, not 6%. The adjustments amounted to $5.1 million.

Councilmember Ken Hutchenrider said, "I'd really like to push and say, 'Could we not consider 6% again this year?'"

City Manager Don Magner immediately responded, "I will take that challenge...This is early on in the process...I do believe there'll be some additional opportunities. And so if that's the consensus, I can take that and really, really move that proposition forward...I think we can do it without sacrificing much of what I'm going to share with you from this point on."

Councilmember Jennifer Justice: "6% sounds great. I just want to see the rest of your presentation before we start committing ourselves to that...I'm a little bit cautious about wanting to make sure that we continue to budget conservatively the way that we always have. We don't know what the property rolls are going to look like or what our sales tax is going to look like."

Clang, clang, clang. Reasons for conservative budgeting.

Mayor Pro Tem Arefin: "I wish you had a better picture on the inflation and recession. I get that that's gone. I get that that's coming still. I don't...I'm more confused now than before."

Clang, clang, clang. Reasons for conservative budgeting.

Councilmember Dan Barrios: "I do want to second Councilman Hutchenrider's thoughts on the 6%. I'm interested in seeing that."

Councilmember Curtis Dorian: "Councilman Hutchenrider, I would consider supporting the 6%."

City Manager Don Magner, discussing the possibility of delaying the additional 1% salary adjustment until we see if revenues come in as forecast: "There are midyear adjustments. You know, sometimes a community will be seeing stronger revenues in other areas than they budgeted for and then they might decide to do a midyear adjustment using some of those revenues. I wouldn't want to suggest that we would do that with sales tax. You know, that's too volatile."

Clang, clang, clang. Reasons for conservative budgeting.

To review, Hutchenrider "pushed" for an additional 1% raise. Magner eagerly accepted the challenge. Barrios and Dorian backed Hutcherider without condition. Justice and Arefin offered qualified support, identifying reasons why conservative budgeting should make them hesitant. In the end, in August, 2023, when the final budget recommendation was made, the 6% raises were in there. The budget impact was up from $5.1 million, before Hutchenrider's push for 6% raises, to $6.1 million after. No one asked if the new numbers were still conservative. In the meantime, elsewhere around the city, office vacancies were rising, sales tax revenues were declining, and a future budget shortfall was being born.

Primary blame for this has to fall on the City Manager. He does the numbers. The City Council accepts his analyses. Knowing full well that office vacancies were rising, knowing full well that sales tax is volatile, Magner said the City could support 6% raises. Wanting to do good, the City Council accepted his proposal, without demanding to see his work. None of that is the hallmark of "conservative budgeting." Placing a million dollar risky bet using volatile sales tax revenues is not conservative budgeting. It's maybe a sign of gaslighting yourselves into believing a story about how the City of Richardson is conservatively run and so, whatever we do, it must be, almost by definition, safe. And that's how we could end up with a sales tax shortfall that our Budget Officer says "is going to hurt." Where the hurt is going to fall is an exercise City Manager Don Magner is going to work out and tell us later.

Back to the present. Nothing said by anyone suggested they learned a lesson from this tale. Even after the sales tax shortfall was revealed, they still praised the City for its conservative budgeting. Don't uncritically believe the myths you hear, lest they lead you into repeating mistakes.

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"Sales tax decline hits.
Richardson feeling the sting.
Future's shadow looms."
—h/t ChatGPT

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Related:

"Council Recap: Where was the Mayor?"
"Council Recap: The City Manager's Curious Statements"