City council proposes lower tax rate

San Marcos City Councilmembers fought for resident relief in a tight economic climate for both resident and city budgets during a budget workshop meeting Tuesday. 

The San Marcos City Council supported a tax rate that would result in 7% growth of the general fund revenue from property taxes; maintaining the staff recommended current property tax rate of .6139 would result in an 8% increase of revenue.

The change would reduce the city’s general fund property tax revenue by $330,000 and would save the average homeowner around $11. 

This was a tough decision for councilmembers as they were presented with a bleak outlook for city revenues in the coming years due to COVID-19’s financial crisis. 

“The recent spike of COVID cases has been alarming and can have a very negative effect on our economy,” City Manager Bert Lumbreras said. “We have to consider the subsequent years and make the right changes that will sustain us beyond fiscal year 21.” 

In addition to the COVID-19 financial crisis, the city has to prepare the impending tax increase caps from Senate Bill 2 for the upcoming 2021 and 2022 fiscal years. The new rate would allow the city to still see an increase in revenue compared to the 2019 fiscal year due to increased property values while giving them time to transition to lower revenues from the tax cap. 

Director of Finance Melissa Neel was working with an assumption that property values will not increase in FY22 and FY23 when she created the projected loss of $330,000 in revenue by not maintaining the rate.

The good news, despite overall projections of revenue loss, is that April sales tax revenue exceeded their projections, changing the city’s estimates to a net revenue shortfall of $2 million compared to their initial projection of a $6.4 million loss. 

Their strategy was to reduce expenditures by $5.5 million and their actual reductions so far have been $4.7 million. 

Slightly better numbers for 2020 does not mean the city is out of the woods. The city is projecting a 10% increase in sales tax revenue from FY19 to FY20 followed by a 19% decline for the 2021, 2022 and 2023 fiscal years. This means that in FY19 46% of the general fund revenues were from sales tax; in FY22 it will be 34% of the revenues coming from sales tax; a massive shortfall.

Hotel Occupancy Tax revenue shortfall is projected to be just under $1 million, or 30% less than FY19  and the city has reduced expenditures to offset $700,000 of this shortfall. 

Other directions included council supporting increasing stormwater utility rate by 6.5% in FY21, after a 0% increase in FY20. There was a 15% increase in the years prior. Staff recommended a 12% increase to achieve financial policy goals, however by agreeing to a 20% fund balance instead of the required 25% fund balance, a 6.5% increase was achievable. 

This translates to an increase of less than $1 per month for residential homes and small downtown businesses, $3 per month increase for an interstate restaurant, $200 per month for an apartment complex and less than $250 per month for an industrial business.

They also agreed to a fee increase from 5% to 7% of gross revenue for commercial waste hauler permits and amending the ordinance to include a street damage clause. Staff recommended increasing the fee to 10% which would have brought in an additional $850,000 in revenue, covering 42% of the street maintenance operating costs. 

After these adjustments, the city will have to explore other options to reduce expenditures in sequential order: holding job vacancies, reducing public facility service hours, early retirement, staff furloughs, salary reductions and layoffs. 

The next budget meeting is scheduled for August and will review final property tax numbers and revenue amounts. Public hearings will begin in September and the final budget for FY21 will be adopted on Sept. 15.