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- Navigating the city budget during and after the pandemic, tonight on Behind the Headlines.

[intense orchestral music] - I'm Eric Barnes with The Daily Memphian, thanks for joining us.

We are joined tonight by Shirley Ford, Chief Financial Officer for the City of Memphis.

Shirley, thanks for being here.

- Thank you, it's a pleasure to be back with you and to talk about something very exciting and near and dear to my heart, so thank you.

- Absolutely, we are also joined by Worth Morgan, Memphis City Council and chair of the Council's budget committee.

Worth, thanks for being here again.

- Yeah, thanks for having me.

- Along with Bill Dries, reporter with The Daily Memphian.

I will go to you first, Shirley.

This is, I mean, obviously a crazy year on so many fronts, but just in terms of a budget season, there are a lot of intersecting factors that we'll try to break down and talk through.

They include, this is a reappraisal year, which could well lead to a pretty dramatic decrease in the property tax rate for people.

There's a huge amount of federal stimulus money that is coming into the coffers of the city.

I mean, as much as 160, 170 million, and we'll break that down, too, and you've also got the debt cliff, as the mayor, and I think you, have referred to it, which is we'll go into the details of this, but it's an opportunity that you all think you have to do about a $200 million investment in various parts of Memphis without having a negative impact on the city's finances.

For you, and, oh, by the way, you're proposing a $700 million budget, as usual, and so on.

Well, I guess I'll ask the question of you.

What is the most important of all these interrelated elements right now as you go into budget season and go into the next year?

- Well, that's a good question to start off with.

So I'm gonna kinda tackle them one by one.

Every budget year seems to have some kind of nuance, and this time last year, it was all about the CARES Act funding and how we could use that and how we couldn't and some of the guidelines and regulations that were surrounding that source of revenue funding.

And then this year, it is the American Rescue Plan Act, which is a little bit more lenient in some ways in terms of what the municipalities can use versus what our CARES Act Coronavirus Relief Funds were.

So that's a really important factor as we sit down and look, but the reality of it is, is that we are just now in the process and the municipalities are actually receiving the money.

So there's a very short period of our fiscal year that we can actually kind of execute on some of that money.

But the interesting thing about this money, as opposed to the CARES Act money, which had some very stringent deadlines to it, is this money is available for us to extend through December of 2024, which kinda gives it a little bit of a different spin, because like all of you I'm hoping that we're still not talking about the pandemic- [indistinct] - Yes, we are- - In 2024.

- On that.

All right, so I think we agree on that.

So I think what has happened with the crunch in this budget season is we got this announcement in March, but just on the 10th of May, just a couple days ago, did we receive kind of what they are calling their final guidelines or some more in-depth guidelines related to the use of those funds.

So there was a, there were a couple pieces that we could pull into and a broad range, looking at how those funds could be allocated within this physical year.

And so we have put those into our proposed amendment to the FY21 budget, and then built them into our FY22 budget to the point of specifically, for this money this time, which is very different again than the last money, revenue replacement.

And that sounds easy, like here's some revenue replacement, which we could not do with the CARES Act fund, but the nuance with the revenue replacement is that you have to compare pandemic impact lines of your revenue received to your last full pre-pandemic year, for which was us, was Fiscal Year 2019.

- Let me interrupt you just for a second, and I wanna get Worth in.

We'll just start with all this CARES Act money.

Am I right?

Just real quickly to give people some bearings on this.

Was I right in saying it's around 160 to $170 million?

Is that what it looks like it'll be?

- They're estimating 168 million, yes.

- And I think you all have talked about what some 5, $6 million that would go towards the Tourism Development Zone money that helps fund some development downtown where that is normally sales tax money.

Obviously that was down this last year because people weren't downtown spending.

Nine million towards the hotel/motel tax revenue.

Again, makes sense.

Since there were very few people staying in hotels.

And then 9 million more towards city-owned assets, but do you even know yet?

I mean, do you view this as a kind of windfall where, hey, let's go ahead and spend some money on new things over and above the usual 700 million-ish budget?

Or is it, hey, let's just, let's replace what we lost and put the rest in reserves?

- So there's some interesting aspects to that that, and like I said, we received some additional information on May 10th.

Our legal team and our administrative team is still kind of piling through that, but I think different than the first year's revenue replacement is that now we have additional guidelines that you can't just pop it in and let it fall into reserves.

- Gotcha, gotcha.

- That it actually has to be expended.

So that, so I would love to go, okay, well let's put 50 million into reserves and hold on to it, but I don't think that's going to be the intent that we are going to have as an allowable use of the funds.

- All right, let me bring in Worth Morgan.

Worth, again, staying on the CARES Act, and again, we'll get to some of these other things like the reappraisal and just the debt cliff and so on.

But what is your sense?

Again, with some of these guidelines just having gotten to you all of where that money can and should go?

- Yeah, so there are two rounds of federal funding.

It's the CARES Act and the American Rescue Plan, which is the CARES Act has mostly been allocated and encumbered and spent.

American Rescue Plan is that 160 million some odd that we'll be able to spend across three fiscal years.

And what did it, it took a lot of pressure off of our budgets.

We are no longer concerned about our fiscal ability to survive, which was gonna be a real struggle for awhile, I think in the pandemic, at least the uncertainty of it.

And now we can begin to refocus on priorities, and where the federal money really has made us whole in many regards, and even in some areas has allowed us to expend the funds in areas, one of the ways we were debating last night was in terms of fiber for neighborhoods, that we wouldn't have been able to do otherwise without the federal funding.

- Let me bring in Bill Dries here.

- All right, and Worth, the budget committee is in its second week of deliberations, and reviewing all of this, correct?

- Correct, we've had, oh, just last night I think was our seventh or eighth hearing on the budget.

And we're about halfway through.

- And one of the things that I noted this week is that it looks like there's going to be some attempt by some Council members, unknown yet if this amounts to seven votes, to have some additional funding for the Memphis Area Transit Authority.

Gary Rosenfeld, the CEO of MATA, had talked to the Council earlier about perhaps having at least $4 million to get a start or to start the first part of what's a $35 million transit vision plan that MATA's had for some time.

What do you think the prospects are for that?

And has anyone indicated where that additional money might come out of?

- This is the hard part to get seven votes.

It's not, we agree in the need for more funding in public transportation.

I think we agree for the need for more funding in our community centers and the police department in terms of recruitment.

What we don't agree on is how funding should be sourced and where it should come from and what should be cut.

I made a motion earlier in the year to shift the City Council grant program, that's 2.6 million to MATA as a source of permanent funding.

As just part of it, just one part.

That motion went down in flames.

And I think I've heard whispers of Council members that are interested in funding MATA to higher levels in this budget and possible sources of funding.

You'd have to look at whether or not the federal grants could do it.

So there's some questions around that, as well as the referendum tax money from the increase in sales tax, that half percent.

Some Council members have talked about that.

That wouldn't be my choice of the source of funding, but I think we're likely to see a motion.

- Mmhmm.

And, Shirley, to that point of moving around dollars, this makes your life more complex.

Not that it's not complex already in terms of this.

For instance, I think the administration has some uses already for some of the overrun, if you will, in terms of the part of the sales tax that goes to restore police and fire benefits, right?

- That's correct, Mr. Dries.

We actually met with the leaders of MPA and IAFF.

We met with the leadership of Memphis Police and Memphis Fire along with my colleague, Chief Doug McGowen.

And we sat down and we talked about what this revenue looked like, and again, this time last year, we weren't sure what that was going to look like.

And so we actually lowered our revenue projections for sales tax, and lo and behold, the big surprise this year was that was not the case.

It was actually trending higher than it's ever trended.

So that created a real flush of cash into this, into this special revenue fund.

And so then the question became, how do we best utilize that with the intent of the referendum?

And so we sat down and outlined some areas, the state comptroller's office guided us in making sure that you put aside some of this money into reserves for future years to kinda help with the volatility of the markets and other things that could happen, related to those restored benefits.

And then the other uses were street maintenance and improvements, which can carry a, I mean, that's a lot broader than just paving and filling potholes.

And then also the pre-K funding to allow, if there were excess funds, to fall into the pre-K funding.

So there's, you're absolutely correct.

There's a lot of moving pieces.

And back to your question about how do you fill those blanks?

And so what happens to us is we go through this budget process, and they approve the budgets as they are in committee.

And we all know that on the last day, when the budget is up for its third and final reading, is usually where we get the, well, I wanna make this amendment or I want to make this change.

And so it's kind of a quick hustle to make sure that we're doing that.

And for instance, with MATA money, $4 million, I mean, when we budgeted this year, when you look at the budget, we basically budgeted for about $300,000 to fall to the bottom line.

That's not a lot with a municipality this size.

I mean, we really focused in on what we think that's gonna be and using some of the American Rescue Plan revenue replacement to balance our budget this year.

So if you wanna take $4 million out of somewhere and give it to MATA, it will be interesting to see how Council navigates that, or if they just say, here, we wanna do this.

You guys gotta figure out how to do it.

- Before we go back to Eric, Worth, the last time that we talked, you said that there was some sentiment on the Council to maybe not just readjust the tax rate to around $2.75 or $2.80 from the current $3.19, that maybe there was going to be a move to tack on a few cents to the property tax rate in the process, but still keep it below the $3 mark.

Is that still the case?

- It wouldn't surprise me, but I think it's gonna be increasingly more difficult.

Just the way the conversations have gone and listening to Council members.

We have an excess of revenue for FY21 that we're still in now and have about six weeks left.

And so I think that would be a more obvious funding source for some of these Council members to do programming that would be important to them.

So I think that's gonna be a much easier political door to walk through than a tax hike.

- Do you have a dollar estimate on how much that is?

How much the overage is?

- Yeah, right now, we're projecting 800 million in revenues and I believe 773 million in expenditures for FY21.

So it's about a $27 million excess.

And again, we're talking about whether or not we allow that funding to fall to our reserve fund if it goes unspent, or do we need to go ahead and have a plan, not necessarily spend it all this year, but go ahead and allocate and appropriate, and maybe it rolls to the next year.

- And real quickly before I go back to Eric, Shirley, how does that number line up with what you're looking at?

And do you have a suggested use for it?

- So the amount that Councilman Morgan just mentioned that looks like for FY21, that projection includes the $26 million of replacement revenue for FY21 that could be used, right?

So, if you take away the American Rescue Plan money, basically we're gonna break even this year.

So there's a real, I think there's a real challenge for members, Council members who want to try to supplant other uses of the money so that that revenue replacement can fall without becoming excess.

So that's gonna be really interesting, and into our re-certification of the tax rate, the whole purpose of this is to not create a windfall of revenue from the reassessment, and it sounds so dramatic that you draw up from a tax rate of $3.19 to where we were looking at somewhere between, $2.75.

It's been a long time since we've had a tax rate that low.

But the idea is that with the increased assessed value of the property is that we're not, we're not creating a huge revenue windfall on that.

So that too is a little balancing act as if this budget didn't need another element or component to throw in the middle of it.

But we will probably finalize the re-certification rate, and we'll submit that to the state next week.

So we'll know what that number is going to be.

- And it wouldn't be a surprise for the Council to have a discussion, make a motion about how to spend funds, only to find out later that it's not legally allowable.

That's not necessarily completely unusual.

And we're all trying to play catch-up and find out just how these funds can be spent.

We're gonna have a presentation from the state comptroller next week to that extent.

And like I said, you're asking me about the Council in general, i think there's movement that direction.

I'm not necessarily the one making the motion.

- Again, we've talked about this, but just to clarify to folks, this is a reappraisal year.

We talked last week with, we've talked, had a couple of shows on this including with Mayor Harris from the county side of things.

And that, again, every year when this happens, property values, if they go up, by state law, the property tax rate has to fall so that cities, municipalities, counties all across the state can't see a windfall.

The other thing, and I guess maybe this is a question for, I'll go to Worth on this, but it's, well, let me go to Shirley on this.

And it's really a question for both of you.

I assume part of the balancing act, and you alluded to this, both of you, that it is one thing to say we've got this extra money from the federal government, we can spend it over four years.

Well, let's go hire a bunch of people.

And because those people ostensibly would have, you wouldn't wanna just hire them for four years.

If you increase the number of bus drivers or increase the number of staff in some way, because after four years that federal money goes away.

If you bought something, I'll just do a simple Eric example, a new bus, that is not something that you have to replace in four years.

That has a lifespan.

So is that part of the calculation, again, to you, Shirley, that you all are trying to make?

And is that why you all proposed bonuses, big bonuses, for police and fire versus big salary increases?

- So, two aspects there.

One of the things that we have been warned on, not just from the federal level, but also from the state comptroller, who Councilman Morgan alluded to, is that this is, this should not in any way be allocated toward reoccurring expenses, which would include the salary increases.

Because salary increases are permanent and they continue and they have that domino effect of increasing your pension expense and those types of things.

As to purchases, there are certain things that you can purchase with it, but remember this is still all related to the impact of the pandemic.

So even though it is allowed for certain areas, you still have to justify that what you are allocating this money toward or you're expending it after it's been allocated to you, is in direct correlation and related to the impact of the pandemic.

So, like the premium pay, that's very specific to infrastructure workers who were essential to continue our operations through the period of the pandemic.

The revenue replacement money is very specific to revenue line items that were impacted by the pandemic.

So and then the infrastructure that's allowed through this is defined as broadband, water and sewer.

So it's not like you can just go out and build a new bridge with this money.

So there are various- - Which apparently we need to do.

- Which apparently, I'm looking out my window at the vacant bridge, but so there's a lot of, as Mr. Dries says, there's a lot of moving pieces to this.

And every time you move one piece of the puzzle then you have to kind of move another piece of the puzzle to make sure that we're staying in balance.

- Comments on that, Worth, and then I wanna switch to the debt cliff and what's going on there.

But go ahead, did you wanna comment?

That whole, do you, I mean part of the question I would ask, do your colleagues on the Council understand this balancing act?

That this is not just a blank check.

You've got conditions on the money, and there are recur... You don't have to name names, or if you want to- - Well, I can't speak, we haven't had a pop quiz on it.

- And again, the whole notion of recurring revenue versus one-time expenses and one-time purchase.

- I think so, cause it's not too different than how we do our CIP budget, where we take out debt every year to pay for major infrastructure.

That's how we pay for the libraries and community centers and the new fire stations and vehicles, to some extent.

But no, if we wanna use this money to hire more police officers in Memphis, which would be my number one priority in the budget, the federal funding is not a source for it.

- Let me just switch to what the administration has called the debt cliff.

And I will do my layman's description of what's happening, which is that in five years from now, in Fiscal Year 2026, a huge amount of debt is paid off that the city has incurred.

And it's basically, if I'm right, if I read this correctly, it's a $63 million a year savings in debt payments.

Mayor Strickland came forward with a plan to say we can go ahead now and do $200 million in debt issuing to dedicate towards various improvements.

We don't have to start paying on that 200 million till five years when the other big chunk rolls off.

And that 200 million translates into about a $12 million a year, give or take, debt payment.

So you still got about a $50 million gap from, as that 63 comes off, you add 12, but you get to do it early, basically.

I think you, Worth, said, I think I read a quote from one of Bill's stories that you said, "It took me a while to get comfortable with this."

Are you comfortable?

Is this a responsible move on the part of the city, which not so long ago had really serious financial difficulties and has worked hard to emerge from that.

- So yeah, the debt cliff is a very ominous term, but it's great news.

And so my first instinct, I think about, think about it like your mortgage.

We have got a lot of debts that we will be, I think, four different series of bonds that we're paying down or finished paying down in 2024, -25, and -26.

And so as we come to the end of those debt payments, like your mortgage, you're no longer paying a lot in interest.

It's mostly principal payments.

So we'll be paying off a lot of debt.

We have $1.3 billion in general obligation debt right now.

And in next year's budget the payments on that will be 148 million.

Those are numbers that don't, you hear more about in the federal conversation than you do at the local level about the size of the city debt.

And so as we pay that down, it frees up a lot of revenue to come into the operating budget for different needs that we might have.

It could be, it could be the police department.

It could be more investment in parks.

It could be transferring money over to solid waste to try to increase the level of services there.

And what we, the administration looked at and pitched to the Council is, basically as we pay down our mortgage, our debt at the city, let's go ahead and take out another mortgage.

Let's take out 200 million more debt, which isn't my first instinct of what I would wanna do.

But when we look at the deferred maintenance on so many of our parks and major facilities across the city, it is something that's needed right now.

There's, part of the opportunity is that we have an incredible market that has an appetite for cheap city debt.

And so we're able to get an incredible value right now that we wouldn't be able to guarantee if we were to take this out four or five years from now, and we're able to defer payments on that debt to even make it more affordable in the short term.

- Back to you Shirley, when the mayor introduced this plan he talked about 75 million towards neighborhood improvements, many millions more towards a city master plan for the parks, fifty million in citywide assets like FedExForum, Mud Island, old Melrose High School, sixty million in streetscape, converting all 84,000 city lights to LED, seven point million for fiber and broadband access, and et cetera, et cetera.

Is there more definition to where that $200 million will go?

And is that part of this budget proposal?

- So it has nothing to do with this budget proposal.

Totally aside from that.

Accelerate Memphis was a product of this debt reduction that we are getting ready to face.

And so we're going, okay, in five years we're gonna have all of this money.

It would be a shame if we can't use it now.

So Chief McGowen and I approached the state comptroller's office, 'cause it is what, as Councilman Morgan said, a balloon indebtedness.

We are not going to be paying back on this for five years.

So the payments will actually coincide with the reduction in debt.

So there is a huge plan.

There was a huge white paper of how many parks we're going to hit, exactly what we're going to do, how we're gonna execute the 3.0 Comprehensive Plan, which as you know, is an amazing plan.

And I would love to have another show just to talk about Accelerate Memphis.

And the debt, I mean, this is one of the most exciting physical, in terms of monetary impacts, that the city is going to experience in a long time.

- Well, I'm sure we will do another show on it.

And I'll give Bill more time to ask questions when we do that.

So apologies to Bill here at the end, but what is the timeframe, real quickly Shirley, in terms of what happens next?

Have you gotten approval from the state on this?

- Yes, we already have approval from the state.

We already have approval to issue the bonds.

So we, I mean, we're looking at having bonds issued for capital appreciation bonds by the end of June.

And so that we're ready to execute in July, and we plan to execute these plans over the next three years, fully completed in the next three years.

- Will the Council vote on the details of that?

I assume, Worth?

- They have already approved-- - Already.

- They've already approved the plan itself.

- Okay, but there won't be revisions in the specifics from this point?

- Not at this point.

- Okay, okay.

We will do another show on that at some point here.

Thank you both for being here.

That is all the time we have this week.

You can get the full episodes of the show at wkno.org or you can download the podcast from The Daily Memphian site, iTunes, Spotify, wherever you get your podcasts.

Thanks, and join us next week for a conversation about the parks master plan.

[intense orchestral music] [acoustic guitar chords]