Just how much did last year set the city’s budget back?

By Jake Conley, contributor

Larry Propst, by his own admission, is not an economist. 

His job, as city director of finance, is to help set the city budget — he calls it “entirely different” from the work of an economist. And on March 14, 2020 — a Saturday — Propst watched as the city of Harrisonburg declared a state of emergency as COVID-19 spread nationwide. Over the next several months, Harrisonburg administrators — Propst’s office included — would watch the city’s finances plummet as tax revenue from restaurants, hotels and other businesses shriveled. Within weeks, millions of city tax dollars vanished. 

“This was like cutting the bottom out of the bucket,” Propst said. 

A year later, as the city reopens and its officials plan for the future, the mood in city hall is cautious optimism.

In response to the lingering economic uncertainties, City Manange Eric Campbell and his office are projecting a “very modest” 2-3% increase in revenues for this year — a figure he called normal, citing that it’s about there that his increase projections fall every year. What he did not do, he said, was to project a massive 15-20% jump as Harrisonburg reopens. It’s measured optimism for his office, too.

 The budget for the 2021-22 fiscal year was passed by the city council May 11.

“I’ve crossed my fingers — what I’m hoping is that we do get a really nice bounce back and that halfway through the fiscal year, our tax revenue is looking really nice,” Propst said. “I can handle more tax revenue than not enough.”

And because Propst isn’t an economist, he’s loath to make assumptions, especially the rosy kind, about what might happen. 

“I don’t want to predict where [revenue] might be in six to eight months — let’s wait ’till we’re there,” Propst said. 

Over the last year, Propst has seen the economists predicting a V-shaped recovery: a situation in which economic levels very quickly shoot back up to pre-recession — in this case, pre-pandemic — levels without any large market sectors falling too far behind.  When he and his office sat down to plan out the next year’s budget that begins July 1, the V-shaped charts and graphs were the last thing on his mind, including national predictions that pent-up consumer demand would dump money into the local economy. Instead, he prefers to keep his optimism tempered.

This year’s biggest considerations, Propst said, were the city’s restaurant and lodging (transient occupancy) taxes — the tax revenue sources that took the largest hit. Those sources dropped 24.5% and 42.3%, respectively. 

Those areas need to bounce back for the city to see a full return to pre-pandemic prosperity, Propst said. But he didn’t want to assume they’d reach pre-pandemic levels in one year. 

In City Manager Eric Campbell’s presentation to the city council April 13 of the recently passed budget, he listed the lingering economic effects on restaurants and hospitality as one of the city’s “budget development challenges.” 

Part of the problem for the city finance office in all of this, Propst said, is the lack of any roadmap for how to emerge from a pandemic-scale event. 

“We just have zero history,” he said.

Clawing back to pre-pandemic levels

The city’s general fund is its main operational money pot that the city council decides how to spend on areas such as the police and fire departments, city planning, parks and other public resources. The majority of revenue comes from real estate, personal property, sales and restaurant taxes, alongside contributions from the state and federal governments and other smaller funding sources. 

Through the beginning of 2020, the general fund was on a skyward trajectory. From Fiscal Year 2015-16 to 2019-20, revenues increased by 31%.

However, when Harrisonburg’s restaurants closed under orders from Richmond and tourists stopped traveling, restaurant and lodging taxes collapsed — taking the general fund with them. 

The shut-down orders came in March, just as the city council began debating the budget for the next fiscal year. And instead of continuing that upward trend, city leaders dialed back spending almost to levels from two years earlier. It was like slamming the brakes on a speeding car. 

Harrisonburg’s economic cratering started at the end of the 2019-20 fiscal year, and city leaders wiped out the city’s extra fund balance, which is like its savings account, to help make up for the steep drop in taxes between mid-March and the fiscal year’s end June 30, largely as a result of the shut-down order. In a comment provided to The Citizen, Campbell said his economic concern was driven by “the uncertainty [of] the impact of the pandemic would have on core City services.”

Facing a $8.3 million drop in revenue for the 2020-21 fiscal year, the budget wasn’t as bad as it could have been. The Harrisonburg Electric Commission, the municipally-owned utility,  transferred to the city more than $1.5 million more than its normal contribution. And increases in city property values helped swell the real estate and personal property tax revenues by another $1.5 million. 

But even after those fill-ins, the city was left to contend with a $5.2 million-sized deficit. 

To fill that hole, the city cut expenditures wherever possible, Propst said. 

That included measures such as furloughing part-time staff and pushing off a cost-of-living salary increase for city employees, Propst said, as well as cutting out all training and travel for employees. Also pushed off was a large amount of spending on capital projects, and capital outlay spending was cut off entirely.

Those cuts among others helped Harrisonburg avoid falling into a hole of debt, crippling the city’s ability to return to normal after the pandemic. And while Harrisonburg might be proceeding cautiously with its spending in the upcoming fiscal year that begins July 1, the budget goes a long way to restoring last year’s emergency cuts.

Whereas Harrisonburg spent approximately $5 million on capital projects for the 2020-21 fiscal year, in 2021-22 the city’s spending $13.3 million. City employees — both full-time and part-time — are also back at work, and the deferred cost-of-living salary increase will land July 1.

As for the city’s extra fund balance, which dropped to $0 last year, the Fiscal Year 2020-21 budget estimates it will fill back up to $3 million. 

Overall, the upcoming 2021-22 general fund will be $123.2 million, which falls about $400,000 short of the pre-pandemic general fund balance. The city is estimating that its tax revenues will go back up by $5.2 million. 

Harrisonburg Mayor Deanna Reed said the city faced economic hardships, but she’s pleased with the response from leadership. 

“The COVID-19 pandemic arriving to our community right in the middle of the budget process was certainly a hurdle and forced us to prioritize needs unlike ever before,” Reed said in a statement to The Citizen. “While we put some key capital projects on hold, I am proud of the work we did to ensure our residents never saw a reduction in service, and we were able to take the appropriate steps to support the health and wellness of our community despite the challenges.”

Campbell echoed Reed’s sentiment in a statement to The Citizen, saying he’s “proud to say the City staff maintained core services to our residents during a very challenging time.”

Harrisonburg Director of Communications Michael Parks said city leadership is already seeing signs of economic prosperity and livelihood returning. Harrisonburg Visitor’s Center has been recently seeing numbers of people almost as high as pre-pandemic levels, Parks said, which indicates a strong return for the city’s bustling downtown.

Avoiding overconfidence

But even as life starts to return to pre-pandemic routines, two major points are still unknown, Propst said.

The biggest factor is the specter of another spike in COVID-19 cases.

"This hasn't 100% completely gone away yet," Propst said. 

And another uptick could plunge the city back into a financial hole if businesses have to cut back or shutter.

Parks said that when it comes to preventing a spike, Harrisonburg residents and the city government have some control over their own fate.

“We continue to push to get the Virginia Department of Health to have more vaccine clinics here in the city, and our friends down the street at JMU want our students to be vaccinated when they come back in the fall,” Parks said. “[That] will surely help make sure that we don’t see a spike like we saw last August, and all of those things ultimately will help our local business community get back to normal.”

Propst said the second indicator of the city’s health that he’ll be watching for is how JMU’s population and activities are looking come fall — and especially come football season. 

Other events such as Homecoming Weekend and Parent’s Weekend draw students with family and friends to the city and downtown, generating tax revenue. If those events come back and are in full swing come August and into September and October, Propst said, it’ll be a good sign for the health of Harrisonburg’s books — assuming that’s what this fall holds.

JMU contributed $480 million to the local economy in Fiscal Year 2014-15, the last year for which those figures were available through JMU’s Office of Institutional Research. 

“Hopefully, that comes back — hopefully we’re seeing 20,000 people in Bridgeforth Stadium in the fall,” Propst said. “Let’s wait to see what happens, and see it happen, before we start planning for it.”

Parks was quick to point out that though the city isn’t entirely reliant on the university, JMU’s population draw “certainly” helps financially.

The final uncertainty here is the money projected to flow out of Washington, D.C., under the American Rescue Plan Act — the Biden administration’s CARES Act. Parks told The Citizen that the amount of money the city will receive, along with the finalized guidelines for how the money can be spent, aren’t yet known.

And neither is the future — both in terms of health and the economy.

“I’ve taken the wait-and-see approach,” Propst said. “Let’s see it develop, and then we can react to it from there.”

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