The City of Sugar Land takes pride in resiliency and strong financial management practices.   The key to the City’s financial resiliency is strategic financial management, planning and flexibility to respond to situations that may present themselves by establishing strong fund balances and reserves. These fund balances and better than anticipated performance in fiscal year 2019 set the City in a good position to withstand the challenges from COVID-19.

Recognizing the economic impacts of COVID-19 on residents and businesses, the City immediately began taking budgetary actions at the start of the global health emergency to respond to anticipated declines in various city revenues – most notably sales tax revenue, which is a major funding source for the City’s operating budget.  With voter approved sales tax for property tax reduction, Sugar Land has one of the lowest tax rates in the state for cities our size. However, sales tax is a volatile revenue source and economic declines such as the one experienced due to the COVID-19 pandemic can have a significant impact on revenues.

Additionally, major decision making on the preparation of the Fiscal Year 2021 budget was delayed to better align with the availability of data and to allow for the development of multiple scenarios and strategies focused on varying degrees of economic recovery.   Establishing and preserving maximum flexibility for the City Council in the fiscal year 2021 budget and tax rate setting process will be critical to allow the City to gather as much information and data as possible prior to setting the tax rate for 2020. 

As such, as part of efforts to prepare for the Fiscal Year 2021 budget process, Sugar Land City Council recently participated in a socially distanced budget retreat and discussed strategies focused on financial resiliency, responsible decision making, and flexibility for the City to respond to challenges that may result from the ongoing COVID-19 pandemic.  Such actions and strategies, which are in accordance with the strong financial management practices that have earned Sugar Land recognition as a financial leader across the nation and by bond rating agencies, include:

• reducing expenditures in the current fiscal year to ensure the City will end the year in a positive financial position with fund balances above policy requirements;
• preparing to further delay major expenditures in Fiscal Year 2021 until there is more certainty on the economic recovery and to ensure that funds are available – providing
• maximum flexibility for implementation of the budget if the recovery is stronger than anticipated or the economy worsens beyond projections;
• considering a revised implementation plan for projects approved by voters in the 2019 bond election to focus first and foremost on projects that address structural flooding; and
• moving forward with City Council consideration of a resolution directing staff to calculate the voter approval tax rate with an 8% limit in response to the disaster declaration made by the Governor on March 13th and in accordance with Senate Bill 2 passed by the 86th legislature in 2019.

Background- Senate Bill 2

The Texas Reform and Transparency Act of 2019 (Senate Bill 2), passed by the 86^th Texas Legislature lowered the voter-approval tax rate – which refers only to the aggregate amount of property tax revenue for maintenance and operations purposes and is not reflective of growth in the total tax rate or average residential tax bills –  to 3.5%, with an automatic election required to exceed that percentage.  The bill includes a provision to return to the previous 8% threshold for the voter-approval rate during a disaster.

The Texas Tax Code, Section 26.04(c-1) allows the City Council to direct the designated officer to calculate the voter-approval tax rate in the manner provided for a special taxing unit (8%) if any part of the City is located in an area declared a disaster area during the current tax year by the Governor or by the President of the United States. 

The Director of Finance serves as the designated officer of the City, and if authorized by the City Council pursuant to Section 26.04(c-1), shall calculate the voter-approval tax rate using 8% instead of the 3.5% until the earlier of:

1. The second tax year in which the total taxable value of property in the City exceeds the total taxable value of the property taxable by the City on January 1 of the tax year in which the disaster occurred; or
2. The third tax year after the tax year in which the disaster occurred.

Additionally, Section 26.07(b) exempts the City from an automatic tax rate approval election following certain disasters.

Fiscal Year 2021 Budgetary Impact

In preparing the fiscal year 2021 budget, staff has been evaluating several scenarios that vary in revenue levels dependent on the economic recovery from COVID-19 and how quickly the economy returns to normal after the shutdown.

As discussed at the June 23^rd budget planning retreat, maintaining every available option and flexibility is essential in the fiscal year 2021 budget and preliminary financial forecast.  City Council approval of the Resolution to direct calculation of the voter-approval tax rate at 8% provides additional flexibility for the City Council to determine what the 2020 tax rate is needed to provide a balanced budget for the City that provides quality services at the levels expected by residents.  

It is important to note that approval of the Resolution directing the calculation to be done at 8% does not mean that the tax rate will be increased - it simply provides additional flexibility for the City Council to obtain as much information as possible before making a budget and tax rate decision.  Further, this Resolution is not setting a proposed tax rate and is not limiting the rates that can be considered by the City Council. There are two key decision points in the process yet to come - proposal of a tax rate for consideration in August and then, after feedback from residents and businesses in a public hearing on the proposed rate, the ultimate adoption of the tax rate in September.

Overall, this action simplifies the process for ensuring the City is still able to provide the services upon which residents and businesses provide – a commitment, along with minimizing the City’s tax burden, the City takes seriously. 

Recommendation

Staff recommends City Council approval of Resolution No. 20-17 directing staff to calculate the voter-approval tax rate using 8% instead of 3.5% pursuant to Section 26.04(c-1) of the tax code.