Even as property-tax and sales-tax revenue continue to climb, Dallas is still projected to face a $38 million deficit by fiscal year 2025, budget officials told Dallas City Council members on Wednesday.
And through 2028 “we show a shortfall of $18 million to $25 million,” City CFO Jack Ireland said at the council briefing. “But when we come to you on August 13, you will not have a budget shortfall.”
By that time, Ireland will have received certified values from the Dallas Central Appraisal District, allowing Budget and Management Services to more accurately forecast the projected 2024-2025 budget of $4.55 billion. The new fiscal year begins on October 1.
“I will say that from fiscal year 2024 — our current year — to fiscal year 2025, our planned year, the budget actually goes down slightly by 1.5%,” Ireland said. “That’s because our capital budget [has not] included any of the capital projects that are going to be from the 2024 bond program that was just passed. When we come back in August, of course, it will be a step up from what you see here.”
Ireland and his staff draft biennial budgets each year. The Dallas City Council adopted the first year — fiscal year 2024 — on September 20, 2023.
“And we present the second year of the biennial … along with, for example, last year’s budget,” Ireland said. “It does lay out what we see coming in the way of revenue and expenses. But we do not expect the city council to adopt the second year of the budget.”
Texas law prohibits municipal governments from adopting more than one annual budget at a time.
The biennial budget update Ireland delivered to council members on Wednesday includes “all revenue and expense assumptions” that are analyzed and updated as necessary. Assumptions for the second year are used to create the next biennial.
For this fiscal year, property-tax revenue was forecast at $1.04 billion, followed by sales-tax revenue of $451.7 million. Next fiscal year, the property-tax revenue is expected to increase to $1.1 billion, and the sales-tax revenue is projected to rise to $476.5 million.
“Our reliance on property tax has grown” between 2019 and 2024, said Janette Weedon, director of Business and Management Services. “It is our most volatile revenue source. I always like to remind the listening public that property tax revenue is based on state law. We have lowered the tax rate for eight consecutive years.”
Since 2016-2017, the rate has dropped from $0.7825 to $0.7458. But homeowners in Dallas pay total rates that include levies from other taxing entities. Their taxes are also impacted by swelling property value appraisals that raise the overall tax paid each year.
“They want to know at the end of the day … what they are getting out of this deal,” Council Member Carolyn King Arnold (District 4) said. “I think we have to make sure we are educating when we go to those sessions … [that Dallas] is not the only taxing entity. I think we don’t clarify that enough. We need to make sure with their property taxes … [they know] what services they are getting. Make it plain.”
Arnold’s comments came after Ireland repeatedly reminded council members that the planned budget for next fiscal year does not include some final numbers, especially in the realm of property-tax revenue, which may be impacted by the 3.5% cap mandated in the 2019 Texas Property Tax Reform and Transparency Act.
The planned budget assumes a 5.17% increase in property-tax revenue reflected by the 3.5% cap in addition to new construction estimated at $3.8 billion on tax rolls.
“State revenue cap of 3.5% applies to Maintenance & Operation (M&O) property tax revenue from properties taxed in both years, without seeking voter approval,” according to Ireland’s biennial budget presentation. “New construction [is] exempt from M&O cap. Cap does not apply to Interest & Sinking (I&S) revenue used to pay debt service. As a result of the FY21 adopted tax rate being less than the calculated voter-approval tax rate, the City was able to “bank” the unused increment and use it over a 3-year period (FY22, FY23, and FY24).”
According to an analysis by the Texas Municipal League, the unused increment rate may be used to increase the voter-approval rate, depending on tax rates adopted by cities in the previous three years.
“In essence, the ‘unused increment rate’ is the 3-year rolling sum of the difference between the adopted tax rate and voter-approval rate,” the TML document says. “Put differently, the city has the ability to ‘bank’ any unused amounts below the voter-approval rate to use for up to three years. Conversely, if the city adopts the voter-approval rate all years between 2020 and 2022, the unused increment rate would be zero.”
Lawmakers’ intent was to “discourage” taxing units from adopting a rate equal to the 3.5% voter-approval rate each year.
“Under the new framework, a city that experiences exceptional growth in sales tax revenues in a year, for instance, may be able to adopt a rate less than the 3.5 percent voter-approval rate and bank the difference for a future year when sales taxes perform worse than expected,” the analysis shows. “On the other hand, many cities will be forced to go up to the 3.5 voter-approval rate every year just to keep up with rising costs. For those cities, the unused increment rate will be a non- factor.”
Because revenue is capped, “As values increase, the tax rate will have to decrease,” according to the biennial budget presentation,
Dallas extends into five counties — Dallas, Denton, Collin, Kaufman, and Rockwall. Appraisal districts in each of these counties have provided estimated values to property owners. Meanwhile, Dallas is projected to forego $415.6 million in revenue from $56.4 billion in taxable values because of homestead and other exemptions.
Tennell Atkins (District 8) said Dallas officials are “going to have to make some major cuts in this budget.”
“These are the taxpayers’ funds, and the taxpayers got to know today we’re going to sharpen our pencils,” he said. “We’re probably going to have more than $38 million to cut. … Colleagues, I know this is a tough decision that we’re going to have to make.”
After Ireland again said that the “shortfall will be resolved” after values are received from DCAD in July, Cara Mendelsohn (District 12) asked him to explain why he believes his approach to the budget this year is different.
“Are you starting with a zero-based budget, which you’ve never done before?” she said. “How are you approaching it differently? I believe, Jack, in the past, you’ve talked about you start with a budget, and you increase and decrease a little bit here and there.”
Essentially, zero-based budgeting requires department heads to begin their budget considerations as if they had no budget the previous fiscal year.
“Council member, I do believe the approach is different this year,” Ireland said. “As far as the enhancements that have come forward in the past, we have pushed back on departments about even bringing forth enhancements. … They cannot be the same type of reductions that we’ve seen in prior years. We’re asking departments to think differently as we discuss our reduction methods.”
Interim City Manager Kimberly Tolbert said every city department has been asked to submit budgets at 6% less than the current fiscal year.
“That exercise is underway,” she said.
A public hearing on the budget is scheduled for May 22. The city council is expected to adopt the fiscal year 2025 budget in September, and the fiscal year begins on October 1.