Upside surprise
Conservative Visalia budget forecasters were too low by 29% but now fear future sales tax revenue will shrink
-April 16,2023-
A funny thing happened on the way to predicting tough economic times in Visalia.That did not happen, despite the worldwide pandemic and business shutdowns. City finance staff have been advising the city council on the need to be conservative on budget estimates year after year but the estimates of sales tax revenue have been too low by 29% cumulatively over three years, a city report said this week. Sales tax and property tax monies makes up over 79% of the city budget
The report detailing a look at the next two years says “the sales tax projection is conservative considering the previous three fiscal years (19/20 – 21/22) had a total increase of 29% which was a higher-than-normal growth.” The economy’s strong performance has surprised the forecasters.
This has been the trend as the city adopts a budget each fiscal year ending June 30 for the past five years. The upside strong numbers have included two other important tax revenue streams for the city – property tax and TOT bed tax monies- both higher.
Staff’s conservative approach goes back to 2018 when they projected sales tax to increase by only 1% in 2018/19 to $31.3 million, and 1% in FY 2019/20 to $31.6 million. They were a little light since the actual sales tax revenue came in at $32.4 million in 2018/19 and $34.2 million in fiscal 2019/20. The results were $2 million over what they had budgeted.
In the midst of the pandemic, city staff, understandably, advised continued caution with a forecast of only a 1% increase in FY 2020/21 and likewise in FY 2021/22. Using their growth assumptions, sales tax – they predicted- would be down to $30.0 million in FY 2020/21 and $30.3 million in FY 2021/22.
Here is where there was a big surprise to the upside.
Actual 2021/22 revenue from sales tax surged to $45.7 million as Visalians went on a shopping spree and revenue from big industrial park projects like Amazon also helped bolster our sales tax numbers.Visalia collects a portion when the Amazon fulfillment center here ships products. Federal help to business and to the city also helped. That year the city had budgeted only $31 million in revenue from sales- but was off by almost $15 million!
The next 2-year budget for 2022/23 for the fiscal year we are still in until June, calls for sales tax to increase 2% in 2022/23 to $43.6 million, and 2% in FY 2023/24 to $44.4 million. Staff reasoned that “This projection is conservative considering the previous and current fiscal years have experienced higher than normal growth”
Indeed budget analysts had figured the COVID 19 pandemic,travel and business shutdown would have put the kibosh on growth.
Visalians proved them wrong.
The April 2023 finance report notes that “Last fiscal year, sales tax grew by 12% and is projected to be the same this fiscal year.”
The 23/24 “adopted budget surplus for this fiscal year was $6.9 million and is now projected to be $15.5 million says the council report ,showing that clearly – sales are better than they thought a year ago- yet again.
But the staff argue that now is not the time to look for this upward growth pattern to continue with fears of recession, high inflation, job layoffs and a potential downturn in the economy makes it likely our sales tax will now shrink.
Particularly, since the tax base has grown so fast to a high-level they argue- we’re ripe for a fall.
“The sales tax projection is conservative considering the previous three fiscal years (19/20 – 21/22) had a total increase of 29% which was a higher-than-normal growth. This higher-than-normal growth has also inflated the sales tax base used to prepare projections for this fiscal year and next year(23/24).”
“In addition, sales tax revenue is the most volatile because it is based on consumer spending. This projection is also being conservative due to the continued rise in inflation. The continued splurge spending that is occurring has been good for the economy and is one of the biggest reasons that a recession has not begun. As mentioned earlier in the report, economists predict this extra spending will have to slow down as the cost of living continues to rise and disposable income becomes less.”
So the staff projecting 23/24 and 24/25 tax revenue will shrink by $2 million in the coming fiscal year (24/25) and decline again in 25/26 despite the 40-year trend of a 5% yearly increase and arguably staff missing the estimate mark over the past five years..
Despite the recession worries, staff says the projected surplus for FY 23/24 is $11 million . There is again a budget surplus for FY 23/24 they say – assuming zero vacancies for full time employees and hourlies. In the past the City has seen savings from vacancies and is safe to assume there will be a savings of $1.0 to $1.5 million. This savings has not been included in the projection, reads the report.
So this fiscal year ending in a few months will enjoy a $12 million surplus.
That’s good news. Most of that will be added to a fund earmarked for the new civic center that because of these years of surpluses since 2018 -now is over $60 milion.
You might wonder – isn’t it better that staff be conservative rather than overestimating income? Sure. But it also seems clear Visalia’s economy is stronger than you might think. Looking ahead there are criss-crossing trends with lower housing permits so far this year but expected increases in car sales and a continuing development pipeline in the Visalia Industrial Park. Mooney and Dinuba Ave are again filled with stores and Downtown has lots of activity.
Well respected MuniServices says Calif new vehicle registration that fell 10% in 2022 is projected to increase by 5.5%. Overall they predict state sales tax to avenge to increase in 2023 by 4.25%.
Not that good times last forever.During the Great Recession, sales tax decreased for three years (2008 – 2010) for a total reduction of 26%.