How did Nashville’s budget get to this point?

Our current budget difficulties can be attributed to a series of separate decisions and events. In isolation each decision seems appropriate, but the cumulative effect has been significant and negative. This goes back at least to the global recession of 2008. In 2009, then Finance Director, Rich Riebling, made the strategic decision to refinance debt to take advantage of lower interest rates and to push some principal payments to the future, lowering the city’s debt service during those economically difficult times. This averted massive lay-offs at the time, but those pushed-out payments are still increasing annual debt service through 2024.

In 2011 through 2014, as the local economy boomed, budgets were passed that used what was regarded as surplus revenue from fund balances to keep property taxes low. Only in FY 2015, did the Council pass a budget that actually directed revenue into the fund balances instead of out of them.

In 2017, a property reappraisal was performed, as required by state law every four years. As part of the reappraisal process, the property tax rate was adjusted downward to ensure that the city doesn’t “reap a windfall” from the increase in property values, as required by state law. This property tax rate adjustment resulted in the lowest property tax rate the city has had in its fify- four year history as a metropolitan government, $3.15 per $100 of assessed value. That rate, instead of being revenue neutral as intended, ultimately resulted in a decrease in revenue because of an unprecedented number of successful reassessment appeals, particularly from commercial properties. Other sources of revenue also decreased – the state lowered payments for education because of decreased enrollment and energy grants to MTA were cut-off.

Historically in reappraisal years, the city has adjusted the tax levy upward some to account for inflation. This was not done in 2017 because of the upcoming sales tax referendum, which was intended to create a dedicated source of funding for transit. The new sales tax income would have provided much of the operating funding for the MTA bus system, which instead stayed in the Metro budget without any increase in revenue when that referendum failed.

In the next two years Nashville experienced two mayoral elections and transitions where the budget was balanced again without increasing taxes, but instead with sales of property and controversial one-time programs like the proposed parking management contract and the sale of the downtown district energy system. As philosophies changed between mayors, and the council resisted property sales, these sources of revenue were not used, and fund balances were further depleted to fill in the gaps. Metro is required by state law to file our budget with the State Comptroller every year for approval, and the Comptroller responded to the FY 20 budget by requiring that we “structurally” balance the budget and restore the fund balances to their required minimums.

In the fall of 2019, Metro’s current Finance Director, Kevin Crumbo, presented the council with revisions to the budget to match revenues to expenses within each fund (General funds and debt service funds for the city and for Metro Schools), and to restore the required 5% minimum fund balance that is required by state law. This included an on-going annual payment of $12.5 million from the Convention Center Authority to Metro and an impoundment $4.5 million of the Barnes Fund for Affordable Housing.

In early March of this year, Mayor John Cooper and Director Crumbo had put together a proposed budget for FY 21 that would maintain fund balances and get Nashville back on a fiscally sound track. This was totally upended when a tornado tore through North and East Nashville and the Donelson Hermitage areas, and the coronavirus arrived in Tennessee bringing tourism abruptly to a halt. Projected revenues were recalculated, assuming six months of shut- down, and all capital spending projects that were not already underway were put on hold. Department hiring freezes were extended, and two departments were absorbed into others to save money. With all reasonable cuts accounted for, the budget still required a means to make up the projected lost sales tax revenue. CARES Act funding has helped tremendously with surprise expenses related to the pandemic like testing, school laptops, and support for businesses, food, and housing. But that funding can’t be used to replace lost operating revenue, and the bulk of that lost revenue can only be made up with additional property tax income.

This sequence of events has gotten us where we are today. The next question is, what is the best path forward?