Louisville Metro Council members learned this week that a stagnating economy and rising labor costs could lead to a $70 million budget shortfall in 2024, growing to $109 million in 2025.
The deficit projections from the city’s Office of Management and Budget has some council members concerned about the long-term stability of city programs and spending increases in Mayor Greg Fischer’s recommended budget for 2023. Fischer’s proposal for the next fiscal year, which starts July 1, would direct more money to the police department, youth programming and the Community Ambassadors program.
Monica Harmon, Louisville’s finance director, presented the budget deficit projections to Metro Council’s Budget Committee on Monday. She said additional money from the federal government could alleviate the budget shortfalls in coming years, but that officials shouldn’t rely on that happening.
“Assuming that we’re going to continue to have normal growth, then we’re going to have to find more money,” she said. “It’s just that simple.”
What’s behind the dire forecast?
Harmon said the projected shortfalls are the result of a number of factors, including record vacancies across city departments. Louisville Metro Government had 5,584 full-time employees in 2017. That number dwindled to 5,008 as of April. The vacancies resulted in unexpected cost savings for the city, but those savings will dwindle as positions are filled.
Louisville also saw an increase over the past two years in what are called “non-recurring revenue sources,” such as one-time federal grants and spikes in tax revenues that are expected to be fleeting.
For example, the city more than doubled revenue from the tax on business net profits in 2021 and saw a 21% increase in 2022. But budget officials are forecasting a double-digit decline this year.
“I encourage you to know that these [positive] trends will not continue,” Harmon told Metro Council members.
With a slowdown in revenues on the horizon, Louisville budget officials are also expecting the city to struggle with the same economic trends playing out across the county.
Economic growth in the United States shrank in the first three months of this year, with the country’s gross domestic product (GDP) down 1.4%. At the same time, the U.S. is seeing record inflation in the cost of labor and goods and services.
Budget officials estimate that nearly half of the projected deficits in 2024 and 2025 are due to personnel costs.
Last year, Louisville Metro signed new contracts with the unions representing Metro Corrections officers and police department employees. Those contracts included significant salary increases. Non-union employees also received raises.
Since many city workers receive a pension, those raises will also result in higher pension costs in future years. The city’s annual contribution to its pension fund increased from $89 million in 2019 to $113 million last year. It’s expected to rise another $24 million by 2024.
“You are going to need to remain competitive in the job market with wages, and so those are going to drive your costs up as well as supply chain demand,” Harmon said.
Deficits could be ‘the primary focus’ of budget talks
As Metro Council debates changes to Fischer’s proposed budget for next fiscal year, the looming shortfalls could dominate the conversation.
His budget recommends $10 million be put into the rainy day fund and another $15 million be set aside for potential gaps. Some Metro Council members, however, aren’t convinced that will be enough for long-term stability.
District 19 Council Member Anthony Piagentini, who leads the minority Republican Caucus, told WFPL News that he wants to rein in some of the increased spending Fischer proposed. He said the projected shortfalls need to be “the primary focus” of budget discussions.
“I am focused on making sure that this city is not set up for failure, because that will happen if we pass this current budget,” he said. “I think there is some bipartisan support to get this back into some kind of reasonable level of future deficit risk.”
With a mayoral election in November and Fischer term-limited, Piagentini said there will be a new leader of day-to-day operations in Louisville who will have to deal with the 2024 and 2025 budgets. He said it’s important that the new mayor has a budget that’s not “in shambles.”
“They should be afforded the opportunity to come into some sense of normalcy, some sense of stability, so that they can initiate the agenda that they were elected to initiate,” Piagentini said.
Some council members have also expressed concerns new programs and initiatives created with money from the federal American Rescue Plan Act will drive future budget deficits even higher. Louisville received roughly $390 million in federal COVID-19 relief and has already allocated more than half of it for policing reforms, public health initiatives and affordable housing.
At Monday’s meeting, budget officials said the ongoing costs of those programs were not included in the budget shortfalls they projected for 2024 and 2025. District 11 Council Member Kevin Kramer, a Republican and vice chair of the Budget Committee, said that makes him “anxious.”
“So, we could be looking at [a deficit] significantly greater, if we intend to continue funding programs that we funded with American Rescue Plan money?” Kramer asked.
“That’s correct,” Harmon, the city’s finance director, responded.
Metro Council’s Budget Chair Bill Hollander, a Democrat representing District 9, does not appear to be as concerned as some of his colleagues.
In an interview with WFPL News, Hollander said he believes the deficit projections provided by budget officials are conservative, meaning they are likely much bleaker than what the reality will be.
“It’s good to see these numbers for future years but I think that they are highly speculative, frankly,” he said. “If you’d have done this last year for what our situation would be right now, you’d have had a completely different picture.”
Budget officials told Metro Council members on Monday that they originally thought there would be a $60 million deficit when they started putting together Fischer’s recommended 2023 budget last November. Instead, the budget grew from $1.1 billion to $1.3 billion.
Hollander also noted that many of the programs started with federal COVID-19 relief were funded for a few years in order to give Metro Council time to assess and potentially discontinue programs that might not be as successful as they hoped. The city has $15 million of federal funding set aside that could mitigate the need for future budget cuts.
Over the next month, leaders of almost every city department will appear before Metro Council to justify their budgets. The council will also discuss potential changes to the overall budget before a final vote on June 23.
Residents can provide their feedback on the proposed budget at two in-person meetings on May 18 and June 2, or through an online comment form until June 3.