Nashville Property Tax Increase
A Review of Public Documents
Wes Chapman & Pepper Hatch
September 16, 2020
Summary and Conclusions
On April 28th, 2020 Metro Nashville provided an updated budget proposing a $332.7 million property tax increase in response to economic uncertainties related to COVID-19. We have conducted a financial analysis based on public documents to understand the need for this tax increase. After that budget proposal, the CARES Act was passed providing $229.4 million in direct funding, and an additional $506.5 available with the cooperation of the State of Tennessee. Metro issued $285 million of notes on July 1st and has enjoyed substantially better economic conditions than those envisioned in the budget. Our analysis indicates that even after eliminating the tax increase entirely, Metro Nashville currently enjoys $182.6 – $285.7 of liquidity above the projections in the May budget, and excess long-term solvency of $282.5-444.3 million. The tax increase is unnecessary based on the financial figures provided by Metro.
The arrival of COVID-19 in the first quarter of this year, and the March nationwide shutdown prompted everyone from government entities, businesses, not-for-profit entities and families to rethink budgets – considering dire possible outcomes. This included Metro Nashville Government, which published a budget revision on April 28, 2020 looking at downside revenue projections for fiscal 2021, and what steps would be required to maintain sound liquidity and solvency for Nashville under reduced revenue from COVID-19 impacts. This was followed by a recommended operating budget in May, and updated revenue projections through June.
The updated budget of April 28, 2020 showed a revenue shortfall of $216 million based on then current assumptions. Including one-time funding requirements and other adjustments, the amount determined to be needed without any material expense reductions was $332 million – approximately 14% of the original $2.33 billion budget. The response by Metro Nashville was to propose a new budget, including a $332 million property tax increase – approximately 34%.
The analysis presented here simply reviews and examines the budget figures as presented and updated. This review examines the liquidity and solvency requirements of Metro Nashville government and how the evolving financial situation of Metro Nashville relates to the budgeted amounts, including the requirement for the proposed tax increase. Our liquidity analysis examines the availability of cash for Metro to meet its normal obligations, relative to budgeted amounts. Solvency looks at a “steady state” budgetary requirement against the proposed tax increase after revenue shortfalls recover post COVID-19.
Our analysis has been helped and guided by the kind help of Metro Council member Angie Henderson, to whom we are grateful.
These Metro budget documents number hundreds of pages and include mind numbing detail which must be sorted out to come to a sensible overall conclusion. Our analysis looks at those documents and distills the essence of the changing view of Nashville’s revenue and taxation needs as the impact of COVID-19 revealed itself since April.
The analysis shown in Table 1 below examines the liquidity crisis that Metro faced initially, and how it has changed over time. The original budget revenue of $2.33 billion from the pre-Covid budget is shown in line (1), and the revised estimate of $2.12 billion made in the 4/28 document is shown in line (2). This resulted in a revenue shortfall of $215.8 million (line 3). Metro requested additional cash for funds of $99.9 million (line 4) and had miscellaneous budget adjustments of $16 million (line 6) resulting in the requested tax increase of $331.7 million (line 7).
Subsequent to 4/28, Metro executed funding of tax anticipation notes of $285 million (line 8) and has access to (and has subsequently drawn in amounts still undisclosed) $229.4 million in funding from the Federal CARES program, resulting in total additional liquidity including the proposed tax increase of $514.4 million (line 11), and excess liquidity without any tax increase of $182.6 million (line 12). We recognize that the $285 million in notes were issued only for one year, but also understand that Metro has direct access to $675.9 million in credit lines through the Federal Reserve which it has not utilized.
We have seen the tax collection data through June provided to Metro Council, and they show collections substantially more than original budgeted amounts. We have not been provided with updated data since June. Based on the initial favorable variance, the prospect for increased economic activity driven by increased “opening” and improving control of COVID-19, we made an estimate that the tax decline would be only half of the original projections made in April. The favorable estimate is $103 million (line 10). This results in excess liquidity, after the elimination of the entire proposed tax increase of $285.7 million (line 12). Calculations of the tax estimate is shown in Table 3.
The inescapable conclusion is that, based on Metro’s own financial disclosure, Metro does not face a liquidity crisis that requires an immediate tax increase. Based on Metro’s disclosure, it should have excess liquidity of $182.6 – $285.7 million. Finally, it is important to note that the current budget includes $62.4 million in contingencies and reserves which are discretionary funds for Metro government. Including the initial request of $99.9 million for the restoration of cash and fund balances with the additional contingencies and reserves, the total contingency and reserves included in the budget are $162.3 million.
In the course of our discussions we were initially told that Metro could only access $23.8 million of the $785.8 million made available to it under the CARES Act, and that the State of Tennessee would not cooperate in the release of any of the potential $506,475 available through the State. This was confirmed in the Tennessean 9/18/2020 based on Governor Lee’s opinion that Metro government showed inadequate commitment to reopening business in Nashville. We were subsequently told that Metro would access all the $229.4 million directly available through CARES, which we have not been able verify. The Tennessean did verify that Metro has spent $93.8 million of the $121.1 million budgeted for local relief. The total amounts available directly and through the State of Tennessee are shown below. If the allegations that the State Government has refused to cooperate with Metro Government are true, we would hope that the government of Metro Nashville would diligently work to fix this problem.
The solvency analysis is based on a simple question – once the city returns to normal operation, will the permanent tax increase proposed by Metro be required to maintain a solvent future, or will it prove unnecessary? This is a critical question because it would be unnecessarily burdensome to impose a 34% permanent tax hike to solve a short-term problem. The column shown below in Table 4 “Metro Financials” looks at the derivation of the tax hike request, resulting in the requested tax hike of $315.7 million (line 7). Lines 8-9 simply add back the budgeted shortfalls which are COVID-19 related and assumed to be temporary in nature. Line 11 adds back the excess liquidity derived in Exhibit 1. Not surprisingly, the first year of normal function without COVID-19 impediments produces excess solvency of $282.5 million based on Metro financials. The column “Updated Estimates” includes the positive tax variance and we have identified a modest level of specific spending reductions totaling 2.52% of the budget (line 11). This produces excess solvency of $444.3 million in the first year of normal operations post COVID-19.
Based on the financial budgets, statements, and other public data, we have examined the prosed $315.7 million tax increase requested by Metro Nashville for fiscal year 20/21. Based on their financial estimates Metro Nashville will enjoy excess liquidity of $182.6 million and excess solvency of $282.5 million with no tax increase. This is our base case.
We felt compelled to do a realistic case looking at our best estimate of where we are and what might realistically get done to mitigate the fiscal needs of the city. Nashville is a city of capable and famously friendly people, with a history of accomplishment and fiscal prudence. We felt it only fair to consider what might be done to help by prudent financial cost reductions. We are certain that any budget which has not been subjected to any material cost reductions (like the 20/21 Nashville budget) can be prudently reduced. We have identified potential operating cost and capital reduction targets of at least 10% of the budget but feel that any implementation plan will be hampered by time (nothing could be done prior to October) and political realities. Accordingly, we have carved back targeted reductions to 2.5% of the budget – $58.7 million. It is important to note that none of our contemplated reductions in budget directly impacts the normal operating budgets of fire, police education and other essential services. Finally, our identified budget cuts amount to 36.2% of budgeted contingencies and reserves.
We have been disappointed that up-to-date financials are not available, such that we could provide a better estimate of the amount of the positive tax collection variance versus budget. Absent timely data, we have made an estimate of a 50% improvement versus the projected decline in the budget versus prior years. The growth in Nashville has continued despite the COVID-19 crisis, and the city has enjoyed sales tax collections in the past commensurate with population and economic growth. Additionally, the COVID-19 crisis has led to a spike in online sales, which may more than offset declines in sales through retail outlets. These are incorporated into our best estimate case, showing excess liquidity of 285.7 million and excess solvency of $444.3 million.
We hope that this analysis will assist Metro Nashville reach a fair and well-reasoned decision regarding the proposed tax increase. Metro government has not been responsive in providing updated financial analysis to justify their need for a tax increase and has repeatedly warned that refusal to acquiesce to the tax increase will result in takeover of Metro finances by the State of Tennessee. Based on the performance of Metro government to date, we support that takeover and would hope that the State might over greater transparency regarding financial needs and obligations than this administration.