The recent surge in inflation is a blessing and a curse to city budgets in a volatile age, but for Arkansas mayors and municipal finance officials doing the counting, the blessings are largely prevailing.
While driving up the cost of fueling fleets of police cars and firetrucks and significantly raising construction expenses, a stubborn trend of 8% inflation has also compounded revenue from municipal sales taxes, including a flood of steel purchases for the Interstate 30 Crossing spanning the Arkansas River at Little Rock.
City revenue and budgets are up this year compared with 2021 across the board, though last year’s unexpected surge in sales tax revenue may be showing signs of tapering off. Federal COVID relief money for cities and towns has also offered some breathing room.
Staffing and payroll pressures are mounting, with all six cities surveyed by Arkansas Business raising pay to a floor of $14 or $15 an hour. Little Rock commercial drivers now command at least $18 an hour, and the city has begun hiring remote employees in jobs like finance that don’t require on-duty presence.
“So far, so good this year,” said Sara Lenehan, Little Rock’s chief financial officer. “We were a little bit conservative in our forecast for 2022 because we had some unusual sales tax growth in 2021. So we backed off a little bit in our projections, because we had seen a surge connected to economic development and major construction projects going on. And, of course, inflation is probably playing a little bit of a factor in the rising collections.”
Though Lenehan didn’t expect the 2021 sales tax bonanza to last into this year, “the January to March results we received through May were still 6.6% above the first quarter of last year.” She credited local governments’ ability to collect taxes on internet sales for boosting revenue through the pandemic. “It helped mitigate the losses. We’re also seeing recovery in some of the hardest-hit categories of 2020, like restaurants, bars and tourism.”
Little Rock’s 2022 operating budget of $287.5 million — just up from an amended 2021 budget of $287.3 million — “was built around a much stronger economic outlook than we saw a year ago,” Mayor Frank Scott Jr. said in April. “As staff began building the Fiscal Year 2022 budget in September of 2021, the forecast focused on recovery from a global pandemic.”
Cities routinely adjust their budgets throughout the year to prevent operating in the red.
North Little Rock’s original 2022 general fund budget was $76.8 million, up 3.3% from 2021’s $74.4 million. The overall 2022 city budget was $212 million, almost exactly duplicating 2021’s, including $102 million for North Little Rock Electric, the municipal utility. Costs are under surveillance, but they’ve been rising.
Raises All Around
“Around last summer, we went ahead and raised all of our full-time people to $15 an hour, right around when Amazon, McDonald’s and everyone else started that process,” North Little Rock CFO Ember Strange told Arkansas Business. “We jumped on doing that right away, because we were seeing so many people leaving the workforce.” Jonesboro tacked a 2% cost-of-living adjustment on top of its usual 2% raise for city employees, and set a minimum wage of $14 an hour.
Conway’s total revenue for 2022 is projected at $76.2 million, well above 2021’s $68.6 million, which drove a $67.5 million budget and a $1.1 million surplus. Conway’s conservative budget of $73.2 million this year has a built-in $3 million surplus.
“Sales tax revenue continues to be budgeted flat relative to the prior year’s actual receipts,” said Conway municipal CFO Tyler Winningham. “However, collections were very strong in 2021, so the budget from 2021 to 2022 shows a significant increase.” Conway’s 2021 tax receipts were 14% above 2020, which of course included the COVID lockdown. The 2022 budget provided a 4% cost-of-living raise for all full-time city employees.
Last year, full-time employees received a 3% bonus rather than a raise, with Mayor Bart Castleberry citing financial uncertainties. The 4% cost-of-living adjustment “is the largest given in many years, and it is management’s intent for this to help employees deal with the ever-increasing costs of goods and services,” Winningham wrote in a report to the city.
No town can escape rising costs, said Mark R. Hayes, executive director of the Arkansas Municipal League.
“Fuel costs in particular have caused cities and towns in Arkansas to adjust considerably,” Hayes told Arkansas Business. “The services provided are vehicle-driven, pardon the pun. Garbage pickup, police cars, firetrucks and other city vehicles all require fuel, so these are substantial budget issues because of the rising cost of fuel.”
Even buying city vehicles is a challenge as supply chain slowdowns persist. “The lack of processing chips that make the vehicles operate has caused a problem,” Hayes said. There’s also the added cost of drivers, and every other sort of city worker. “Pure labor jobs all the way through the highest professional jobs, people are just hard to find. When you find them, they typically want more money than what has been offered in the past.”
Budgeting for $5 Gas
Strange, the North Little Rock finance chief, said she has spoken with the city’s director of vehicle maintenance and other department leaders to develop plans for keeping vehicle and fuel costs down. “The problem is, we’re not just seeing increases in fuel; we’re seeing it in everything. And then there are delays to get things we need.”
Fayetteville CFO Paul Becker said personnel costs largely drove an 11% budget increase for 2022. “We deferred salary increases in 2021, and that impacted this year,” Becker said in a phone interview. “We adopted some measures for retaining police officers, and we did increase some capital expenditures. But we had pulled back our budget by 8.4% in anticipation that revenue would fall, but that didn’t happen. So we restored many of the things and pushed ahead. Revenue is holding pretty steady, especially sales tax revenue.”
Becker thinks he can amend this year’s budget to cover extra fuel costs. Carl Geffken, city manager of Fort Smith, where the 2022 budget is up 7.4%, said his officials had the foresight to budget Police Department gasoline purchases at $5 per gallon, more than the highest retail rate so far.
“It’s all about conservative budgeting, but not overly so,” Geffken said. “We saw last year that oil had hit $100 a barrel, gasoline prices were going up. We were just covering our bases, trying to avoid getting caught short and having to move money around.”
COVID Rescue Funds
Federal money to cities from the American Rescue Plan Act signed by President Joe Biden in March 2021 has provided a cushion in certain budget areas. The $350 billion in direct aid to local governments flowed in two tranches to cities, with Little Rock poised to receive its second of two $18.8 million infusions last week.
The capital city received the most, a total of $37.7 million, followed by Springdale at $21.4 million, Fort Smith at $21.2 million, Fayetteville at $17.9 million and North Little Rock at $16.8 million. All cities were expecting their second installments in coming weeks. Lenehan said proposals for Little Rock’s new money include $2 million for parks and community centers, $2 million for a senior center revamping and $1 million apiece for affordable housing and healthy food in grocery deserts. Other priorities are replacing sewer station discharge pumps and buying two $300,000 side-loading sanitation trucks.
All the state’s other cities have infrastructure plans for their Rescue Act funds, but dollars are not going far these days.
“The labor shortage has been a real challenge in every city division,” Lenehan said. “Pay levels have gone up across the board, and offering remote work is one of the ways we are trying to help make finance positions more attractive. But obviously that’s not possible in positions like police, fire and public works. If you’re collecting trash, fighting crime or filling potholes, you’ve got to be physically present.”