Understanding Covington’s general fund shortfall: Could working from home be a factor?

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The City of Covington has attributed its recent budget shortfalls to rising work-from-home policies.

Covington’s Finance Director Steve Webb disclosed during a presentation at a city commission meeting on May 23 that the city’s general fund’s expenditures had exceeded its revenue for the third quarter of the 2023 fiscal year, which ends on June 30.

The city’s finance department attributed the budget shortfall to declining payroll tax revenues following the rise of work-from-home policies at the city’s large employers. Specifically, they cited Fidelity, which employs nearly 5,500 people at its office in Covington.

Covington’s general fund expenditures and revenue as of March 31, 2023. Data & chart: provided | The City of Covington

“We fall off the pace due to the implications of remote work situation with our largest employers,” said Webb at last week’s meeting. “As remote work has become normalized, these employers are now withholding and remitting portions of the occupational license tax to the jurisdictions where their employees are physically working.”

A breakdown of revenue sources for Covington’s general fund. Note the difference in payroll tax collections between FY 2022 and FY 2023. Highlight added. Data & table: provided | The City of Covington

This shortfall did not occur in other sections of the city’s budget, most of which were funds used for special projects and programs. Much of the money for those other funds come from grants and other monetary sources unrelated to local tax collection.

Payroll tax has historically been a large chunk of Covington’s revenue and has accounted for 45% of the general fund’s revenue for the 2023 fiscal year thus far.

For the 2022 fiscal year ending on June 30, 2022, payroll taxes and similar licensing fees accounted for about two-thirds of the fund’s revenue.

This is not the first time the general fund has experienced a deficit. Expenditures have exceeded revenues for the two preceding quarters of the fiscal year.

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The fund was also in deficit at the end of the last fiscal year and the end of the 2017 fiscal year, according to annual comprehensive financial reports from the city.

The largest expense for the general fund since 2017 has been public safety costs, including salaries and benefits for firefighters and police, and has consistently taken up about 60% of the general fund’s expenditures.

Final counts for revenues and expenditures of the city’s general fund from fiscal year 2017 to fiscal year 2022. Data: provided | City of Covington. Chart by Nathan Granger
Covington general fund revenues vs. expenditures for the first three quarters of fiscal year 2023. Data: provided | The City of Covington. Chart by Nathan Granger
Public safety expenditures for the city’s general fund from fiscal year 2017 to fiscal year 2022. Data: provided | City of Covington. Chart by Nathan Granger

Webb did not mention work-from-home policies in his presentation to the board in February.

The comprehensive report for the 2022 fiscal year suggested that payroll tax collections were up.

“Revenue from the payroll tax was far ahead of schedule as of October,” said the finance department in an email. “In fact, it was running on a pace to finish the fiscal year some $2.5 million ahead of projections.”

By the end of the calendar year, the email went on to say, growth had tapered off. By January, the city had noticed that payroll tax receipts had “dropped below the budgeted pace.”

Like many businesses, Fidelity changed its labor policies at the onset of the COVID-19 pandemic to allow employees to work from home.

In spring 2020, management sent all but essential workers home to abide by shelter-in-place orders. Sources from within Fidelity indicate that the company had about 3,000 Covington employees at that time.

Workers were allowed to return to the office voluntarily in 2022. Today employees operate on a hybrid work arrangement with five required in-office days per month. Otherwise, employees are free to work from home, an arrangement many employees still take advantage of, several employees said.

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A spokesperson from Fidelity confirmed that the company changed its tax withholding policy late last year to collect taxes from the locality where employees are scheduled to work.

“Payroll taxes are deducted based on an associate’s scheduled location of work and designated for that geographic location accordingly,” the Fidelity spokesperson said. “As working trends continue to evolve, we will continue to assess this situation to ensure we and our associates are meeting our tax obligations accurately.”

St. Elizabeth, another large regional employer, spoke with LINK nky about their work arrangements and confirmed a hybrid work arrangement for many of its employees as well. St. Elizabeth’s Covington employee count is considerably smaller than Fidelity’s; however, employing only about 150 people in Covington. Other large employers in the city did not respond to calls to comment.

The City Commission will take up the issue of next year’s budget at a special meeting this Saturday, June 3, from 9 a.m. to 11 a.m. at Covington City Hall on Pike Street. The meeting is open to the public.

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