The Covington City Commission and city staff considered the possibility of diverting American Rescue Plan Act, or ARPA, money into the city’s general fund to close a shortfall caused by dwindling payroll tax revenue at a budget meeting on June 3.
No final decisions were made at the meeting, and the discussions were all preliminary. The city commission will explore the possibility of using the funds more in-depth at upcoming commission meetings.
Also referred to as COVID emergency funds, ARPA money was disbursed by the federal government to help municipalities recover from the economic downturn that followed the onset of the COVID-19 pandemic.
Covington has 32 distinct budget line items for ARPA funds, and the money has been used to invest in everything from small business expansion to affordable housing to IT infrastructure. Any changes used to meet the budget shortfall would not affect any ARPA projects currently in progress, but they could potentially “zero-out” any future projects, as Mayor Joe Meyer put it.
Covington’s general fund expenditures have exceeded revenues since the beginning of the fiscal year. 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.
A spokesperson from Fidelity confirmed with LINK nky that the company had changed its employee tax withholding policies at the end of the last calendar year to withhold payroll taxes based on where employees are scheduled to work rather than the location of their office. In other words, if a person is working from home outside of the city, the company withholds taxes for the jurisdiction of the employee’s residence. Today, Fidelity employees are only required to work in the local office one week per month.
City Finance Director Steve Webb laid out several scenarios for how the city could deal with the shortfall.
“So in this year’s budget process, we have a very small sample size for a very large change,” Webb said before laying out the different responses the city could take.
“So the worst case scenario would be the payroll tax does not recover,” Webb said. “In that scenario, I expect we’ll need about $7 million of our revenue replacement to back fill fiscal [year] ’23.”
In this scenario the city would also need to draw upon about $10 million in ARPA funds for fiscal year 2024, leaving about $7 million in ARPA funds for fiscal year 2025.
On the other hand, Webb said, the best case scenario would be if everyone returns to the office or if there is some change at the state-level that would enable some other revenue source to bridge the gap.
“We could amend our budget to bring back some of the projects that were previously planned,” Webb said. “And/or we could fund those same projects through the general fund if the revenue replacement transfer is done beforehand.”
Webb went on to say that based on conversations he’d had with Fidelity representatives, the company wanted their employees in the office but were afraid to implement the change due to the labor market.
“They [Fidelity] say we need you [the employees] back in the office, and they say we’re not doing it; we’ll go somewhere else,” Webb said, recounting a hypothetical conversation between Fidelity management and employees.
Many in the room, including the mayor and several commission members, weren’t pleased by the turn events, but it wasn’t all doom and gloom.
“Things are trending very well for the city of Covington… ,” said City Manager Ken Smith. “This is just one anomaly that can change tomorrow.”
Webb and Smith both discussed ongoing business development in the city, such as development parcels on the former IRS site, which could make up for the shortfall in the long-term.
“I think this is going to be somewhat of a living document,” Smith said, referring both to the revenue projections and the city budget generally.
The city needs to have a working version of the next year’s fiscal budget by the end of the month. More budget discussions will take place beginning at the next commission caucus meeting this Tuesday, June 6 at 7 p.m. at Covington City Hall on Pike Street.