Discussions between Covington city staff and elected leaders in January indicated the city needs to find short-term solutions to the problem of declining tax revenue.
“Staff expect the [Covington Central Riverfront development] site to fully replace this revenue once it’s fully developed, but we need to work through the next few years to close this gap,” said Covington Finance Director Steve Webb at a special budget meeting on Jan. 6.
The effects of tax revenue decline have been known since at least last year, when the city confronted work-from-home arrangements among its larger employers, namely Fidelity, which employs about 5,500 people out of its Covington office complex. As a result of work-from-home arrangements, Fidelity began remitting payroll taxes to the jurisdiction where the employees were completing their work rather than the offices’ location. This meant that if an employee worked from home outside of Covington, they were getting taxed in their home cities, even though they were officially employed out of the Covington complex. An October letter Fidelity sent to the city indicated that the company had no plans to require that people permanently return to the office.
This led to a deficit in the city’s general fund, from which the city pulls much of its operating budget. Other city funds, less reliant on tax revenue, were unaffected.
Webb presented the numbers to the commissioners and city staff members on Jan. 6 and then again to the public at the commission meeting on Jan. 23. The finance department’s analysis showed that payroll tax revenue had declined by about $5 million from the end of fiscal year 2022 to the end of fiscal year 2023, which concluded on June 30, 2023.
Covington and other cities are reliant upon property taxes, payroll taxes and taxes on insurance premiums for revenue. The state levies sales taxes at 6%, but counties and cities are constrained in their authority to impose additional sales taxes. The state also imposes a flat income tax on residents of 5%.
Covington Mayor Joe Meyer spoke before the Kentucky House Budget Review Subcommittee in September. Compared to other states, Meyer argued, this tax structure leaves municipalities limited in how they can collect revenue. He appealed to the committee to make state-level changes allowing cities like Covington to bring in additional money.
In the meantime, the city has pulled on its American Rescue Plan Act, or ARPA, funding as a stopgap. ARPA funds were federal funds disbursed to cities to help them continue operating during the economic downturn of the pandemic. There is currently $11.6 million in ARPA funding allocated to the city’s general fund for fiscal year 2024, Webb said. If the city uses all of that funding this fiscal year, it will have about $5.5 million left over for fiscal year 2025. Since the American Rescue Plan Act was a one-time program, the money won’t be replenished once it’s spent.
“For planning purposes, under those assumptions the city needs to close about $6 million of revenue expense gap in each of the next two fiscal years,” Webb said on Jan. 23.
Several options for taking the pressure off of the general fund were discussed. These included ordinance changes to prevent transfers out of the general fund, restructuring of the city’s debt, cashing out some of the city’s investment portfolio, adjustments to the solid waste fee, changes to city employee benefit structures, overtime reductions and temporarily under-funding the city’s legacy pensions, among other measures.
City Manager Ken Smith also stated on Jan. 23 that the city expected to sell some property in the next few years, which could also provide some revenue in the short-term, “but the [Central Riverfront] development is a very long-term project,” Smith said. He couldn’t give an exact timeline for when those sales might occur.
Commissioner Ron Washington asked on Jan. 23 about the potential for “right-sizing,” or reducing the size of staff and operations, in different departments in the city.
“Specifically, which departments would you right size and to what degree?” Washington asked.
Webb said the department would take a “data-driven approach” and analyze the recurring expenses and revenues in different departments before it could make any recommendations. There are benchmarks, Webb said, within each department by which the city can judge what to sacrifice. One example Webb gave was for the police: The benchmark there was how many officers were needed to protect a certain number of residents. By analyzing these different benchmarks, the city could determine what could be cut and what could be kept.
“Do we anticipate that the payroll tax that we’re able to collect from the IRS site will be able to exceed the current gap over the course of that five-year period?” asked Commissioner Tim Downing on Jan. 23.
Webb replied that that still needed to be determined.
No official action was taken at either the Jan. 6 or the Jan. 23 meetings. City staff must present budget recommendations for the next fiscal year to the commission by the beginning of May, but the mayor insisted that considerations begin as soon as February so that the commission could make well-informed decisions by the time May rolled around.
“The first week of February or so, we need top line on some of these revenue and some of these expenses,” Meyer said. “We need some insight into the type of cuts that have to be made in order to achieve these expenditure goals…, so by the time it comes to us at the end of April, there are no surprises.”
“We can really not overstate the seriousness of this situation, which was created by circumstances completely outside of the control of the city government,” Meyer concluded on Jan. 23.
The next meeting of the Covington City Commission will take place on Tuesday, Feb. 6 at 6 p.m. at Covington City Hall on Pike Street.