City revenues outpaced projections by 29% from FY 2019-20 to 2021-22 despite shutdowns of businesses, events and tourism
VISALIA – The city of Visalia’s sales tax revenue outpaced projections by 29% during the pandemic thanks to a resilient local economy and conservative forecasting by its finance department.
The local economy’s strong performance has surprised city finance staff who have continually underestimated the city’s financial forecast for the last three years.
A recent staff report detailed the trend over the last two years stating “the sales tax projection is conservative considering the previous three fiscal years (19/20 – 21/22) had a total increase of 29% which was a higher-than-normal growth.” That’s a huge boon to the city as sales tax and property tax represent 79% of the city’s budget. The upswing in revenues wasn’t limited to sales tax as two other important tax revenue streams for the city – property tax and bed or hotel tax monies – were both higher.
City staff’s underestimation of tax revenue began in 2018 when they projected sales tax to increase by just 1% in FY 2018-19 to $31.3 million, and 1% in FY 2019-20 to $31.6 million. Sales tax came in $2 million over what they budgeted at $32.4 million in 2018-19 and $34.2 million in 2019-20. The city adopts a two-year budget every other year.
In the midst of the pandemic, city staff understandably advised caution forecasting just a 1% increase in FY 2020-21 and likewise in FY 2021-22. Using their growth assumptions, sales tax was projected to fall to $30.0 million in FY 2020-21 and $30.3 million in FY 2021-22.
Instead, sales tax revenues surged to $45.7 million in 2021-22 as Visalians, and the rest of America, went on a shopping spree, the federal government flooded the market with cash for individuals and business, while the industrial park boomed with projects like Amazon to help bolster sales tax revenue to $15 million over projections. Visalia collects a portion when the Amazon fulfillment center here ships products.
Staff has projected the current 2-year budget cycle ending this June will see sales tax increase 2% to $43.6 million, and another 2% in FY 2023-24 to $44.4 million.
“This projection is conservative considering the previous and current fiscal years have experienced higher than normal growth,” staff reasoned.
Budget analysts across the state and nation forecasted the pandemic shutdown of events, tourism and services was going to stifle growth, but Visalians, and American consumers overall, proved them wrong.
“Last fiscal year, sales tax grew by 12% and is projected to be the same this fiscal year,” the city’s April 2023 finance report stated. The 23/24 “adopted budget surplus for this fiscal year was $6.9 million and is now projected to be $15.5 million,” the council report stated, showing clearly sales are better than they thought a year ago, yet again.
Despite the underestimations, city staff continued to argue that now is not he time buy-into the pattern of upward growth and continue with conservative estimates with fears of recession, high inflation, job layoffs and a potential downturn in the economy likely to take a toll on revenues. The tax base has grown so fast at such a high level, they argue revenues are ripe for a fall.
“The sales tax projection is conservative considering the previous three fiscal years (19/20 – 21/22) had a total increase of 29% which was a higher-than-normal growth,” the report stated. “This higher-than-normal growth has also inflated the sales tax base used to prepare projections for this fiscal year and next year (23/24).”
Inflation is primary reason for caution, the staff report stated, as excessive consumer spending is the only reason a recession has not begun and it won’t last forever.
“[E]conomists predict this extra spending will have to slow down as the cost of living continues to rise and disposable income becomes less,” the report stated.
That’s why staff is projecting tax revenue will shrink by $2 million in fiscal years 2023-24 and 2024-25 and decline again in 2025-26 despite a 40-year trend of a 5% yearly increases and staff missing the estimate mark over the past five years.
Even with conservative projections, staff predicts a budget surplus of $11 million by June 2024 assuming zero vacancies for full time and hourly employees. The city annually sees at least $1 million in savings from vacant positions, which is not in the projection, making the surplus a more likely $12 million. Most of that will be earmarked for the new civic center fund which is now at more than $60 million due to conservative estimates since 2018.
The bottom line is the city has benefitted from conservative estimates and Visalia’s economy is stronger than anyone expected. While car sales and industrial development are expected to continue and commercial corridors on Mooney and Dinuba boulevards are full with stores, housing permits are coming in much lower than expected. So far this year, Visalia is seeing a decline by about two thirds in both the number of new homes permitted and the value of all permits. Multi-family permits are also down through March in Visalia after a big run up in 2022. High interest rates and tighter bank financing may be slowing the pace of all building activity in town this spring. Existing homes sales are also way down.
In other words, the city might as well save money now as good times never last forever. During the Great Recession, sales tax decreased 26% over three years (2008 – 2010).