Why Knox County Mayor Glenn Jacobs plans furloughs instead of using the millions on hand
Knox County announced Thursday that 366 county employees will be furloughed for eight weeks beginning May 8, saving the county an estimated $1.73 million in payroll as sales tax revenue has taken a hit during the coronavirus pandemic.
In late March, as the scope of COVID-19 and its severe economic impact on local government finances was becoming clear, the city and county’s top finance minds put their heads together to come up with a formula projecting what it would do to their respective governments.
What Boyce Evans, the city’s interim finance director, and Chris Caldwell, the county’s finance director, calculated meant millions of dollars in lost sales tax revenue compared with last year. Official sales tax figures run two months behind so the county will not receive its March sales tax figures until mid-May.
County projections anticipate a decline of $7 to $18 million by the end of the fiscal year in June, depending on the model used, Caldwell said Monday. Included in the loss is an additional $4.6 million in tax revenue the county had projected, before the pandemic, it would take in this year.
Jacobs could have opted not to implement the furloughs since the county has nearly $200 million in its “overnight account” — the amount of cash on hand that ebbs and flows daily — but, Caldwell said, the amount will evaporate quickly.
Often, the county’s rainy-day fund, the county’s general fund balance (roughly $68 million, not including what is appropriated to Knox County Schools), is used to detail and budget county finances at a certain point in the fiscal year, but the cash on hand figure is a more accurate picture of where the county sits.
During Tuesday's City Council meeting, Mayor Indya Kincannon said the city anticipates an $8 to 9 million drop in sales tax spanning the last months of the current fiscal year that ends June 30 and into next year's budget. The city is not planning furloughs or layoffs at this time, she said.
“Considering we’re in the middle of a global pandemic, we’re in strong financial shape and well-positioned to withstand this financial hit," she said.
The sales tax projections, among others, led Knox County Mayor Glenn Jacobs to announce furloughs for county employees last week, though the details about who would be furloughed still needed to be worked out. The decision to delicately handle county finances during the crisis stands out in contrast to the weeks of the county dragging its feet with its COVID-19 response and Jacobs' bluster about personal liberties during the crisis.
Last week, Jacobs said anything the county can do to help offset the revenue loss should be done.
"At the same time, because of the (federal government stimulus package) CARES Act and what the state is doing, we can do that and still, to the extent possible, ensure that our employees are getting taken care of as well," he said.
The furloughs do not have to be approved by the County Commission.
Kincannon said she would still present her first "no-frills" city budget in the State of the City address Friday, but the process won't be the same. Instead of gathering with hundreds of city employees and stakeholders, Kincannon will release a short video and budget details sometime Friday. The city has not yet announced a time for the post.
How sales tax collection works
Sales tax collection in Knox County is divided between the city and county, which both direct 72% of all of the dollars collected to the Knox County School System, and the town of Farragut, which directs 50% to schools. Roughly 70% of all sales tax collection in the county happens within the city limits, but all sales tax dollars — regardless of where they are collected in the county — are funneled from the state to the county which doles them out appropriately.
Using the most recent county figures, here is how the sales tax calculations are configured.
February 2020 sales tax figures
- Whole county: $17.2 million
- Schools’ portion: $12 million
- City’s portion: $3.3 million
- County’s portion: $1.2 million
- Farragut’s portion: $485,000
What about the $200 million in the bank?
The county's cash reserves will continue to decline as bills are paid throughout the summer, including a $40 million debt payment scheduled for June 1 and a loss of roughly $46 million in Basic Education Planning funding for July and August when the education funding isn't paid out, Caldwell said.
Separately, he said, the county continues to pay the roughly $500 million budget for the school system, which amounts to over $1.3 million a day.
"Those expenses don't stop," Caldwell said. "Revenue doesn't come in, but expenses continue."
The goal, he said, was to budget with dwindling reserves in mind. The furlough savings, although a relatively small amount compared to the total cash on hand amount, will help.
Last year the county’s cash on hand low point came — as it typically does — in September (before county property taxes flow in) when the county was down to roughly $30 million on hand, Caldwell said.
If you place this year's projected struggles on top of last year's numbers and subtract the $7 to 18 million in sales tax revenue, cash on hand takes a hit. This doesn’t account for the millions in other presumptive losses on coming from the county’s hotel/motel tax, property taxes and court fees, he said.
“So, point being, why did we do the furlough?” Caldwell asked. “We’re doing the furloughs with an eye on revenue four months into the future, five months into the future.”
The county could get temporary relief and request a low interest Tax Anticipation Note from a bank, but Caldwell said it would add to county debt payments and could potentially damage its AA+ bond rating.
The county could impose a temporary property tax hike, something that’s at least been on some commissioners’ minds in recent years since the county hasn’t had a property tax increase in 20 years, but doing so during a pandemic would be a nonstarter, plus Jacobs — like his predecessor, Tim Burchett — has promised no tax increases while he’s mayor.
On the other hand, nearly three weeks ago Nashville Mayor John Cooper announced the state's capital would have to "sharply" increase in the city's property tax rate. The city had already been in dire economic constraints long before a tornado ripped through portions of town and COVID-19 hit.
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