Miami Beach's FY 2021 Budget Challenge: “Double whammy” of low growth in property values and impact of COVID-19

Susan Askew
Susan Askew

Miami Beach's FY 2021 Budget Challenge: “Double whammy” of low growth in property values and impact of COVID-19:

City’s CFO sounds alarm for next two to three years

  • Miami Beach has to plug a $6 million "permanent" gap and a "temporary" $32 million hole caused by COVID-19 in its FY 2021 budget.
     
  • City CFO John Woodruff said he was concerned that growth in existing property values is "dangerously close to zero" and he anticipated "2022 could be just as bad or worse..."
     
  • The City is likely to use $20 million in reserves – $5 million to cover the shortfall in this year's budget due to the pandemic and $15 million next year.
     
  • Woodruff urged Commissioners to look at diversifying the City's revenue base to not be as dependent on the volatile resort tax revenue stream generated by the tourism and hospitality industry.
 

Miami Beach is dealing with “a double whammy” of low growth in property values and the impact of COVID-19, according to the City’s CFO. It was John Woodruff’s task to deliver the bad news to Mayor Dan Gelber and City Commissioners this week that the City will have to fill a “permanent” $6 million gap in the General Fund budget for the coming fiscal year and a “temporary” hole of $32 million caused by the coronavirus closures. Woodruff also sounded the alarm about the next two to three years.

Property taxes, which comprise 54% of General Fund revenue, are based on property values which this year are anticipated to grow 3.5%. Woodruff said maintaining the budget at current levels when taking inflation into account usually requires values to increase “4-5 percent.”

 


Looking at the trends, Woodruff said, “A normal person would look at this and think ‘Hey, we’re at 3.5%. That’s more than last year’s 3.1%. Maybe we bottomed out and now we’re starting to pull out of this.’ I want to make sure that everyone here is super clear that I don’t believe that that’s the case.” 

The reason, he said, is that this year’s growth is fueled by a large amount of new construction coming online, something that is not expected to be the case for the next few years. Approximately $1.2 billion in properties hit the tax rolls this year. In a normal year, he noted, new construction coming online is about $200-300 million. The number “reinforces how important new development is to the City, at least financially, but it’s skewing the picture,” Woodruff said.


 

 

 


Pointing to the existing property value trend, he warned, “We’re dangerously close to zero. We’re at 0.5 percent and it doesn’t appear to me that we have bottomed out yet. What this is to me is a red flag about the following year.”

“We’re focused right now on balancing next year’s 2021 budget but this concerns me given that 2022 could be just as bad or worse if we haven’t hit bottom yet,” he added.

The City has engaged a consultant to review the last ten years of property values to understand what’s happening. “It’s very important that we understand what’s driving this [decline in values],” he said.

Gelber pointed out the overall values show that the “coastal communities seem to be going negative. We look like the only one that is even positive, even though it was just barely.” He asked Woodruff if he thinks Miami Beach is “going to get the same negative slope.”

“I’m afraid that could be the case,” Woodruff answered. “I’m hoping it’s not.” 

“We know that we’re doing things the other folks aren’t [with resiliency efforts], so hopefully that’s something of an advantage but I think we need to know what those things are to make sure that we’re aware of them, especially for policy making purposes,” he added.

Gelber observed, “It looked like the further you go inland, the higher the increases” in property value growth.

“That’s the kind of dynamic we really want to understand,” Woodruff responded. “It could be as simple as there’s too much inventory of condominiums on the water, higher-end condominiums, but I wouldn’t want to assume that. I think we would all be more comfortable if we understood a little clearer what that dynamic really is.” The analysis will be ready for the Commission at its next budget workshop on July 17.

Woodruff cautioned about the potential for lower growth next year. “What would happen if next year or the following year we didn’t have that impact from new construction?” he asked. “What if we were at 1.5% growth” instead of 3.5? With each percentage point equaling $2 million in revenue, he said this year’s “$6 million gap would grow by $4 million.”

“This time next year we could be facing a $10 million gap in our budget, just to give you some perspective,” Woodruff said. “So, I just want to make sure everybody understands that we are having a very challenging fiscal condition. I certainly would not recommend adding any additional costs to the budget, if at all possible.”

Commission Finance and Economic Resiliency Committee Chair Ricky Arriola said, “I’m a little concerned there’s not much development in the pipeline.” He agreed the next few years could be difficult. “We need to brace ourselves for that.”

“The thing that I’m concerned about now is existing property values, particularly in the commercial areas as we see more vacancies” Arriola said. With businesses not reopening, he said, "Those properties are going to reset. When you don’t have tenants paying rent, all of those property owners are going to go to the property appraiser and, justifiably, argue that their properties are not worth what they were in 2018-2019 so they’re going to get reset and that’s going to have an impact on us so I think we need to start not just looking at 2021 but subsequent years.”

In terms of revenue variances, particularly hard hit is the resort tax which includes hotel and food and beverage taxes. “We think the new normal [is that] resort taxes will top out at about 90% from where we are today for at least two or three years," Woodruff told Commissioners.

Representatives of the hospitality and tourism industry have told him “The leisure market will likely rebound faster than expected, however the [hotel] rates that they charge will likely be lower the next 3-6 months.” 

They are anticipating high occupancy for the Fourth of July, he said. “Demand during the summer should be fairly good due to targeted ad campaigns to folks within driving distance.” He also noted, “Miami Beach is seen as a safer destination than other domestic destinations because many of our activities are outdoors.”

“The leisure market looks fairly rosy but not at the rates that we’ve seen before,” he said. Those expectations are baked into the revenue projections for the resort tax which are estimated at the beginning of the fiscal year to be at about 50 percent and not getting to 90% of normal until the end of the year. “That’s about a 25% reduction in revenue,” Woodruff explained. “We’re projecting to receive 75% of what we normally would have gotten compared to a year like 2019.” The City’s fiscal year runs from October 1 to September 30.

With regard to conventions and large corporate meetings, which at this point are not permitted, he said, “It looks like it will take longer to rebound for those events that book far in advance.” The industry professionals “feel it’s critical” if it’s possible “to host Art Basel and the National Championship.” In addition to the December art fair which is the anchor to Art Week, Hard Rock Stadium in Miami Gardens is set to host the College Football Playoff National Championship in January.

“If we aren’t able to host either one, they really feel like that’s going… to be a problem,” Woodruff said. “Anything we can do to ensure success around Art Basel and the National Championship is really key moving forward.”

The bottom line: $6 million in permanent cuts to address the slow growth and $32 million to be made up on a temporary basis until the tourism industry rebounds.

 


Woodruff proposed dipping into the City's reserve fund for $15 million. “I’m not sure we can come up with $32 million in cuts – at least not easily – and still preserve most of our service levels,” he said. “I do think if we cut that number approximately in half and took the approach of using approximately $15 million of General Fund reserves and then the rest of it, about $15-16 million, I think we could come up with some temporary type reductions to fit that.”

The City already plans to tap about $5 million to make up this year’s budget shortfall due to the COVID-19 closures. In April, Woodruff warned the City was losing $3.6 million per week due to the closures. A large portion of the gap was closed through furloughs and other budget cuts.  

The City came into the year with a healthy reserve fund after setting a goal of increasing the fund to three months of General Fund expenses. With $80 million in reserves, Woodruff said using $5 million this year and $15 million in FY 2021 would leave $60 million, “still slightly above” two-months of expenses which is the “mininmum best practice amount.”

Commissioner Micky Steinberg said she agrees this is “what the reserves are there for” but she cautioned about using too much of the reserve fund. “We’re still going through hurricane season right now,” she said. “We need to be mindful of that and then we need to understand that moving forward in the next fiscal year when we’re dealing with these budget crises that we’re not going to maybe be able to replenish our reserves moving forward and how does that leave us for the next fiscal year?”

“I think you have a good handle on it, John,” she told Woodruff, “but I just want to put it on the record that we need to really be careful how much of that reserve we use and how we plan on looking forward when we still don’t know – we don’t have a crystal ball – we still don’t know what to expect.”

Commissioner Mark Samuelian said, “Just to see some of these numbers is really driving the point home about how dependent we are” on tourism and hospitality.

Woodruff commented, “As we look ahead and plan for the future, if there’s anything we can do to diversify our revenue base, that would be a great idea. At the same time, it’s not an easy proposition but I think it’s the kind of thing we probably should look at over the next two or three years.”

Woodruff said he’d like to look at ways to use City-owned assets for long-term recurring revenue streams. He also mentioned the potential of selling the naming rights to the Convention Center.

“Sometimes we talk about these things and there’s discomfort around some of them, but I think it’s probably well worth some fresh thoughts about some of those kinds of options,” he said. “We’re looking at probably a minimum of two years, probably more like two to four years of tight times.” He suggested the City discuss how to “position ourselves for the future. What are the kinds of things we can do as we have opportunities?”

City Manager Jimmy Morales added the City should also look at how it uses its revenue sources, in particular the “two most volatile funding sources” of resort taxes and parking revenue. “We need to probably be more careful, not making long-term recurring commitments with those dollars,” he said. Hurricanes, 9/11, Zika, and now COVID have impacted tourism and the resort tax which is used to fund services like the trolley and Park Ranger program. Morales suggested “some portion of those volatile revenues" should be used for one-time expenses or put into reserves in the future.

“How do we make sure that we don’t lock ourselves into long term commitments with volatile money?” he asked. Figuring that out is part of the City’s long-term financial resiliency plan.
 
The City does anticipate being reimbursed for some of it’s COVID-related expenses which, right now, total about $3.4 million. At a 75% reimbursement rate from FEMA, the City would be eligible for about $2.5 million but, Woodruff noted, that can take three to four years. As an example, he said, three years later the City has only received $2 million of the $11 million it anticipates collecting in reimbursements for Hurricane Irma expenses.

The next meeting to discuss proposals for balancing the budget will be July 17. The budget is expected to be finalized on July 24 with public hearings in the fall. 


 

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