Eugene developing solutions to address budget gap

Balancing budgets amid shifts in revenues and expenses are a normal part of running a city, but Eugene, like many other Oregon municipalities, is facing continuing budgetary challenges.

Last June, the City approved a two-year budget (2023‐2025) to fund a wide range of city services and programs. A key component of the budget is the City's General Fund, which accounts for the funds not legally required to be held in a separate fund. This funding is the most flexible and can be used for any service.

The City had been forecasting a budget gap in the General Fund and took action as part of the 2023-2025 budget process to implement almost $25 million in budget gap strategies resulting in a General Fund operating budget of $362.7 million for the two-year period. Even with significant adjustments to the fund, a $8.3 million revenue placeholder is in the second year of the budget cycle, as expenditures continue to outpace revenues.

Not keeping pace

The City's General Fund is in a long-term state of structural imbalance where expenditures are growing at a faster rate than revenues.

In Eugene, property taxes make up 71% of General Fund revenues which are not restricted and can be used to pay for any service. The General Fund currently pays for services such as police, fire, library, parks, recreation, planning, community development, facility maintenance and municipal court. However, property tax revenue growth is limited due to the Oregon property tax system.

Oregon Measures 5 and 50, both passed by voters in the 1990s, imposed limitations on property taxes that have led to slower revenue growth for municipalities across the state, contributing to revenues lagging behind the cost of providing critical services to a growing Eugene population. The current property tax system is governed by the Oregon Constitution and state statutes, with minimal local control for Eugene voters to modify property tax levies to fund desired services.

From 2019 to 2023, Eugene's median home price rose from $306,500 to $465,000, seeing year-over-year growth of up to 18%. However, over those same five years, the City's General Fund saw average annual average revenue growth of only 4% in property taxes, primarily because the assessed value for existing properties is capped at a maximum growth rate of 3% per year.

During this same period, other General Fund revenue sources have remained flat or declined, in part due to the effects of the pandemic. Overall, the City's General Fund revenue - excluding one-time state and federal funds - increased from 2019-23 by an annual average of just 2.6%.

General Fund expenses during that same time saw an annual increase of 3%, despite efforts to cut costs and increase efficiencies. When one-time state and federal fund expenditures are included, General Fund expenses during this time increased 5.1% per year. U.S. inflation rates during this same period ranged from a low of 1.6% to 7.2% contributing to upward cost pressures, as well as population growth as more residents move to Eugene. Furthermore, a look at citywide 10-year trends shows property taxes as a percentage of revenue has declined by nearly 7% while inflation-adjusted operating expenses have increased 28.6%.

Even though Eugene has continuously implemented budget gap strategies ($60 million in General Fund reductions, efficiencies, and service realignments since 2010), other sources haven't been identified to fill the funding gap.

Evolving service needs

In addition to the structural gap in the General Fund, other needs for additional funding are primarily driven by evolving service needs and rebuilding General Fund reserves that the City relied on during the pandemic.

The City has been funding urgent services, such as the homeless crisis and climate recovery, and making downtown investments using one-time state and federal funding. The City may not be able to continue funding some of these services at current levels once those funds are depleted.

It's also critical that the City rebuild its General Fund savings account for emergency use. The Reserve for Revenue Shortfall (RRSF) is a key measure of the City's fiscal health and allows the City to weather economic downturns with minimal service disruptions. The City relied on these reserve funds during the pandemic and is strategically working to rebuild reserve levels. Without sufficient reserves, the City would need to impose emergency service reductions to address unplanned, emergent needs in the future.

Budget priorities

Knowing the forecast for the 2023-2025 budget projected a gap in the General Fund, Eugene City Manager Sarah Medary introduced new approaches to the planning process, including strategic planning efforts, changing to a biennial budget, and a priority-based budgeting approach. In 2022, a community survey was conducted, and the City Council developed a new strategic plan. The change to a biennial budget provides a longer-term planning horizon, increases staff efficiency, and provides time between budget processes to be strategic with investments while responding to Council and community priorities. The initial phase of priority-based budgeting provided the foundation to develop a program view of important investments for the community.

As cost pressures continue to grow, the $8.3 million annual placeholder for new revenues set in the second year of the biennium as part of the City's six-year budget forecasting continues to increase and is currently estimated at over $13.9 million per year. These revenues are needed to fund the current service system and begin to stabilize reserves; however, the long-term structural gap will remain in the outyears of the forecast due to the structural imbalance between revenue and expenditure growth over time.

As the City Manager considers future revenue solutions, she has convened a group of community members, Budget Committee members, and City Councilors as revenue advisors to provide feedback on potential revenue options the City could pursue to provide funding for important community services.

City staff, meanwhile, continue to work on ways to address revenue shortfalls and consider alternative options as it is expected that more budget adjustments are still ahead.

For more City updates visit our City Newsroom webpage.

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