Budget deficits will be the norm for the city of Roanoke unless significant changes are made as revenue growth slows after a post-pandemic bump, according to a consultant’s report.

The city over the past decade maintained balanced budgets, even with significant investment in employee pay and substantial growth in school funding – and its bond rating is stable, reads the report by the PFM Group. 

However, “the city’s long-term health faces significant risks beyond the assumptions included in this moderately conservative outlook,” the report continues. That includes projections that the city will not meet some requirements – such as debt financing ratios – as soon as 2026-27, according to the report.

The City Council faced difficulties in approving the current fiscal year budget, freezing school spending at last year’s level and increasing the meals tax by a percentage point to generate money that will pay for some of a long list of needs. The forecast is for a downturn in revenue based on sales tax and real estate analysis in the coming years, according to the PFM report.

The council gathered Saturday at city hall for a budget retreat to hear a presentation by PFM and city budget managers. The city contracted with PFM for a four-month period from July through October and agreed to pay the firm up to $200,000, according to a contract provided by the city to The Roanoke Rambler.

PFM was hired by the city to do an independent assessment of its finances heading into the next budget cycle and beyond because, City Manager Valmarie Turner said, it’s imperative that the council and city administration understand what may be coming.

“Financial resources will not be sufficient right now to address our priorities,” she said, later adding “we need to make incremental changes every single year.” 

Among selected peer jurisdictions in the PFM report — including Lynchburg, Roanoke County, Hampton, Newport News and Portsmouth — the city of Roanoke has the second-highest real estate tax rate but a weaker per capita tax base. That limits Roanoke’s ability to raise its real estate rate while remaining competitive within the state, the report states.

Tracking the next five years, the consultant’s report notes that the city’s pension and health insurance funds are already underfinanced. That comes at a time when the city’s contribution to schools is almost double what the state determines as an adequate contribution, based on Roanoke’s population and socioeconomics, according to the report.

The city’s school contribution grew from $76.4 million in 2015 to $106.9 million this year, according to the PFM report.

Meanwhile, its employee pension plan does not have enough money to pay out its future obligations — even with an increased contribution rate, according to the PFM report. The pension plan is funded at 67 percent, well below the 83.1 percent national median, according to the report.

The city’s risk management fund — used to cover health insurance, workers’ compensation and other claims — is below its policy minimums. In fiscal year 2024, there was $10 million in cash in the fund, but $14 million in claims, according to the report. The city, to maintain the fund’s liquidity, is making annual transfers to subsidize it — and that will have to continue, according to the report. 

Roanoke is also subsidizing other functions deemed by definition to be self-supporting, such as the civic center, by millions of dollars annually. That’s one of the reasons the city announced that it is pursuing a casino to reshape the civic center, an idea that’s been panned by state legislators in the region.

For Roanoke taxpayers, nonprofits, and parents and students, the forecast brings questions: Will there be tax increases? Will the city have to cut services? And, a question that’s hung over the council for months: Will it decide to reduce the city’s school funding?

Here’s a closer look at three issues that were part of Saturday’s session:

Taxes

The council approved the 1 percentage point meals tax increase this year to generate $4 million in additional money city officials said is needed to pay for overtime and long-ignored maintenance projects such as $4 million alone in back-logged elevator repairs.

However, in approving the meals tax increase, the council also agreed that it would sunset in two years, a concession to opposition which included restaurant owners and others tied to Roanoke’s food scene.

During Saturday’s session, PFM representatives said the loss of that revenue could create problems because it will come at a time when the city will likely be more cash strapped.

Meanwhile, city councils current and past stayed away from raising the city’s primary money driver – the real estate tax, which currently provides more than a third of annual revenue. That’s mainly because of annual assessments that increase property values and result in higher taxes paid, even with the rate unchanged. The city council could lower the rate to offset all or part of the annual increases, but the rate remains the same as it was a decade ago.

The city’s personal property rate – also known as the car tax – hasn’t changed since 1986. It remains to be seen if Democrats, who will now control the General Assembly and the governor’s office, will finally do what politicians have discussed for years and do away with the tax – something that was discussed Saturday.

If that were to happen, Roanoke could lose annual revenue of as much as $38 million.

Mayor Joe Cobb said the difficulty for the council is reassessing what the city can support when there are risks such as the projected slowing of assessed property value levels.

“It’s a lot to keep in perspective, but I think this presentation really is an excellent summary,” he said.

The school question

Saturday’s retreat happened as a task force of several city and school officials continues to meet privately over the future of local education funding. When the task force will complete its work and offer recommendations is unclear. 

For years, the schools received 40 percent of the city’s annual revenue based on a formula approved by city council. That formula has been revised over the past few years, and the schools can now get “up to” 40 percent of the city’s budgeted revenue, not actual.

Whether such an agreement will even continue, and at what percentage, remains to be seen. 

What is clear, based on the PFM report, is that the city is providing a substantial amount of money to the schools. That shows the city’s “ongoing commitment to education, and also the high level of support driven by the historical local contribution policy,” the report reads.

But the report also notes that the city does have a decision to make on its school funding commitment based on its other needs and the financial forecast ahead. 

School Chief Financial Officer Kathleen Jackson, who is part of the task force, attended the Saturday retreat. She said the school system will need to know something soon in order to begin its planning for next year’s budget.

An incremental change

Turner, the city manager, used one part of Saturday’s retreat to make a point.

The city is struggling with employee turnover and usually deals with more than 200 annually.  The city’s turnover rate was its highest ever a couple of years ago at 16 percent, said Chris Parker, the city’s human resources director. The police department alone has around 50 vacancies at present, he said.

With that number of vacancies, there can be a silver lining: the savings can be used for other needs. But that isn’t happening, mainly due to the overtime the vacancies require – mainly in the fire and police departments and sheriff’s office.

“It’s like we’re spending it on both sides,” Turner said. “We’re taking the vacancy savings and balancing the budget, and then we’re spending it on the other side in overtime.”

Turner, making the point that the city needs to make changes, offered one on Saturday. She is recommending a new way for nonprofit groups to apply for funding. A slew of organizations get city funding at various levels, from Mill Mountain Zoo to Center in Square to the Harrison Museum of African American Culture. The total amount of money involved is between $1.5 and $2 million annually.

There are details to be worked out – and the current budget will not be changed — but she essentially wants to consolidate the city’s application process and cap funding per request to 30 percent of an organization’s annual budget, or a maximum award of $140,000, whichever is lower. Several organizations are being funded at levels higher than that in this year’s budget, including Center in the Square ($200,000) and the zoo ($183,120).

The new system will make the process more competitive – eliminating the practice of funding the same organizations year in and year out – and will have a goal of giving agencies that have not received city funding a better chance at that, Turner said.

The council is set to discuss the matter more, potentially at a meeting Monday.

Councilwoman Evelyn Powers said she likes the idea, because it is an example of a way to better scrutinize the use of taxpayer dollars.

“There’s gonna be some tough decisions" ahead, she said.