photo by: Shawn Valverde/Special to the Journal-World
Downtown Lawrence, looking north, is pictured in this aerial photo from September 2023.
It was about this time in 2023 that the seeds of Lawrence City Hall’s 2025 budget problems were planted.
They weren’t intentionally planted, but nonetheless, the summer of 2023 played a big role in the current city budget woes that have led City Manager Craig Owens to recommend a 3.5 mill property tax rate increase, which would be the largest such increase for Lawrence city government in at least 50 years.
What happened in the summer of 2023 is that staff and commissioners were crafting the city’s 2024 budget. A key factor in crafting the city’s budget is estimating how much sales tax revenue the city is going to receive. It is akin to creating a weather forecast: You must predict the future.
While not easy, it is important because about 40% of the city’s general fund operating budget is funded through sales tax collections. No other single revenue category plays a larger role in funding general operations. If you have ever wondered why I write these riveting, monthly articles reporting on sales tax collections, that’s one reason why.
So, back to the summer of 2023, the city is trying to predict how much sales tax revenue it will collect in 2024. In order to do that, you really need to predict how much sales tax revenue the city will collect in 2023. After all, City Hall officials don’t know that number in the summer of 2023. They’ve only seen six or seven months worth of collections at that point.
There’s no way around that timing, due to the schedule the state requires cities to adopt their budgets. However, that makes it no less perilous. Now, with the benefit of hindsight, we can see that it was a particularly perilous time in the summer of 2023. The reason: Sales tax collections in the first half of 2023 were significantly better than they were in the second half of the year.
Back to the weather analogy, the first half of the year showed a warm front, but the second half of the year ended up being a cold front. Simply put, city budget-makers did not see the change in weather coming. Instead, they thought it was going to get even warmer.
To show you that, I have to go all the way back to 2022. (Masks optional.) That is when the city was setting its 2023 budget. It budgeted to collect $54,243,000 in sales taxes. But then the city saw a few months of sales tax collections in 2023, and decided that the city was going to collect quite a bit more. The city revised its 2023 sales tax estimate upward to $56,916,000. That is a 5% bump, which is big in the world of sales taxes.
That ended up being an important — and flawed — decision. But you could argue that it was reasonable. From January through March, Lawrence sales tax collections really were growing strongly. They were up 4.5% in January 2023, 6.9% in February 2023 and 11.7% in March 2023. It did look like a warming trend was coming.
By the end of the year, though, that forecast was in shreds. Sales taxes in 2023 grew by just 3.9%. The city ended up collecting $51,999,827. That was a shortfall of $2.1 million from the city’s original 2023 budget. Importantly, though, it was a nearly $5 million shortfall from the city’s revised 2023 budget.
That’s important because of what came next. In the summer of 2023 — when the city was crafting its budget for 2024 — it was still convinced warmer weather was ahead. City Hall budget-makers got very aggressive in predicting 2024 sales tax revenues. They predicted that 2024 sales tax revenues were going to grow by more than 8% over 2023’s revised budget. To put that in perspective, a 5% growth rate is considered aggressive. The city’s presumed all-time high (based on data from recent records) was 9.1% in 2021 when there was a lot of pent-up demand and inflation coming out of the pandemic.
So, 8% is aggressive. Was it a reasonable estimate? That’s not for me to say, but I can report the data. While sales tax growth rates were strong in the first quarter of 2023, they definitely had weakened by June, when the city manager’s staff was wrapping up its recommended budget. At the end of June 2023, the city’s sales tax collections were on pace to grow 4.6% in 2023. To think that sales tax collections were going to grow by more than 8% in 2024 when they were growing at about half that rate in 2023 was aggressive.
Whatever you think of the reasonableness of the prediction, the 8% growth estimate ended up being fatal to the city’s 2024 budget.
Here’s the key number: The city budgeted to collect $61,636,000 in sales tax revenue in 2024. If you recall from above, the city only collected about $52 million in 2023. Thus, in order for the city to meet its budget projections, sales tax collections need to grow by 18.5% in 2024.
With that number, the city’s budget was cooked as soon as the calendar turned to Jan. 1, 2024. An 18.5% growth rate would be more than twice the city’s all-time record. Such growth would require both KU football and KU basketball winning national championships, plus Taylor Swift would need to host a Lawrence concert with Travis Kelce playing drums. In other words, something truly extraordinary would have to happen for that type of growth.
Now, it is fair to remember that the city did not build a budget with an assumption that sales taxes were going to grow by 18.5%. That would have been irresponsible by any budgeting metric. Instead, the city got caught in a thunderstorm it didn’t see coming, and the 18.5% increase is basically what they need to have happen in order to fix all the damage from the storm.
Not to spoil the ending, but the city’s sales tax collections are not going to grow by 18.5% in 2024. The state of Kansas released its most recent sales tax collections on Thursday. With that release, the city now has seven of the 12 sales tax checks it will receive from the state in 2024.
Total them all up, and the city’s sales tax collections are on pace to grow by 1.6%.
So, what should the city predict sales tax collections to do in 2025? The recommended budget is estimating sales tax collections will grow by 3.2%. In other words, that’s twice the rate that the city’s collections are growing in 2024, but also falls well within historic norms for the city. (That 3.2% increase doesn’t include any new money the city would receive if voters approve a requested rate increase for the affordable housing sales tax.)
But remember, the city also must predict what it believes 2024 sales tax collections ultimately will end up being. There are still five more monthly checks to collect. The city, for budgeting purposes, is predicting 2024 sales tax collections will grow by 2.7%.
At 1.6% thus far in 2024, collections are not on pace to hit that mark. That means the city is betting on a strong finish to the year. The city is making that bet despite the fact that the University of Kansas won’t be playing its home football games in Lawrence this fall.
The good news from the most recent sales tax report is that the July reporting period — which basically tracks sales that were made in June — was strong. Sales tax collections for July 2024 were up 4.4% from July 2023 collections. If that trend continues, the city may meet its revised 2024 budget.
If it doesn’t, it could find itself at risk of getting caught in another summer thunderstorm.
Here’s a look at year-to-date sales tax collections for Lawrence and other major retail markets compared to the same period a year ago. As you will see, Lawrence is not alone in posting sluggish numbers.
• Shawnee: up 2.5%
• Olathe: up 2.4%
• Kansas City: up 2.2%
• Lawrence: up 1.6%
• Topeka: up 0.6%
• Salina: down 0.1%
• Lenexa: down 0.6%
• Merriam: down 0.7%
• Sedgwick County: down 0.9%
• Statewide: up 1.0%
Welcome to the new LJWorld.com. Our old commenting system has been replaced with Facebook Comments. There is no longer a separate username and password login step. If you are already signed into Facebook within your browser, you will be able to comment. If you do not have a Facebook account and do not wish to create one, you will not be able to comment on stories.