BG Blog: Austin Budget - Reviewing DSD, Austin Energy and Austin Water
The Austin City Council is slated to adopt a proposed $5.9 billion 2025 budget this week. are becoming clear.
While new city manager T.C. Broadnax and the financial staff have delivered a draft budget for 2025 and a look-ahead at the 2026 budget that are both balanced, there are some tough decisions ahead for City Council.
Those matters, along with determining the appropriate level of support for the Austin Police Department, will get plenty of attention this week.
Away from the spotlight issues that so far have taken up most of the attention, there are nuances in the budget that offer interesting looks at the state of business and development for the city.
After a building splurge in recent years, there’s been a slowdown in major projects through most of 2023 and 2024 that will bring about some major changes to the Development Services Department.
Utility rates for all Austin Energy and Austin Water users, including the business community, are going to see noticeable increases in 2025.
Those hikes are due to some needed capital projects but also because the city-owned utilities are being relied upon to contribute more to the city’s general fund to offset the ongoing caps on property tax increases enacted by the state.
Let’s examine these hidden forces shaping and reacting to the local business community and what their moves could mean for those making big decisions in and outside of city hall.
Development Services DEPARTMENT
The numbers don’t lie: Austin is experiencing an undeniable slowdown in major development activity. A cocktail of high interest rates, persistent softness in projects heavy with office space, and a continued increase in housing supply have dampened what had been red-hot interest in turning dirt in the Austin area.
During the mid-July budget presentation, budget officer Kerri Lang didn’t mince words about what the ongoing slowdown will mean for development staff.
“The Development Services Division is experiencing contractions and development activity that is decimating their revenue,” she said to explain an ongoing hiring freeze and plans to eliminate staff positions in the next fiscal year. “Department leadership is developing a plan to right size operations and work on creating a nimble organization that can contract and grow with the industry demands.”
That right sizing means builders should probably abandon any hopes of having excess staff needing work to do translating into shorter wait times and a streamlining of the city’s notoriously difficult permitting process.
Any shakeup and staff reduction does present an opportunity for the city to forcefully implement the recommendations delivered last year from consulting firm McKinsey. Though we hope DSD’s restructuring is done in a way that will allow the team to adapt to the eventual livening up of the city’s development market, so that long wait times don’t wind up becoming even longer.
Austin Energy
As the city’s largest enterprise fund, Austin Energy represents 29 percent of this year’s total budget, with more than 1,900 full-time employees and a budget of $1.85 billion.
That number is representative of having to power a major growing American city that is moving toward a net-zero carbon policy. Eliminating greenhouse emissions from the AE energy portfolio will require ongoing expansion and conversion of existing assets.
The annual utility transfer from AE to the city next year is expected to be $125 million, or about 13 percent of the roughly $1.4 billion general fund portion of the budget. AE has planned on a total rate increase of 2.3 percent, or an extra $2.70 per month for the typical residential customer.
Business owners and large commercial interests will have to do the math on what that rate increase will mean for their monthly expenses. The real piece of business intelligence came from the comments from Lang that the transfers into the general fund are projected to increase at a greater rate over the next five years.
That change, which will potentially mean even higher rate increases, is pinned on the continued state-imposed caps on property tax increases that are forcing city staff to look for other revenue sources to cover other expenses across other departments. That need is especially acute in years, like 2024 and expected in 2025, when sales tax receipts grow slower than expected or stay flat.
Austin Water
Austin Water, which represents 12 percent of the total city budget, is projected to increase its budget 3.7 percent to $768.6 million.
Rate increases for water use look to be about 7.2 percent in the next budget, with a 9.2 percent increase forecasted for the 2026 budget year. Those are substantial increases that utility leaders say are needed to cover the cost of substantial infrastructure improvements, including needed upgrades to the Walnut Creek wastewater treatment plant.
Also increasing is the amount of money Austin Water is transferring into the general fund, with a 6 percent bump to $52.4 million in the next budget.
Managing a finite resource, Austin Water is feeling the pressure to serve surging demand from major new businesses moving into the area or ramping up their operations.
The most recent major consumers in recent years have been Cypress Manufacturing, NXP, Samsung, Tesla and the University of Texas, who will see their rares increase on an individual basis from 11.4 percent to 18.2 percent. Collectively, commercial customers were expected to see a rate increase of 22.7 percent.
There are a number of potential business impacts from these increases:
Financial Planning and Pricing Strategies: The substantial rate hikes might necessitate revisions in financial planning and pricing strategies for businesses. Companies may need to increase their prices, which could affect competitiveness, especially for those industries where water is a critical input.
Strategic Conservation: Businesses may need to consider water conservationand efficiency improvements to mitigate the impact of rising water rates. This could involve investing in water-saving technologies or redesigning processes to be less water-intensive.
Business Attraction and Expansion: The rising costs of utilities could influence decisions by businesses considering moving to or expanding within Austin. While Austin remains attractive due to its vibrant economy and skilled workforce, higher utility costs could be a deterrent, especially for water-intensive industries.
What It All Means
Businesses and new residents remain attracted to Austin, but the considerations around relocating and expanding are changing.
Companies, particularly those heavily reliant on utilities like water and energy, should revisit their financial plans to accommodate the projected increases in rates since higher utility costs will play into their financial health and cash flows.This will also play into decisions on making investments into energy and water efficiency, and taking advantage of new green technologies.
For builders and those connected to development, the picture is less clear since the pending reorganization of Development Services looks like it will be trying to win two battles: improving service while reducing staff in response to the recent slowdown in new activity.
That uncertainty shows why engagement and activism will be key, and why business leaders should take every opportunity to get their message heard by City Council members. Advocacy and participation in public forums can help influence decisions that impact business costs, especially regarding utility rate increases and development policies in the months and years to come.
//A.J. Bingham, Founder & CEO, Bingham Group, LLC
Questions or Comments? Email at -> aj@binghamgp.com