Sioux Falls sales tax growth low, but stable, so far in 2023

SIOUX FALLS — The financial picture for the city of Sioux Falls is pretty good given the circumstances.

Years of pandemic-related trauma, cash infusion from the federal government, an exploding housing market, and inflation followed by interest rate hikes has created a volatile stretch for local governments.

Recent reports indicate that while there’s been uncertainty-driven heartburn over the budget, things are fairly stable for Sioux Falls, though there are concerns about the trends going forward.

“We definitely had a good year for our city in terms of revenues and expenses and where we sit in terms of reserves,” city Finance Director Shawn Pritchett told the city council recently. "The last two years we have had very strong revenues, but that’s not inline with our long-term trajectory. We are already seeing that change going into 2023.”

The city council will have its next round of discussion over finances on Tuesday, April 25, at its regular informational meeting. Pritchett will present the latest numbers that show a 5% increase in sales tax growth in March compared to last year.

That comes despite worries of a nationwide economic slowdown. While that’s a positive — though modest — number, inflation is still about 5% nationwide which cuts into that growth in revenues.

The rolling 12-month average for sales tax collections at the end of March was still 9.3% but that number has been in steady decline with a roller-coaster of an erratic economy.

Long-term, lingering fears of recession and the overall demand for services in a growing city, prompts a cautious note from Pritchett.

“With a growing population, stubborn inflation, growing city limits and big infrastructure needs, there are many things that will need resources from the city in the days and years ahead,” Pritchett said during a recap of 2022 for the city council.

That caution is why the city is carrying a higher-than-normal amount of money in reserve.

At the end of the year, the city had $82.8 million in the general fund, which is 37.8% of the budget. That’s notably higher than the city’s goal of 25%.

The large reserve is necessary for a number of reasons, Pritchett told the council, not the least of which was the special 6.5% pay bump recently approved for city employees to keep up with inflation.

While the size of the reserves may seem high right now, it starts to shrink in the coming years when the pay increases are taken into consideration. That’s because wages and benefits are more than two-thirds of the city’s general fund.

“Remember this is a snapshot in time,” Pritchett said. “This policy target is extremely important during the creation of annual budgets when it comes to looking out five or 10 years in advance.”

The city has four notable pots of money to manage, three of which get sales tax money:

• The general fund. The first penny of sales tax goes here, plus money from property taxes and other smaller sources. This fund pays for the operation of the city, the largest portion of which is employees, but also includes street maintenance and other needs.  
• The capital program is funded with the second penny of city sales tax and is used for infrastructure and buildings. 
• The entertainment tax is the third penny of city sales tax but it is only collected on prepared meals, alcoholic beverages, concerts and other events. This smaller fund pays for the operation of city-owned venues such as the Premier Center, the Washington Pavilion and the Orpheum Theatre. 
• The enterprise funds. These are self-sustaining services that are paid for with money from the users, such public parking, the landfill and water. 

Taken together, the city manages about $645 million in those four pots. It’s the general fund — with a budget of about $219 million last year — which has been the subject of most of the attention in recent weeks.

Pritchett’s words of caution notwithstanding, the large amount of money sitting in the general fund reserve does attract attention.

Sales tax revenue fell during the depths of the pandemic and then exploded in 2021 before leveling off to about 12% last year. That has made forecasting difficult but a 37% reserve is concerning, City Councilor Greg Neitzert said recently.

“You can’t extrapolate anything from the past couple of years,” he said. “That being said, at some point you feel like we are just stockpiling cash. We are way over our reserve target. At what point do we have to act and do something?”

Pritchett said that revenues, even at the roughly 4.6% increase of the first three months of 2023, are still trailing inflation. That, plus the fact that cost for public projects is often well above that general inflation level, suggest that level of reserves is a prudent approach.

“It won’t be double digits again,” he said of the 2023 sales tax projections.

The monthly report includes other notable updates on the Sioux Falls economy, including:

• The unemployment rate for the metropolitan area ticked up to 2.3% in February from historic lows of 1.9% in January. About 900 more people were in the labor force in February, while the number of positions rose about 220.
• The value of building permits is down 28% compared to the white-hot levels of 2022. In the first three months of the year, $270.3 million in permits were issued compared to $376.2 million last year.   
• Overall expenditures from the general fund are up, driven in large part by spending for highways and streets. That’s driven primarily by extra money needed for snow removal and winter patching. The city has spent 24% of this year’s general fund budget in the first three months, compared to 21% at this time last year.