Consumer confidence is sinking, federal grants are in jeopardy and — if the Texas legislature has its way — municipal governments will soon have major restrictions on how and when they can borrow money.

Cuts to San Antonio’s city spending are starting to appear inevitable, according to presentations city staff delivered to reporters and council members this week, setting up one of the toughest and most pressing tests new city leaders will soon have to face.

For the first time in more than two decades, San Antonio is about to have a mayor with no previous experience on the council, as voters will choose between former Air Force Under Secretary Gina Ortiz Jones and former Texas Secretary of State Rolando Pablos in the June 7 runoff.

The 10-member City Council will also have at least four brand-new members, as longtime incumbents either termed out or joined the mayor’s race instead of running for reelection. A fifth council seat is also in play in District 1, where the incumbent was pushed to a runoff.

Newcomers will be sworn in on June 17 — roughly three months out from a mid-September budget deadline that’s likely to include some tough spending decisions.

“The outlook and the forecast is bleak,” said Councilman Jalen McKee-Rodriguez (D2), who will be one of the council’s longest-serving members by the time the next budget is signed, in reaction to a city financial forecasting meeting Wednesday.

“It’s clear the next four years and this incoming council will experience conditions that are very different from the conditions many of us have navigated.”

Just how much trimming is needed has yet to be determined.

City Manager Erik Walsh told reporters Wednesday that consumer confidence is down, with losses reflected across all facets of usually reliable city revenue, including hotel occupancy tax, the airport development services and residential and commercial building permits.

Most significantly, he said, sales tax and property tax revenue are on track to come in about $10 million short of projections by the year’s end — something city leaders in Fort Worth and Austin are contending with as well.

“In the spirit of what’s happening nationally, there is a fair amount of uncertainty, and I think it’s evident in our revenue that people are being careful,” Walsh said.

At the same time, pending policies at the state and federal level could saddle the city with more expenses and fewer options to pay for them.

President Donald Trump took office in January and immediately sought to pump the brakes on federal grants, which currently pay for about 750 staff positions at the city and fund many of the city’s housing initiatives. They also fund many nonprofit services that the city has come to rely on, and might be asked to pay for if the federal money dries up.

At the state level, the Republican-led Texas legislature has San Antonio city leaders sounding the alarm over plans to rein in municipal debt — a move with major financial repercussions for a city that’s leaned hard on its AAA bond rating to borrow money for big infrastructure projects, including affordable housing.

Given the uncertainty of such proposals, Walsh said the city’s government affairs team is tracking them closely, but the budget writers haven’t yet factored them into their projections.

“This forecast does not make any assumptions about any potential legislative bills up in Austin that may impact us, nor does it take into account any potential changes in federal funding that may or may not happen,” Walsh said. “We didn’t make any assumptions about any of that stuff.”

A ‘compounding’ budget problem

Last year San Antonio’s nearly $4 billion fiscal year budget also required some belt-tightening to account for waning sales tax.

Given the size of the budget, Walsh said this year’s roughly $10 million shortfall alone won’t rock the city’s ability to continue delivering services this year, particularly with CPS Energy revenue coming in higher than expected.

But failing to realign the city’s spending and revenue would put it on an unsustainable path — even without potential state and federal headwinds.

Left unaddressed in the budget, the city estimates that this year’s shortfall would grow to $31 million by the 2026-2027 fiscal year, and $148 million by fiscal year 2027-2028.

“The changes in revenue are resulting in a manageable issue in this year’s budget,” Walsh said. “But more importantly, they’re compounding as we put together the forecast for the next five years.”

Zero-based budgeting?

Wrangling city spending will be almost certainly be among the toughest challenges the next mayor and San Antonio City Council have to navigate.

Even without specific cuts on the table at Wednesday’s budget forecast meeting, the discussion grew tense as council members reacted to a proposed budgeting process that would force each line item to be justified before it’s included in a future budget.

So-called “zero-based budgeting” was championed by the council’s lone conservative, Councilman Marc Whyte (D10), and gained enough support last year that the city hired a consultant to look into the idea.

This week representatives from Public Financial Management Company (PFM) presented their findings to the council as part of a broader budgeting recommendation that calls for city leaders to fine-tooth comb the budget once every five years, starting the calendar year after a city election.

As San Antonio transitions to four-year council terms this year, that means the new mayor and council would have several months to get up to speed, using the existing budget process this fall.

They would then spend nearly the entire next year working on an “in-depth comprehensive budget review” — a process that would repeat in 2030, after the next city election in 2029.

“The first year will be hard,” Walsh said to the council after the consultants’ presentation. “But I think we all need a little bit more leg room — council, staff, budget office, all of us — to make sure that we’re aligned [in our spending priorities].”

To guide those decisions, he said, the “underlying facets of it ought to be rooted back into what we can afford.”

A spending problem vs. revenue problem

Whether the city institutes the new budgeting process will be up to the next leaders.

The next budget meeting will be at the end of June, Walsh said. By then, the council could include an infusion of conservative or progressive voices, depending on the outcomes of the June 7 runoff elections.

If Wednesday’s meeting was any indication, the two camps are already fiercely divided.

Whyte heralded the zero-based budget proposal as a “historic day” that will lead to “a more transparent and accountable budgeting process.”

Councilmembers Phyllis Viagran (D3), Teri Castillo (D5) and McKee-Rodriguez, on the other hand, suggested the city wasn’t looking at the issue holistically.

McKee-Rodriguez said the PFM presentation singled out only parts of the budget for zero-based budgeting, while leaving other elements, like law enforcement, as essential services requiring less spending scrutiny.

“If you think that as a result of zero-based budgeting we’re going to identify waste in a meaningful way, we’re probably looking at the wrong departments,” McKee-Rodriguez said.

Castillo said her constituents wouldn’t agree with major spending cuts at the same time the city is trying to fund “vanity projects” like a new downtown entertainment district known as Project Marvel.

Several council members asked whether the city could raise its tax rate, if revenue comes in below the state’s 3.5% growth cap.

That option hasn’t really been given much consideration in the past, because property values had been rising rapidly since the state put the cap in place in 2021.

If top city staff has its way, however, raising the tax rate will not be a part of the path to financial solvency. Walsh was quick to clarify that nowhere in the city’s recommendations is there a call for increasing the property tax rate.