Under the weight of inflation and Montana's antiquated tax system, the City of Missoula on Wednesday made clear the financial difficulties ahead as it embarks on crafting this year's budget.

A tax increase on property owners is certain, and the city has no plans to hire new staff, buy new equipment or expand any programs. It will use a portion of its remaining ARPA funds to cover basic expenses, and it could be forced to make program cuts down the road.

“This year hasn't been an easy budgeting year,” said Mayor John Engen. “Inflation is a continuing challenge for the city of Missoula, as it is for our private and public sector partners. Labor and the things we purchase to provide services to our residents cost more than they did last year. It's as simple as that.”

The current financial picture is the result of a perfect storm. The city reduced its mill levies in FY21 and FY22 while directing funding from the American Rescue Plan Act to prop up a number of programs.

Now, those programs will either need ongoing local funding or face cuts – or result in cuts from other city services.

Inflation has also exacerbated the problem. Citing one example, Engen said the cost of chip-seal oil was $434 a ton last year. It now stands at $605 a ton, nearly a 40% increase.

But the state's current tax system may be the biggest outlier facing local governments across the state. The Legislature has consistently rejected a number of proposals that would help local government find additional revenue without relying solely on property taxes.

The Legislature has killed a proposed tourist tax every session and it recently revoked the local option fuel tax passed by voters, which would have helped fund road maintenance and repairs.

Holding the line on new spending won't be enough to keep the general fund afloat this fiscal year given the merging of factors, Engen said.

“Because we have a state that has rejected the idea of a tourist tax, I have to rely on property taxes and fees to cover costs,” he said. “A tax increase is likely to be more than we've seen in my tenure as mayor. I know the increase is unwelcome news, but it will make us comparable to what other cities around the state are doing, particularly because they're rowing in the same type of boat.”

Missoula Mayor John Engen. (Missoula Current file photo)
Missoula Mayor John Engen. (Missoula Current file photo)

Members of the City Council earlier this month were notified that the city's budget was facing a structural imbalance. It could take several years to bring it back in line given the force of outside factors, city CAO Dale Bickell said.

“During the pandemic, our budgets held the line or even reduced mill levies slightly at a time when we had a lot of operational needs. What we created was a situation where our ongoing expenses exceeded our ongoing revenues,” said Bickell. “We'll have to make some difficult choices in the coming years in the budget as we come up against our mill levy caps.”

The Missoula City Council includes a number of new members who have no experience crafting a municipal budget, and the months ahead could be challenging as council members debate ways to spread the city's revenue.

Engen on Tuesday said he plans to maintain essential services and continue programs that aid people, including the Mobile Support Team, Operation Shelter and the Affordable Housing Trust Fund. It will also honor cost of living increases for city employees, and it will continue to invest in police and fire.

Engen said the city will also work with the private sector to develop city properties including the Sleepy Inn, the old library block and the Riverfront Triangle.

As it stands, he added, the parks and road districts will have $2 million less revenue this year when compared to last.

“I'm not asking for new staff, new programs, or new equipment unless it's unsafe or more expensive to keep in service. We will continue to fund existing programs and invest in people. But this year, we're resetting and holding the line,” he said

Engen added that that “reset” may have to play out over two budget cycles, and until the Montana Department of Revenue releases this year's taxable values, the exact numbers won't be known until August.

This is an appraisal year, which means the state could increase the value of properties. That, combined with general obligation bonds recently passed by votes, could result in some sizable tax increases passed on by the city, the county and Missoula County Public School.

Bickell said the city plans to spend $3 million of the $8 million remaining in its ARPA funding simply to cover the budget.

“There is approximately $3 million needed using the revenue replacement provisions of ARPA to balance the general fund budget,” Bickell said. “It's keeping our general operations going. If we didn't have this, we'd have to find $3 million in cuts.”