City officials working to diversify sales tax base, keep property tax low

The marriage of Dell Inc. and the City of Round Rock reads like a storybook romance of private industry and public growth.

The relationship started nearly 20 years ago when Dell was a rapidly expanding tech company searching for a permanent home and Round Rock was a sleepy bedroom community with big ambitions and the incentive packages to match.

In 1994, the union was sealed when Dell accepted a 60-year deal from Round Rock that included sharing sales tax collections and significant rebates on property taxes for the company. During the decade that followed, Dell's share of the worldwide personal computer market exploded, revenue poured into the city's coffers, and the city's population and infrastructure multiplied exponentially.

Honeymoons, however, are not meant to last forever, and by 2005, about the same time Dell computer sales were reaching their zenith, city officials recognized that not only was the high revenue unlikely to continue, but also that it was unwise to place such a reliance on one company.

"I got on the council in [2005], and that's when we first looked at our Dell revenue," Round Rock City Councilman Joe Clifford said. "Back then, our reliance on their money accounted for over 50 percent of the money we use for operations—which is a huge amount. ... It was kind of frightening. Even in good times it was kind of frightening.

"Dell has been a great corporate partner for our city—and they still are—but nothing lasts forever. So we saw at that time we needed to get off that money, not knowing if it would be there forever."

While Dell is far from a failing company, indications from Wall Street and financial analysts point to the restructuring of the company from its origins as just a computer manufacturer. An October report from the financial analyst firm IHS indicated that PC sales have declined to their lowest level in a decade. The net result for Round Rock is a decrease in Dell sales tax revenue.

October also saw Dell stock prices hit a 52-week low, just months after the company reported an 18 percent decrease in quarterly profits compared with the previous year.

"Dell strategically is moving from being just a hardware provider to being an end-to-end technology services provider," Dell spokesman Jess Blackburn said. "Over the last 3–4 years we've really been evolving."

The Management Policy

According to Clifford, it was at City Council's 2005 winter retreat that a plan was born to progressively wean the city off of its reliance on Dell sales tax revenue. On March 10, 2005, the council adopted a Financial Management Policy that limited Dell revenue to accounting for no more than 50 percent of the city's operating revenue.

"I look back now and I can remember the retreat in [2005], and I guess it was just forward thinking," Clifford said. "In hindsight it was a very smart move."

In 2009, City Council amended the Financial Management Policy to further draw down the use of Dell revenue for operations.

"The economy started changing a little bit what we really needed to do was lower our overall reliance on Dell," Round Rock Financial Director Cheryl Delaney said. "Not just to the 50 percent but all the way down to 20 percent ... by 2017."

To date, the city has followed the policy when drafting its annual budgets. The 2013 financial year budget finalized in September draws about 34 percent of the city's operating costs from Dell revenue.

"The shift has been over the last several years, getting to the point that we're relying on Dell in the 20 [percent to] 25 percent range," Round Rock City Manager Steve Norwood said. "That insulates us from a drop in market conditions or a drop in how or where sales are collected. It's more of a safeguard than anything, and it makes us respond to changes in the economy much easier."

The policy plan also allows the city to utilize excess funds for Dell in ways that reduces the city's debt and avoids new taxes.

"If we get excess revenue, we are going to use those dollars for capital projects or paying down debt," Delaney said.

Walking on its own

City officials are quick to give credit to Dell for helping build up Round Rock's population, infrastructure and tax base. The belief behind the Financial Management Policy is that the city has now built itself up to the point that it can function on sales tax revenue beyond Dell.

"There are cities all over America that would love to have Dell—and I would never sell Dell short," Clifford said. "It is still a large, very viable company. But when things begin to change, out of necessity you begin to change with them. Several years ago ... we went after retail, and we were able to get IKEA, and we got the premium outlets, and we got Emerson last year.

"You've got to keep a strong, vibrant economy, and so far we've been fortunate to be able to do that. Every success you have, it only helps you."

According to city sales tax records, as Dell's revenue has entered a decline, the city has enjoyed a boost in its sales tax collections from other sources. From 2002–06, sales tax collections from Dell versus other sources were near equal. In 2012, however, sales tax revenue from Dell accounted for slightly more than one-third of the city's total collections.

The impetus for keeping sales tax revenue strong is that it allows the city to keep property taxes low for residents, Clifford said.

"We could become a conventional, property tax–driven city—but I hope that doesn't ever happen," Clifford said. "I would like to be able to be reliant on sales tax to keep our property taxes down."

An uncertain future

Round Rock officials are not privy to insider information regarding Dell's future. Although the city hosts Dell, its leaders say they have no better understanding of where the company is headed as a business than do financial analysts.

"With Dell, they are such a huge contributor to our city," Norwood said. "That's good and bad. Yes it is a good revenue source, but at times we need to be careful because as with any industry, it has its ebb and flows.

"I am talking to my financial folks monthly to get a check on [Dell]. ... With Dell being the largest contributor, we need to watch that even more closely. I don't want to play Chicken Little, but I also don't want to underreact and not respond."

The sales tax revenue Round Rock collects from Dell is limited to local and online sales of computers purchased in Texas. As the company diversifies to other income sources, city officials anticipate further declines in Dell tax revenue—and hope the preparations they have made will be enough to offset them without raising property taxes to make up the difference.

"Everything cycles. I am old enough to know a lot of industries have come and gone," Clifford said. "The staying power of business is different today than when I was born. Businesses change dramatically through the times.

"But Dell will always be a valued partner here. They are what made us, essentially."