A Tale of Three Budgets

It’s a good thing that Council member Tim Burgess just put the 2016 Housing Levy to bed, because he now needs to wrestle three separate budgets to the ground. And the early numbers suggest that there’s some belt-tightening coming in 2017 and 2018.

The three budgets in the queue are:

  1. The 2015 budget, which strangely enough still needs to be closed out;
  2. The 2016 budget, which is due for its first quarterly supplemental update;
  3. The 2017-2018 biennium budget, which is getting a preview now and will proceed in earnest starting in July.

Before we dive into them, it’s worth reviewing some rules that govern how the city’s budget (and many other organizations’ budgets) are managed.

An annual budget has three main pieces:

  • revenues, i.e. money coming in;
  • operating expenses;
  • capital investments (in Seattle’s case, called a “Capital Improvement Plan”).

Revenues are the money that’s brought in from all sources: taxes, fees, penalties, rents, grants, donations, interest on investments, sales of city-owned utility services, etc. The city brings in money all sorts of ways.

Operating expenses are the funds you spend to make things happen, including salaries, office supplies, rent, fuel for city-owned vehicles, salt to spread on icy roads, and on.

Capital investments are sort of like operating expenses, but they are funds spent to create something of tangible value. All the money that the city spends to build a new building or road, including some of the same things that got listed above under “operating expenses” like the salaries of people working on the construction project, get counted as capital investments, so long as the end-result is a thing whose value goes on the city’s books at the end. (ok, this is slightly oversimplified because there are some exceptions, but at a coarse level it’s a good way to think about it)

Seattle writes its budget in 2-year increments. The initial budget is an enormous amount of work to put together, and then it’s tweaked on a regular schedule along the way. There are quarterly updates, and then there is a more substantial adjustment process for the second year of the biennial budget. Right now, Seattle is in the second year of the 2015-2016 biennial budget. This coming fall it will adopt a budget for 2017-2018.

The City Council’s job in writing a budget is to (within legal restrictions) set various rates (taxes, fees, utilities) to bring in a certain amount of revenues, and authorize city departments to spend money for both operating expenses and capital improvement projects. This is really important: the only money that gets received or spent in the city is money explicitly authorized by the City Council. Even if the Parks Department brings in additional revenues from permit fees, it can’t spend any of those additional revenues unless the City Council approves it. Further, if SDOT lands a huge federal highway grant, it can neither accept the money nor spend any of it unless the City Council grants the authority to do so.

Revenues from some sources, including car tabs, federal and state grants, and often permit fees, may have restrictions on what the money may be spent on. Those restrictions are written into federal, state, county and city laws, and they create an enormously complicated web of restrictions of how much money is available to do things. The city’s accountants manage this by creating sub-funds within the budget that are each labeled with their use restrictions. There is a “General Sub Fund” that is a large pot of money with no restrictions, and then dozens of other sub-funds.  A tremendous amount of the messiness in city budgeting comes from managing and tracking this matching process.

Washington state law requires the city to have a balanced budget. The practical effect of this is that when the Mayor or the Council wants to propose some new activity that will cost money, they need to identify (or create) a revenue sub-fund to pay for it that not only has sufficient dollars but legally matches the intended use.

A simplifying aspect of Seattle’s budget, vs. yours or mine, is that because the city has a large rainy day fund and significant other monetary assets it doesn’t have to try to manage cash flow as an aspect of decision-making for the budget; it can “float” itself money if expenses happen before the revenues do — and it likewise earns interest on cash in the bank when the revenues come in first. The city’s finance directors spend a lot of time modeling cash flow and moving money around so that the bills get paid and the checks don’t bounce, but the City Council members don’t spend time thinking about that.

To create next year’s budget the City Budget Office starts by asking “what if we repeat what we did this year?” So they create a copy of this current budget and make a number of adjustments: they plug in next year’s raises for employees; for everyone who was hired mid-year (and thus only got paid part of a full year’s salary) they extend the budgeted salary to a full year. They update anything else on the revenue and expense side where there are changes already codified in law, such as tax rates, permit fees, negotiated union workers’ wages or benefits, etc. And they remove one-time expenses, grants, and other capital projects (if you built a new park restroom this year, you don’t have to build it again next year). Then they run the numbers and get a “baseline” starting point for further budget changes by the Council. If they’re lucky, there’s money left over they can spend (within subfund restrictions); if not, they need to find things to cut.

One last note: unless an explicit exception is granted by the Council, expenses authorized in an annual budget can ONLY be spent in that year. The dollars remain restricted by their source, but the Council can reallocate them to other allowed uses in the following year’s budget.

Deep breath.  I apologize for that lengthy primer on city budgets, but the payoff comes right now when we look at the first of the three budgets on the table: the 2015 budget.

Why is the 2015 budget still being discussed in May of 2016? The books are actually closed, but some things happen at the end of any given budget year that need to get cleaned up. For example: because of the ongoing construction boom, Seattle Public Utilities got a higher number of requests for new water taps than it had originally estimated, and at the end of the year the cost for installing them finally exceeded their full-year budget for tap installations. They brought in enough money in installation fees to cover it, so it’s not really an issue, except that SPU needs the Council to explicitly increase its operating expense budget to cover the added costs. There are four items like that left over that need to be resolved. Also, there are 53 expense items that need authorization to carry over their budgets into 2016 because they didn’t complete the work in 2015. This happens for a variety of reasons, such as an external grant that is awarded late in the year or some unanticipated delay in the start of a project. In some cases, though, the carry-forward involves re-appropriating money to a new purpose, such as item 1.30 that proposes using $375,000 of unspent 2015 City Council funds to pay for district offices for Council members; and item 1.33 that carries forward funds of the overworked Office of Labor Standards to pay for outreach and education efforts to increase Seattle business’ awareness and understanding of local labor laws. So the task for the City Council is to review each carryover request and ensure that it is a responsible and appropriate use of funds.

That brings us to the second budget: the first quarter supplemental update to the 2016 budget, which has two parts.

The first part is easy and straightforward: the city was awarded 21 separate grants in the first quarter, and the Council needs to authorize acceptance of the grants and spending of the funds. Many of them are relatively small amounts, but a couple are more notable, including item 1.9: a $500,000 grant to fund incentives for Seattle residents to perform energy upgrades to their homes; and item 1.12: a $420,000 grant for safer walking routes around Rainier View Elementary School. The Seattle Police Department (items 1.14 through 1.17) and Seattle Public Utilities (items 1.18, 1.19, and 2.2)also scored several substantial grants worth millions of dollars.

The second, harder part will be going through the 38 pages of requests for other changes to the 2016 budget submitted by the Mayor on behalf of city departments. As we discussed earlier, every one of them that asks for more money must have a corresponding revenue source to pay for the increase. The Council must decide whether each is a worthwhile expenditure. But for some, it must also look at the long-term implications; every new staff position created, for example, is a commitment of funds in 2017 and beyond.

Last Wednesday the Council met with City Budget Director Ben Noble and began walking through these requests. Many are simple, small tweaks that will be quickly approved. Several relate to Seattle Center, where event bookings have been stronger than expected so the Center is staffing up to handle the additional load and will pay for the extra staff with the additional revenues from the events. Seattle Center and SDOT also jointly wish to fund a study of allowing ORCA Card payments on the Monorail (yay!).

The Department of Constructions and Inspections is struggling to keep up with the demand driven by the construction boom in the city, and is asking to staff up. Likewise the Law Department needs to staff up (item 3.35) to keep up with the boom in Public Records Act requests it must serve. The Office of Labor Standards is requesting “emergency staffing” (item 3.37) to help it catch up with its backlog of investigations. And the Mayor is hiring a new Director to coordinate the city’s inter-departmental response to the homelessness crisis (item 3.36).

One item in the list (3.30) allocates $612,500 to pay for the new election voucher system approved by the voters (as I-122).  Also, there is $1,450,000 to pay for the Center City Mobility Plan (item 3.45).  Finally, the Seattle Fire Department is asking for $990,000 to replace its outdated self-contained breathing apparatus equipment (item 3.49); Noble explained that the original plan was to replace it in phases over several years, but with the receipt of a federal grant to pay for part of it and a lack of compatibility between the old and new equipment, SFD is now suggesting that the best course of action is to replace it all at once.

Council member Lisa Herbold plans to introduce a 2016 budget change as well, that would provide continuing funding for a pilot program that Mayor Murray started to provide some basic sanitation services at unsanctioned homeless encampments (essentially dropping off and picking up garbage bags at encampment sites). Herbold admitted that she hasn’t identified a funding source yet, and so this might slip to the second-quarter supplemental budget.  Council member Rob Johnson also plans on a budget request, to provide additional funds for increased community outreach around HALA-related zoning changes as those changes come up for consideration in the coming months. Johnson plans to introduce the funding request next week, including identifying a funding source.

Affordable Housing, Neighborhoods and Finance Committee Chair Burgess has scheduled a meeting for May 18th to take action on the Q1 supplemental requests, so we will hear more next week.

And that brings us to the third budget: the 2017-2018 biennium budget. A week ago the first meeting of the Budget Committee was held, to present some early projections of revenues for the next two years and to review some changes in the budget process.

The City Budget Office is fortunate to have some very talented financial analysts, some amazing city data sets, and valuable national, state and county data and resources available to it, and they all contribute to creating the revenue forecast.

Since their largest buckets of revenues are business taxes, property and real estate taxes, sales taxes, and utility taxes, they track basic city demographics closely. That includes population growth in the city, which shows that the growth in increasingly concentrated in the city of Seattle:

population growth

Also employment. Puget Sound employment has been tracking around 3%, compared to the US average of 2%.

US employment growth

Much of that growth has been driven by “non-store retailers,” i.e. Amazon.

seattle post-recession employment change

But Boeing is expected to cut 4000 jobs in June, and 8000 by the end of the year. Also construction, which has been booming, is expected to drop a bit.


So overall the growth going forward is expect to be closer to the national average.

PS employment growth projections

In 2015, they city took in $80 million in sales and B&O tax revenues; they expect that to drop a bit this year and beyond.

They track property values and sales, both residential and commercial, in order to estimate property taxes and real estate excise taxes on sales.  Commercial real estate sales went through the roof last year, with almost $7 billion in sales contributing $30 million of real estate excise tax. But that is not sustainable, so they are forecasting a significant drop this year and moving forward.

commercial real setate sales

The residential market , as we all know, has been insane. Home prices just exceeded the pre-recession peak. It was also pointed out that while we hear about the extremely low inventory of homes for sale, the volume of sales has been high — meaning that homes are churning through the market rapidly. The forecast is for more of the same: high prices and high volume.

residential real estate sales

Based on their collected market and economic forecasts, they have a baseline prediction for revenues going forward:

general subfund revenues

For 2016, individual line-items have moved up and down, but the bottom line has only changed $470,000 — a rounding error in a $1.1 billion budget. Beyond that, the city has been seeing revenues grow annually around 4%, but the budget office expects that to slow; they are forecasting 3.7% in 2017 and 3.4% in 2018.

When they match that against the baseline expense model (replicating the 2016 budget with the usual adjustments) they get this:

general subfund balances

A few notes of explanation here: The “fund balance” is essentially how much cash is sitting in the city’s bank account at the beginning and end of the year. In a year where expenses end up exceeding revenues, the fund balance decreases. Also, the “reserves” line is a set-aside for the expected cost of wages for city unionized workers whose contracts are currently being negotiated; whenever those contracts are finalized, the reserves move up into the “expenditures” line.

The baselines predictions, if nothing else changes, would deplete the fund balance in 2018. But of course, other things will change — both expenses and revenues. First, known new expenditures include funding for 100 additional police officers and some other SPD expenses such as adding more staff to answer 911 calls, and IT for support of body-worn cameras:

spd expenses

Also, the Office of Labor Standards needs another $3.6 million. To balance this out, and prevent depleting the general fund balance, the Mayor has asked most departments to identify ways to trim their budgets. He has also identified three opportunities to bring in more money:

budget strategy

The B&O tax increase would be phased in over two years and generate $8 million of revenues. For a business with $1 million in annual revenues, it would be an increase of $70 per year. The business license fee, which currently only has two tiers based on the business’s gross revenues, would instead have multiple tiers:

revenue proposals

In the briefing, Council President Bruce Harrell asked Noble to look at further extending the tiers so that companies with $50 million or $100 million in revenues, or perhaps even more, could pay even higher rates.  It certainly is ridiculous that Amazon’s annual business license fee is only $110; expect that number to go up significantly by the time the budget is done.

So when you add in the extra costs and the proposed new revenue sources, the new bottom line looks like this:

revised bottom line

Basically, the changes cancel each other out in the short term, and compound the deficit farther out. And as Noble pointed out, this doesn’t include any continuation of the $7.3 million of one-time emergency funding to address the city’s homelessness crisis.

Keep in mind this is all just the baseline, the starting place for the 2017-2018 budget, and it has fairly conservative revenue expectations. The Mayor and Council have not made any hard decisions about cutting programs, and finding $20 million in a $1.2 billion budget is really not that difficult. Noble summed it up well: “We are in a hole and need to dig out… this is a challenge we are up for, but it will have implications as well.” The biggest implication is that there will not be new money to spend in the next couple of years; anything new the Council wants do will come at the expense of either some existing program or taxpayers’ wallets.