Let the budget shell games begin: Sawant pitches 1000 new affordable housing units

Over the next eight weeks, the City Council members will be looking for hidden pots of money that can be used to fund new or expanded projects. And Kshama Sawant has already put forth her first proposal: now that the North Precinct police station is at least temporarily shelved, she wants to use that money to fund 1000 new units of affordable housing. But chasing the details of her plan takes us deep down the rabbit-hole of municipal finances.

Sawant is not new to controversial funding ideas: last year she proposed taking $15 milion out of the city’s revenue stabilization fund (aka the “rainy day fund”) for programs for the homeless. That didn’t fly, but this is a new Council with a different tolerance for radical ideas and it’s hard to say how they will react to her latest scheme.

A quick refresher on how city spending works: there are “unrestricted” funds, mostly sitting in the General Subfund account, that is fungible and can be spent on almost anything (within legal limits; for example city governments can’t just give money away without asking for anything in return). And there are funds that may only be spent on particular projects or efforts, as determined by legal restrictions placed on the sources of the money. For example, Real Estate Excise Tax (REET) funds are restricted by state law to a specific list of capital projects such as streets, parks, and city buildings.

REET limitations

So if a Council member wants to spend money, she or he needs to identify not just a source of revenues to pay for it, but one that is allowed to be spent on the intended purpose.

Big capital projects such as a $149 million police station are a particular challenge because the city doesn’t have that kind of cash sitting around. So they are usually handled by borrowing money, i.e. issuing municipal bonds, which converts the expense from a big dollar amount up front to much smaller, regular payments for years (if not decades). The City of Seattle has a stellar credit rating, so it can issue bonds at favorable interest rates, but the city still needs to find the long-term source of funds to pay the debt service on the bonds.

For the North Precinct project, Mayor Murray wants to issue about $100 million of new bonds, and use REET revenues to pay the debt service. Police stations are an allowed use for one kind of REET revenue according to state law, so that’s ok so far. But it turns out that the city’s financial policy doesn’t allow for REET funds to be used for debt service on police stations, so Murray intends to ask the Council to modify that policy — carving out an exception for just the North Precinct station.

That solves the legal issues, but leaves a policy issue: is that a wise use of REET funds? It turns out that REET revenues are highly variable from year to year, and took a major downturn in the last recession.

REET appropriations

That makes them an excellent source of funds for “making hay while the sun shines,” but an unwise source for 20–30 years of regular debt service payments: if the revenues dry up again, the city will be in jeopardy of defaulting on its debt. The Council has not yet had an opportunity to weigh in on the fiscal prudence of Murray’s proposed financing scheme; if the North Precinct had not been shelved, that would have been a key point of debate in the upcoming budget discussion.

Nevertheless, that’s the starting point for Sawant’s proposal: permanently kill the plan for the North Precinct, and use the Mayor’s financing plan to pay for 1000 units of new affordable housing instead. Except that the plan immediately runs afoul of state law: REET funds cannot be used for affordable housing. And this is where the budget shell game kicks in.

It turns out that there are several city capital projects whose debt service is currently being funded with unrestricted General Subfund money and that fit the state’s criteria for REET revenues.

REET eligible projects

The city’s financial policy currently doesn’t allow these projects’ debt service to be funded by REET dollars either (with the exception of the fire facilities), but just as the Mayor proposed to change the policy to make an exception for the North Precinct station, it could also be changed to make exceptions for any or all of these projects. If that were to happen, then the 2017–2018 budget could be changed to pay for these projects with REET dollars and free up the equivalent amount of unrestricted General Subfund dollars to cover debt service on new bonds to pay for affordable housing.

That last part, swapping in restricted funds to free up unrestricted funds, has plenty of precedent and generally doesn’t raise eyebrows. The tough sell in all of this is still the change in the city’s financial policy to use REET dollars, which are an unreliable source of funding, to cover long-term debt service on a variety of capital projects. Sawant has the Mayor in a bind, because he would be forced to argue that a police station is a justifiable exception but affordable housing is not. I suspect he would evade the question altogether by responding that he still eventually wants the North Precinct project to go ahead in some new form, so the funds can’t be reallocated to a different use.

But since the Council has never approved the Mayor’s proposal to make an exception for the North Precinct, Sawant’s colleagues are in a much stronger position to resist modifying the city’s financial policy as she is requesting. And it’s tricky because she is not asking for a narrow exception; she’s asking for the rules to be relaxed for a collection of capital projects across several departments. Burgess will almost certainly be dead-set against it, and Harrell would likely back him. On the other hand, O’Brien might argue that affordable housing is the biggest crisis in Seattle right now and they have a responsibility to use the tools available to them to address it. Bagshaw would normally take the fiscally conservative approach, but she is currently up to her neck in the homeless crisis response and might be convinced that this was a necessary step. The other four Council members, all new, have no track record and could go either way.

Here’s the Council Central Staff analysis on Sawant’s inquiry into the finances of reallocating the North Precint funds.

Sawant is already rallying the troops to fight for her proposal. They will no doubt show up in force at the first public hearing on the budget October 5th, and it wouldn’t be surprising if they showed up at Monday afternoon’s full Council meeting when the Mayor unveils his budget proposal.

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