Understanding the Seattle City Budget, Part 2: Revenues

Most of what you need to know about the city’s revenues can be learned from one chart.

And here it is:

revenue-summary

It’s not a sexy graph. In fact, it’s downright boring. But it tells you the two most important things: where the bulk of the money comes from, and the expected growth trend.

There are 16 buckets for “general subfund” revenue sources (actually 15 and a catch-all for everything else). Four of them make up 78% of the projected total revenues for 2017; the seven largest represent 90%. Some of the smaller revenue sources fluctuate a lot, but it doesn’t matter because they are completely drowned out by the bigger ones. And the top four are all expected to have slow, steady growth through 2018. That’s the overall trend: total revenues are projected to grow 3.39% in 2017, and 3.72% in 2018.

Here are the details (click to enlarge):

revenue-totals

To take this analysis any further, we need to step back and look at the underlying drivers for this forecast. The city’s budget team starts by taking the temperature of the national and local economy. And the news is pretty good:

annual-gdp-growth

National GDP growth is expected to be steady, as is US employment growth:

us-employment-growth

As the budget team explains it:

Although the current expansion is already the fourth longest of the 11 post-World War II expansions, it is not yet exhibiting signs its end is near. Most expansions end when the economy overheats, which causes a rise in inflation, which in turn spurs the Federal Reserve to raise interest rates to slow the economy. There are few signs that the economy is overheating, in large part due to the depth of the recession and the weakness of the recovery.

The employment news is even better for the Puget Sound region, especially Seattle:

wa-seattle-employment-growth

But this is an unsustainable pace, and is expected to slow down in the coming years.

puget-sound-employment-forecast

The slowdown will be driven by three things: announced layoffs at Boeing, an expected slowing of Amazon’s torrid hiring pace, and cooling off of the construction boom.

Speaking of construction, let’s look at that. Back in April, the budget office was seeing a significant slowdown in taxable retail sales in Seattle based upon the available numbers through January. But since then the numbers have turned around:

taxable-retail-sales

And it’s due to construction, which has continued to boom — especially in Seattle.

taxable-retail-sales-growth

Commercial construction is strong though expected to cool off over the next couple of years. Residential construction has  been particularly strong, with stable sales and rising prices for single-family homes, the largest segment of the residential real estate market.

commercial-real-setate-sales

seattle-single-family-market

And it looks to stay that way, since the permits being issued this year are a leading indicator for the amount of housing that will come on the market in the next two years.

residential-building-permits

Armed with this information about what the national and local economy are doing, we can make sense of the forecast for the major revenue sources for the city.

Let’s start with sales and B&O tax revenues. which together account for 41% of the city’s revenues. Factoring out construction, these revenues have been fairly steady.

annual-sales-and-bo-tax-revenue-growth

With construction projections included, the city’s forecasts for total sales and B&O taxes look like this:

annual-growth-of-sales-tax-revenues

annual-growth-of-bo-tax-revenues-2

Sales tax will track closely with inflation. B&O tax will outpace it, partly due to construction and partly because of the increase in B&O tax rates effective next year.

Property tax is a different situation. By state law, the amount the city can collect in a given year is capped at a figure that is 1% higher than the previous year’s amount collected, plus the taxes on any newly-constructed construction. Again, the permits issued allow for fairly accurate prediction of completed construction over the next two years. And the rapidly rising property values guarantee that the 1% figure will be the cap next year, and virtually assures it will for the following few years in the absence of a complete collapse of the local real estate market. In the end, we get 3.27% growth in 2017, and 4.39% in 2018.

The fourth big revenue source is utility taxes. That’s a bunch of different pieces: Seattle City Light, Seattle Public Utilities’ water, sewer/drainage, and solid waste services, and taxes on private providers of natural gas, telecommunications, and other utility services. Collectively they represent modest growth, but that’s the sum of a number of separate pieces:

  • Seattle City Light’s consumption rates are down, but it has raised rates to compensate. The utility is projecting flat consumption over the next two years given the population and employment growth in the city, so there is downside risk here.
  • Seattle Public Utilities has also raised water rates. Their consumption rates are heavily dependent on weather.
  • SPU’s drainage, wastewater and solid waste rates have been raised recently (solid waste significantly).
  • Natural gas prices are low, and the consumption rate is closely correlated with the winter weather.
  • Wireless telecom providers have been a source of growth in utility taxes, at the expense of traditional telecom providers. By law, the city can’t tax data and internet services, so the move to smartphones is actually reducing the city’s utility tax revenues a bit.
  • Cable tax revenues are showing slightly positive growth, just barely beating inflation. The city also imposes a franchise fee of 4.4%, which is deposited into the city’s Cable TV Franchise Fee Subfund (not into the general fund) for restricted purposes.

Paid parking is another sizable chunk of revenues, projected at nearly $41.5 million in 2017. The city currently has around 2000 pay stations controlling 12,300 paid parking spaces. The parking spaces are not managed to maximize revenue; they are priced to manage demand so that there are usually 1-2 open spaces per block. In 2017 the city will continue to tweak prices to maintain that performance metric, and it will extend paid parking in the Pike-Pine and Capitol Hill neighborhoods until 11pm due to increased demand for street parking in the late evening there. So even though they are not managing the system to increase revenues, they will nevertheless see a healthy increase — up to $48.5 million in 2018.

Details of all the other revenue sources can be found in the Mayor’s Budget Book. The Mayor and the Council members go fishing around in these buckets for small change (relatively speaking) to fund a pet project here or there.

Also keep in mind that what’s listed here are only the sources of funding for the General Subfund, which is the big pot of unrestricted money that the city can make decisions about how to spend. There are other sources of money, such as the Real Estate Excise Tax, which go into restricted accounts and by state law may only be spent on narrow purposes (mostly certain kinds of capital projects).  We’ll leave those for another day.

The big take-away from this look at city revenues is that anyone who was hoping to discover a large source of new revenues, or a windfall from the local economic boom, will be disappointed. The biggest sources of revenues are tracking towards modest growth, and there are few knobs to turn that will magically create large amounts of new revenues. Much of that is due to state law, which caps most kinds of taxes and prohibits others (such as income taxes). In that context, it should be no surprise that the Mayor’s proposed budget is incremental and lacks any major new initiatives.

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