More Notes on the 2018 Proposed Budget

Late last week, the City Budget Office provided the Council with updates on its revenue projections as well as a verbal overview of the Mayor’s proposed 2018 budget. As the Council starts working on their own proposals this week, here’s a summary of what the budget office told them, as well as highlights of some of the more interesting details in the budget proposal.

Let’s start with revenue projections, which are driven largely by economic forecasts.

As a reminder, the post-Great Recession recovery in the U.S. has been one of the longest since World War II — but also the slowest, with average GDP growth around 2%.

That is expected to continue over the next few years. The general consensus is growth hovering around 2%, with perhaps a slight bump up in 2018.

Economists suggest a 10% chance of a recession in 2019, with a 25% chance of a “policy-induced slowdown” — i.e. the Trump administration does something that hurts the economy, such as escalating tensions with North Korea or starting a trade war. Others, such as Windermere Real Estate’s Chief Economist Matthew Gardner, are now predicting a short and shallow recession beginning sometime in 2019.

Seattle’s economy has been faring just a bit better, with local employment as a proxy for overall growth.

But as you can see, growth has been softening here as well, a trend that is expected to continue into 2019.  The trend is being driven by three sectors responsible for  the most local growth: aerospace (i.e. Boeing), non-store retail (i.e. Amazon), and technology (Microsoft and the collection of smaller companies moving into the area).

The big driver of employment growth in Seattle for the past few years has of course been Amazon, though technology has been a modest contributor as well. But Boeing has actually come full circle since the recovery started: after going on a hiring spree up through 2012, they have been reducing their workforce and are now back down to the size they were in mid-2010.

The other industry we need to look at to understand the local economy is construction. Count the cranes downtown, and you know we’re in a construction boom. But there are clear signs now that the boom as peaked and might even be starting to soften. For starters, construction employment has flattened.

That may be at least in part to a shortage of construction workers, which has been widely reported recently. But construction permits have also flattened, which is a leading indicator for how much construction we’ll be seeing 1-3 years out.

Construction is a major source of the city revenues. The business itself generates B&O tax, as well as sales taxes for materials purchased. It also increases property taxes as projects finish, and it creates Real Estate Excise Tax (REET) when property transactions complete (such as when a new home or building is sold).

So a flattening of construction activity means that growth of the city’s revenue stream will also shrink, even as people keep moving to the city (though population growth generally follows employment growth by a year or two, so the slowing employment growth suggests population growth will also level out in the coming years).

Real estate excise taxes are known to be a highly variable source of revenues for the city, since the sale of a single highrise tower (and not necessarily a new one) can contribute a substantial amount of REET to the city’s coffers. The developer-driven construction boom has significantly increased REET lately, with a significant shift to residential projects as the industry tries to catch up to the local housing shortage.  Unless the economy drives off a cliff again we’re unlikely to see the kind of sharp drop-off in REET that occurred in 2008, but even a softening in construction will likely see it drop a bit. The city budget deals with this by using REET revenues for one-off and short-term projects, such as major maintenance and refurbishment of buildings, rather than long-term commitments like debt service on municipal bonds issued by the city. There are plenty of short-term needs so the city won’t have trouble finding uses for its REET revenues; nevertheless it has already flattened and is unlikely to grow in the coming years.

Sales and B&O taxes have also begun to soften, and are projected to flatten out at around 3% — a little above local inflation, but not a comfortable margin.

One of the reasons for this is the telecommunications tax.

People have been dumping their landlines as mobile phones have become ubiquitous. Also, mobile plans have switched from charging for voice and text to charging for data, and federal law prohibits local municipalities from taxing data. So these shifts have significantly dropped telecommunications tax revenues over the past ten year.

So that’s the big picture: no good news, some potentially bad news a couple of years out, and “no news” in the immediate term. That means the revenue outlook for 2017 and 2018 has not dramatically changed from six months ago. The 2018 General Subfund revenue forecast is up $26.7 million, about 2% from the April estimate — and almost $15 million of that is from the new “sweetened beverage tax” recently passed.  And the REET revenue forecast has actually decreased slightly.

This means that the Mayor and the City Council don’t have much in the way of uncommitted revenues to spend, and in the words of Budget Director Ben Noble, the Mayor’s budget merely makes some changes “on the margins” from last year’s endorsed 2018 budget. In order to make meaningful funding changes, they would need to either find a new source of revenues, or reduce funding for some existing program. Both are unlikely to happen.

Here are some notes on what the Mayor’s budget actually does:

  • It adds $7.5 million to the Human Services Division budget for both new and sustained investments. Some of the money will go to setting up an HMIS scan-card system to facilitate getting homeless people coordinated access to human services. It will also pay for a second Navigation Team to focus on those living in vehicles. The Mayor is also proposing to reorganize the city’s emergency response to homelessness (but not the long-term response) into a single department under Finance and Administrative Services, where Director of Homelessness George Scarola will now be; the plan also creates a new position to coordinate the city’s cleanups of unsanctioned encampments.
  • The Mayor’s budget proposes how the expected $14.8 million in revenues from the sweetened beverage tax should be spent.  The proposal is somewhat tenuous since the community-based advisory board has not yet had a chance to provide any guidance, and because the revenues are expected to decrease over time as consumers’ purchasing decisions shift in response to the tax. The Mayor proposes a mix of one-time funding, some ongoing funding, and some uncommitted funds that the advisory board can have more influence over. Overall though, the spending recommendations reflect the tension among the Council members between spending the revenues on food and nutrition programs, and spending it on education programs. The Mayor’s proposal tilts heavily toward education, so expect this to be a subject of significant debate as the Council’s deliberations proceed.
  • Seattle Fire Department will get $4.5 million more to help it scale up to match overall growth of the city. It will add a  second class of recruits, which will partially pay for itself by reducing overtime for the existing employees. The department will also expand paramedic training classes, refurbish its maritime facilities, and add another aid unit during the peak demand hours (not around the clock).
  • Seattle Police Department will continue its programmed hiring; the department believes it is on track to add 200 officers above its 2014 staffing level by mid-2020. The SPD budget also includes $2 million for implementation of the recently-passed police accountability legislation, including staffing up the Office of the Inspector General, the Office of Police Accountability, and the Community Police Commission.
  • The budget adds $380,000 for the new domestic violence gun forfeiture program. It also adds $500,000 to the existing program providing support for survivors of sexual abuse and assault (a nod to the poor handling by city leaders of the accusations against former Mayor Ed Murray).
  • The SDOT budget adds $500,000 to an existing pot of $1 million for landslide mitigation and repair. Earlier this year, Council member Herbold brought to attention the long backlog of landslide mitigation work that needs to be addressed and the lack of funds to keep up with it. An additional $500,000 is a drop in the bucket given the amount of work to be done, so don’t be surprised if Herbold asks for more.
  • The Tenant-Landlord Resource Center will be set up within SDCI, in order to help tenants and landlords learn about and comply with the several new renter regulations that have been passed over the last two years.
  • The budget anticipates a formal plan for establishing Mayor Burgess’ Retirement Savings Plan for all residents of Seattle, and sets aside money for implementing it once the plan is in place.
  • The Seattle IT department’s budget increases by about $20 million, most of which is further consolidation of resources from other departments.
  • The Judgment and Claims Fund gets another $12 million to finish out 2017, and its 2018 budget is increased by another $1.4 million. Much has been said and written about this fund over the last week, and much of that is inaccurate. I’ll post on this separately in the next few days (I’m still gathering information).
  • The six-year Capital Improvement Plan (CIP) has few significant changes. More money is being put into asset preservation (much of it one-time REET spending).
  • One notable buried in the CIP: the capital project to replace the North Precinct police station is gone. Instead, there is a new project to upgrade the existing facility and do long-term planning, with an allocation of $11.6 million in 2018 and nothing beyond that. Here’s the description:
    This project funds planning, design and construction for long-term facility needs as well as interim upgrades and potential expansions at the existing North Precinct to accommodate growth of the Seattle Police Department. This project includes, but is not limited to, planning, design and construction for long-term police facilities needs in the North and funding for interim needs including, but not limited to, building upgrades, system maintenance, facility maintenance and temporary facilities.

Last week, new Budget chair Lisa Herbold published a memo to her colleagues laying out principles for making changes to the Mayor’s budget, an update to the emo that former budget chair Burgess had sent out earlier.  Herbold also send out an updated calendar for the Council’s budget process. It makes reference to the meetings this coming week related to choosing an new Council member. It also pushes out the second public hearing to allow members of the public to react to the first “balancing package” after it is published.

As a reminder: the first public hearing on the 2018 budget is this Thursday evening.  You can find the complete proposed budget here.