This afternoon the Council held its first budget discussion, mostly focused on the revenue side of the ledger.
Any conversation about city revenues must start with a discussion of the national, regional and local economies. On a national level the economy is cooling, mainly for three reasons: exhaustion at the end of a long run-up; the fading impact of the 2018 fiscal stimulus, and Trump’s trade wars. As I reported last year, economists are predicting a recession, and those predictions continue to point to 2020.
The US Bureau of Economic Analysis isn’t willing to go there yet, but is predicting much slower growth for the next few years.
Washington State’s economy has outperformed the nation as a whole, with Seattle pulling the average way up. Here’s a comparison of employment growth, one way of making an apples-to-apples comparison:
But both Washington and Seattle are heavily dependent on international trade, so Trump’s trade wars create extra economic risk here for the technology, agriculture, aerospace, and retail sectors. Construction, also a big local economic contributor, isn’t directly affected by trade but is affected by the growth rates of the business sectors here that are: when they stop hiring people, the construction industry stops building office towers and housing for them. (I’ve written in the past about the high exposure of Seattle city revenues to the fate of the local construction industry through B&O taxes, retail sales taxes, and REET)
Both Seattle’s employment growth and its population growth are cooling off. This is attributed to Amazon backing off from its torrid hiring rate, and Boeing’s business cooling off. The 737 MAX issues have not yet been figured into the employment projections, but local economists are very concerned about the impact it will have.
We can already see the effect it is having on construction. Last year the value of new building permits issued started to drop, and that trend is expected to continue.
With that backdrop, let’s look at the city’s revenue stream. Nearly three quarters of the city’s “general fund” revenues come from four sources: property taxes, retail sales taxes, business and occupation (B&O) taxes, and utility taxes.
The growth in “general fund” property tax revenues generally comes from new construction (restricted-use property tax increases come from new or renewed levies). The local construction boom seems to have peaked, and so the year-over-year growth in new construction is starting to trend down. But it still will add a good amount to the city’s coffers.
Sales tax revenue growth has cooled significantly this year and is projected to be under 3% next year.
The same story holds for the B&O tax.
Utility tax is the least volatile of the four, and is expected to continue chugging along with moderate growth.
Last year when the city wrote an “endorsed” budget for 2020, it predicted low growth overall in 2020. Today it stuck by that prediction, adding that its 2019 forecast was looking spot-on.
We can see that the growth in four big revenue sources is really the dominant factor in determining how much money the city has to spend (that one solitary green spike on the right is the Mercer Megablock sale).
There are a few other taxes worth paying a bit of attention to. One is the Real Estate Excise Tax (REET), which can also be volatile because it depends how many real estate deals happen in any given year: if one big office tower changes hands, that can generate a big REET windfall for the city. State law restricts the uses for REET, though the legislature has been in the mood to grant exceptions recently and in particular for affordable housing projects. You can see in the chart below that REET revenues have remained strong, at least for now: permit issuance is at some level a leading indicator for REET, so the drop-off of permits is not a good omen for REET revenues a few years out.
Back in April when the City Budget Office gave the Council its last revenue update, it predicted that 2019 general fund revenues would come in $2.5 million higher than budgeted. Today they have raised that figure by another $2.5 million — but $5 million is a rounding error in the $1.35 billion budget. The April forecast for next year raised the revenue projection by an additional $3 million, and today’s update left that alone, with the exception of one item: the proceeds from the sale of the Mercer Megablock. That one-time windfall shows up in the $72 million of “other revenues” in the far right column below.
The Mercer Megablock proceeds are the largest chunk of revenues that the Mayor and the City Council get to fight over. However, there are a few other new treasure chests:
- The “local option” sales tax. The state legislature generously allowed cities to retain a larger share of state retail sales tax to be used for affordable housing.
- The sweetened beverage tax (SBT). Over the summer, the Council prohibited the Mayor from siphoning away SBT revenues for other uses through “swaps” of General Fund dollars. The Mayor has complied with that directive, but there are still decisions to be made about how to spend the freed-up SBT revenues — as well as additional funds since the tax revenues continue to creep up. The SBT is expected to generate just under $24 million this year, and $24.3 million next year.
- The Mayor’s proposed tax on Uber and Lyft rides. Assuming the Council approves it, the tax should generate about $52 million through 2025. The Mayor has thoughts on how she wants to spend it (mainly on fully funding the Center City Connector streetcar), but the Council will have its own ideas.
- Two $5 million donations — one from the Mercer Megablock buyer, and one from Microsoft — toward addressing the homelessness emergency in Seattle.
- The Library Levy. The Council won’t get to do to much with this, as the spending plan was largely baked into the tax levy approved by voters in August.
- Some miscellaneous sources: revenues from street vacations for the Convention Center expansion; and federal Community Development Block Grant funding.
- accumulated REET revenues. The Mayor has proposed a reallocation of some REET dollars, but the Council gets the final word and may disagree.
Much of the money in play comes from one-time sources, which will constrain the choices of how to spend it to items that don’t accrue ongoing costs. Acquiring property, building out housing and transportation infrastructure, catching up on major and minor maintenance are all good, while anything that requires staff or ongoing payments over the long-term is bad. Some of the ongoing taxes could be used for staff and long-term programs, but only to the extent that the revenue stream is expected to be stable. That is a concern for the city with regard to the proposed tax on Uber and Lyft rides: both Uber and Lyft are currently operating in the red, and it’s unclear how long they can remain afloat while continuing to burn through investors’ cash.
In the end, though, the Mayor and the City Council don’t have much to work with on the revenue side, since neither of them has much appetite for cutting existing programs.
The rest of this week, the Council will be hearing presentations on specific department budgets, and will learn more about the Mayor’s proposal for how to spend the limited funds available. At a high level, this presentation outlines where she wants the money to go.
- the Office of Economic Development;
- Seattle Parks and Recreation;
- the Office of Labor Standards;
- the Human Services Department;
- the Office of Housing;
- the Department of Educationand Early Learning.
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