City budget office updates its economic and revenue forecast, and City Hall misses the message

The City Budget Office delivers an economic and revenue forecast to the Mayor and City Council three times a year: in August, at the beginning of the annual budget process; in November, for a last-minute budget update before it’s passed; and in April as a check-in to see how things are going. Today City Budget Director Ben Noble delivered the April update, which he will present in person to the City Council’s Finance and Housing Committee tomorrow. The Mayor and two Councilmembers immediately issued press releases remarking positively on the economic recovery, highlighting $40 million in additional revenues, and salivating over how that money could be spent.

Not so fast. To quote Inigo Montoya, “I do not think it means what you think it means.”

First of all, it must be said: someone needs to give Ben Noble a medal for nailing the 2021 revenue forecast last November, in a crazy, unprecedented time when predicting the future was nearly impossible. Here’s an excerpt from a memo he delivered with that forecast:

This revenue forecast continues the tack we have taken since April of being based on the “slower recovery” scenario we have developed from the more conservative range provided by our national forecast service. There are several reasons why we believe this is the preferred approach, but the overarching uncertainties lead us to believe there is cause to be prudent for the purposes of setting the City’s budget. Primarily, growth at the more optimistic levels is highly contingent on getting control of the Coronavirus. National forecast assumptions are that the current third wave will not exceed the second wave experience of July and therefore not lead to significant restrictions and closures. This may prove true, but recent numbers of national and local cases have surpassed earlier highs and it has become apparent that the trajectory of the pandemic still remains highly uncertain. Moreover, the relevant impacts of the pandemic are not just on overall local economic activity, but where that activity occurs. Both the new payroll tax and the B&O tax are fully or partially dependent on where employees work. Stay at home orders and work from home policies, could have significant effects on these two revenue streams, effects that tax payment data does not yet capture and that we do not yet understand. Furthermore, due to the timing of its announcement, job and business activity losses related to Boeing are only partially captured in this forecast.

In other words: Noble went with the pessimistic revenue forecast, and sold it to the Council. His office projected $1.573 billion in “general fund” revenues in November, and today’s forecast increased that to $1.594 billion for a net change of 1.3% — and in the good direction. In the world of large organization budgeting, that would be a bullseye in good times; in 2020, that’s a freaking miracle. The budget office isn’t yet updating its forecasts for revenue sources other than the general fund, with two exceptions: the School Zone Camera Fund, which looks to gain $2.6 million; and Real Estate Excise Tax. Even in good years REET is a crap shoot: if one downtown office tower changes hands (or falls through) the numbers can jump up or down dramatically. According to the city, REET from commercial sales fell by 56.7% in 2020; revenues from residential sales were about flat, but only because an 18.9% increase in single-family home sales offset a 44.8% drop in multifamily property sales. Based on early 2021 activity, the budget office is now predicting that this year’s REET revenues will be $17.5 million higher than last November’s forecast.

Altogether that means the city has about $40 million more revenues this year: $20 million in the general fund, $17.5 million of REET, and $2.5 million of school zone camera fund revenues.

Mayor Durkan, Councilmember Mosqueda, and Councilmember Lewis all issued press releases today leading with the new revenues and discussing how to spend it. All three also emphasized that the city is entering a period of economic recovery and growth. But they largely gloss over the rest of the City Budget Office’s April report, which details a picture not nearly as rosy.

First, we need to remember the baseline: the revenue forecast was built from a pessimistic, “slow recovery” economic model, and it was almost exactly right. Seattle’s economy is indeed recovering, as is the U.S. economy, and it appears that this recession will be both more severe and shorter in duration than the Great Recession. Though you will notice in the chart below that while Seattle wasn’t hit quite as hard as the country as a whole, it is recovering more slowly.

Job postings for the Seattle area are lagging the rest of the country, as is consumer spending.

While the national employment and spending is slightly outpacing forecasts from last November,  Seattle area employment is slightly trailing and spending is about on par.

Breaking out employment by sector, we see two that have been hammered: leisure/hospitality, and manufacturing (mainly Boeing). The saving grace for Seattle has been retail (read: Amazon and other Seattle-based e-commerce companies), and the tech industry, both of which saw net gains in employment in 2020. Overall, Seattle-area employment dropped by about 6% from February 2020 to February 2021; if it weren’t for e-commerce and tech, that figure would be far worse.

And while the construction sector overall increased employment by about 3%, the story there is much more complicated. As described in this article looking at the city’s MHA program, commercial construction has dramatically shrunk over the past two years, both in number of projects and in the size and value of those project. This is important not only for the impact on employment but also to the city government’s revenues: in 2019, construction projects contributed over $100 million in combined B&O and sales taxes to the city’s coffers. Last year that dropped by more than $10 million. The city also depends on new construction for a substantial portion of its increase in property tax revenues, since under state law property taxes may only increase about 1% per year.

According to the city budget office, sales tax revenues are very slowly recovering, with the notable exception of leisure and hospitality. Again, the tech sector propped up the total.

If you squint at the chart below, you might notice the 1.7% increase in sales taxes and the 2.2% increase in B&O taxes in the latest forecast.

The bottom line: Seattle’s economic recovery is not going that well, and by many measures is now lagging the rest of the country. The pessimistic revenue forecast last November was largely correct, and the latest forecast is an almost imperceptible adjustment to it.

Throughout last summer and fall, as the City Council fought with the Mayor over rebalancing the 2020 budget and writing the 2021 budget, the Councilmembers were nearly unanimous in chanting their fervent opposition to anything that had even a faint aroma of “austerity budgeting.” Over and over again they told us that research showed communities that resisted austerity budgeting recovered the fastest from economic downturns — as they rolled back proposed cuts to city departments (with the exception of SPD), imposed a new payroll tax, and dipped into the city’s rainy day and emergency funds to preserve as much city spending as they could (to be fair, the Mayor offered some cuts to department budgets but also proposed to clean out the rainy day and emergency funds).

So far, there is little sign that the resistance to austerity budgeting is having the desired effect. Most of the rest of the country’s cities tightened their belts, and now Seattle’s recovery is lagging the nation as a whole. The lesson here is not that austerity budgeting is good, or that cities shouldn’t spend money during economic downturns. Rather, the lesson is that how you spend money in an economic downturn is very important — and very different than how you spend it in good times. The Council’s approach to budgeting (and re-budgeting) was to try to keep everything the same, then layer on top of that relief funds for COVID response, rent assistance, and a few other specific needs. That hasn’t delivered on the promise of an accelerated economic recovery.

Looking at the press releases from Mosqueda, Lewis, and Durkan, they seem to be promising more of the same with the extra $40 million in revenues. Lewis talks up spending more on addressing homelessness; Mosqueda cites “direct financial assistance to struggling families and creating more affordable housing and childcare options”; Durkan is less specific, but generally says that the city needs to “double down on our efforts to create a more equitable recovery and continue to support our small businesses, workers, jobs and downtown.”

Many of the things the Mayor and Council have invested in are important humanitarian responses, and some will even have positive side effects; for example, addressing homelessness might make an incremental improvement to public safety downtown that could also improve the business climate there. And investing in more affordable housing is also an investment in the housing construction sector. But it’s generic stuff, it’s not a plan for economic recovery, and it doesn’t address the known issues with the Seattle economy that show up in the budget office’s economic forecast. Now is the time our local government should be thinking about what it will take to revive local tourism and boost the leisure and hospitality industries. It should be considering investments to revive Seattle’s hollowed-out downtown, to lure office workers back, to reopen shops and restaurants, and to create the environment for new commercial construction. It’s not enough to provide relief for people who have lost their jobs; city officials need to be asking what they should be doing to create new jobs and lure the previous ones back into the city.

Of course, figuring out a plan for that will involve talking with the business community. Unfortunately this City Council has burned a lot of bridges there in the past few years. They have taxed, regulated, demonized, and shut out of policy discussions Seattle’s businesses. There is now great animosity and distrust in both directions, and that is an enormous impediment to moving Seattle forward out of the COVID recession.

There are many people in the business community who believe that governments should be run like businesses. They are wrong; governments and businesses have different goals, and while there are some commonalities, many of the fundamental principles of business management simply don’t translate over to running a civil service organization (or a non-profit, for that matter). But the challenge that Seattle currently faces as it tries to dig itself out of its economic doldrums demonstrates the flaw in taking that principle to its extreme: our elected officials’ lack of any basic understanding or appreciation of the city’s business community have left them unprepared to construct a real plan for economic recovery and growth. Instead they are focused on providing basic relief to the unemployed, with a naive optimism that the business community will figure it out on its own — and a blind assumption that Seattle businesses have deep enough pockets to fund the solutions themselves.

The City Budget Office’s economic forecast carries two clear messages: Seattle is starting to fall behind in its economic recovery, and “more of the same” won’t be enough to fix it. So far, there is no sign that the city’s elected officials got the message. Let’s hope it’s not too late for an epiphany.

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