It’s a cut-the-baby-in-half time for Seattle councilmembers and Mayor Harrell. Early forecasts show that, when drawing up next year’s budget, the city will have to grapple with a $117 million gap between revenues and expenses.
The multimillion-dollar gap — viewed in the perspective of an annual budget in the $7 billion range — is perhaps not horrific. But it still is bound to impact what the city can achieve towards meeting its on-going needs and ambitious social goals. The shortfall directly impacts the city’s $1.6 billion general fund, which must stretch to cover transportation, public safety, parks, libraries, and human services.
News of the looming gap came during a week of good and bad news. The welcome news came June 21 when the Court of Appeals affirmed last year’s King County Superior Court decision upholding the legality of the city’s JumpStart tax, challenged by a lawsuit brought by the Seattle Metropolitan Chamber of Commerce. Although the chamber is still deciding whether to go to the Supreme Court, the District 1 Appeals Court was quite clear in deeming the tax lawful. The Court said: “Engaging in business is a substantial privilege on which the city may properly levy taxes.”
The tightly targeted JumpStart tax (aka “payroll tax”) applies narrowly: Only to salaries of employees making more than $150,000 annually, and only to companies with $1 billion or more in payroll. The tax raised $231 million in 2021 – about $31 million more than anticipated. Going forward, the tax is projected to raise $277 million in 2023.
That’s the good news. The bad, however, stems from the dismal revenue forecasts provided to the mayor and city council. Those forecasts will be used by the mayor to draw up a proposed 2023 budget, transmitting it to the council in September. Councilmembers then review the mayor’s budget and submit a revised version by Thanksgiving.
Until the pandemic hit two years ago, Seattle’s revenues had been steadily improving since the end of the 2008-12 recession. Receipts were showing 4-5 percent increases each year. But – wham – the pandemic struck in 2020 and knocked holes in the city’s pocketbook. To deal with the crisis, the city provided help through programs like rent relief, hazard pay, and shelters designed to minimize Covid exposure, since mats on the floor were no longer acceptable.
Federal covid relief – a $128 million grant – helped cover some of the increased pandemic expenses. But – more bad news – the federal help was a one-time patch. Meanwhile, many pandemic programs are on-going and have become a long-term drain on city finances.
That same 2020 George Floyd demonstrations were flooding Seattle Streets. Black Lives Matter participation highlighted the need to address the city’s social inequities. Mayor Jenny Durkan promised and then delivered $100 million for BIPOC communities.
That and other unbudgeted spending opened a gap, filled when Durkan City Council constructed a budget using one-time federal funds as well as the early JumpStart tax receipts. Earlier the council had passed legislation to limit the use of payroll tax revenues to affordable housing and the Green New Deal. Using that money to cover broader current needs is problematic, requiring approval by the city council.
Next year’s budget must contend with the city’s increasing needs while at the same time supporting neglected basic services and any new programs. The result is a growing misalignment between expenses and available revenue.
At the end of 2021, Budget Director Ben Noble, retiring after eight years at the helm, sent a letter to the council warning that unless added revenues could be identified, the general fund would face a $100 million deficit by 2023. He noted that adding new expenditures like participatory budgeting and an Equitable Cities initiative could increase that gap to $200 million.
Noble’s end of year warning went mostly unheeded, even if it was largely true. Today Julie Dingley has taken over as new city budget director. After seeing this year’s worrisome forecasts, Dingley sadly observed, “There’s no obvious way to fill the predicted gap.”
Noble meanwhile was picked to direct a new department: the Office of Economic and Revenue Forecast (OERF). The three-person office is charged with providing the council and mayor with three economic forecasts a year – April, August, and November. Noble explained his new forecasting role when we chatted last week. He noted that Seattle is in a squeeze needing to tighten spending, increase resources, or both. Noble admitted, “There is no magic answer.”
Tightened spending already is on the table. Mayor Bruce Harrell has directed city department directors to identify 3-6 percent cuts when submitting their 2023 budget requests.
So far there hasn’t been much public discussion about increasing resources. Noble pointed out it’s too late to develop any new tax to fill the 2023 budget gap. He explained, “Any new tax would take six months to set up. That needed to be done months ago.” Noble speculated that the solution may depend on increasing an existing tax.
Turns out the only certain forecast is that this will be a busy fall at City Hall.
CORRECTION: The article was incorrect in saying that Mayor Durkan used one-time federal funds for ongoing projects. It was the city council that did so, swapping out one-time federal funds instead of JumpStart revenues. The council made the change over objections at the time from the mayor and a warning letter from Budget Director Ben Noble.
Jean, a clarification on the payroll tax: it applies to all companies with $5 million or more in payroll, but there are different tiers of the taxes, and the highest one is reserved for companies with over $1 billion in payroll.
While the Chamber’s case was weak and doomed to fail from the beginning, Amazon could still file a separate lawsuit, given that this highest tier of the tax was clearly designed to single out and punish it as the only company that would meet its criteria. The fact that Sawant referred to it as the “Amazon tax” then (and still does) makes it very clear that they knew what they were doing.
Of course, Amazon would pay a political price for challenging the payroll tax, and it’s unclear whether it wants to do so.
Kevin, There is no political price to pay for downsizing and moving to areas that would not single them out.
Do you think Amazon is OK with paying the new payroll tax? I get the feeling they are. The trouble is going to start when Seattle pols think they need to ratchet the tax up to cover bad business decisions the City made. As long as the payroll tax remains where it is, I believe Amazon (and the the rest of Big Tech) will just pay up.
The election method of the strong council government has to change, as we need city representation not group activism. Any forward thinking manager could have seen this coming , as also any responsible news reporting tribunal. It will take years to remedy !!!!
This is might be the challenge of the decade for the Seattle City Government. I might be reading this wrong, but Seattle needs to get the budget under control without raising taxes. Looking at the longer term, the City government needs to prove they’re good stewards with tax money right now, because they’re going to have to ask big business to write a massive check to deal with homeless issues and affordable housing down the road. I think the will is there in the business community to help pay for affordable housing, but not if the Mayor and City Council can’t get a realistic budget together ASAP.
Thanks for clarifying, Kevin. By the way, we’re really missing your careful reporting on SCCinsight. You valiantly covered an area badly neglected in other news sources.
Minor Correction. New funding was for the Equitable Communities Initiative not the Equitable Cities Initiative.
https://www.seattle.gov/equitable-communities-initiative