City of Seattle Economic and Revenue Forecast Council meeting of 81023

in the Seattle City Council from Council President Debra Juarez's office.

Thank you for being here as her designee, Brenda.

From the office of economic and revenue forecast, and welcome to being a member of the revenue forecast council.

Is there anything you'd like to say?

Yes, of course.

So chair and fellow members of the revenue forecast council.

Thank you for the warm welcome into my new role.

Senior deputy mayor Harold has been invaluable asset at the mayor's office representative to date.

And I know I have huge shoes to fill.

I'd 1st, like to give my thanks for the quality work from the economic and revenue forecast office team and the city budget office.

The information they provide will offer the guardrails that council members and mayor Harold operate within as we together craft and refine our city's budget.

We don't have unlimited money, but we do have unlimited demands, which is why it's incumbent incumbent upon all of us to receive this neutrally provided information and make our subsequent decisions accordingly.

I think chair can attest that our budget development work last year was light.

And day different from years prior, and I hope we can continue to build on a strong foundation and make the important choices that will benefit the lives of thousands of Seattle lights.

I'm glad to join this esteemed council and I look forward to considering and acting upon the information to come.

So, thank you very much.

Excellent.

Well, thank you and a warm welcome to you as well.

I would concur with your comments about our collaborative effort with legislative and executive colleagues working to try.

in a transparent way, both between branches of government and to members of the public, as we solve for the looming deficit between revenue and expenses, and as we seek to scale up our services for an increased population size and ongoing increased needs, especially exacerbated during the pandemic.

So all of this ties in, and it's a very exciting opportunity for us to hear from an independent office, the Office of Economic and Revenue Forecast.

This meeting is being recorded.

We want to thank you for the opportunity to be here with us on a quarterly basis.

As you see from the meeting materials that are posted on the office of economic and revenue forecast website, they put out in a transparent way, all of the materials and we all receive those collectively at the same time members of the budget office and central staff now have the opportunity to work with us as members of the forecast council, the city council and the mayor's office to craft.

changing revenue streams that are coming to the city to address ongoing needs.

Here, we have an opportunity to walk through the 2nd quarter returns.

We have information that we will be looking at from quarter 2 as well as projections going forward through the remainder of the year.

And then the upcoming near term as well.

We will discuss the new August revenue forecast that is being presented here today from director noble from the office of economic revenue forecast and as director noble has noted in the communication that went out about this meeting.

We have 1 substantive matter on the agenda and it is a very important item.

This August revenue forecast is the forecast that will help provide the basis for the mayor's upcoming 2024 proposed budget.

The city budget must always be balanced.

So the mayor's proposed spending for 2024 will be directly constrained by the forecast and the revenue streams that we will be discussing in large part here today.

It will also be informed and provide a fuller picture from the additional revenue streams that still are within the office of the city budget and both the office of economic revenue forecast and the city budget will be in front of city council next Wednesday in the finance and housing committee meeting to provide a summary of the discussion here today.

But our Revenue Forecast Council that is meeting right now, this is the starting point for us digesting and receiving the proposed revenue forecast and a clear picture of how the projected revenue has come in to date.

Again, the council will be receiving the proposed budget from the executive's office the last week of September, and we are scheduled to also receive a revenue forecast for our October meeting on Tuesday, October 17th.

This is a meeting of this group has been scheduled for 930 the morning of the 17th of October.

This will be the final forecast that helps set the stage for then.

the City Council's final deliberations on the budget.

Both of these meetings are important.

Today, informing the Mayor's proposal.

October, informing the Council's final deliberations on the final budget for 2024. Today's presentation will be led from staff and the City's Independent Office of Economic and Revenue Forecasts and a reminder to the public.

The Forecast Office was established at the beginning of last year.

We had our 1st meeting in January of 2022. It includes the mayor and council, as you heard today, we have 2 representatives from each branch.

The objective is to provide unbiased revenue forecast information free from any potential political pressure or influence in real time.

To both branches, given that the revenue forecast plays such a critical role in determining the financial constraints that govern the city's overall budget.

It is essential that we protect this forecast process from any undue political influence and keep it truly independent.

Before moving on to the forecast presentation from our good director, Ben noble of the office of revenue forecast and his team, let's begin by formally adopting today's agenda.

A copy of the agenda has been circulated to members and is posted in a timely manner on the forecast council website.

Regularly.

We provide that information in real time and along with the material.

So it's all available to members of the public, the press and the city family.

Today, I go ahead, I'm going to go ahead and adopt the agenda.

I move to adopt the agenda as presented in the materials circulated and posted on the website.

Is there a second?

Thank you very much, Director Cornell.

It has been moved and seconded.

Today's agenda is before the forecast council.

There is an opportunity to move any item off the agenda if you so desire.

Are there any proposed amendments?

Hearing none, if there's no objection, today's agenda will be adopted.

Hearing no objection, today's agenda is adopted.

That moves us right into item number 1, which is approval of the minutes from the April 10th, 2023 meeting.

Again, copy of the meeting minutes from our April 10th meeting has been circulated to members of the Revenue Forecast Council, and it is also posted online at the Office of Economic Revenue Forecast Council's website.

If folks have had a chance to read through those, I would move and seek a 2nd for the approval of the minutes.

I move adoption of the minute meeting minutes from April 10, 2023. is there a 2nd?

2nd.

Thank you very much.

Deputy Mayor Washington, it has been moved and seconded.

Is there any additional comments or edits?

Hearing none, if there's no objection, the meeting minutes will be approved.

The meeting minutes from the April 10, 2023 Revenue Forecast Council are adopted and approved.

Let's go on to item number 2 on our agenda.

This is the presentation of the August 2023 economic and revenue forecast office and recommendation from the office of economic and revenue forecast regarding the 23 and 2024 revenue forecast.

Today's presentation, as I noted, will be led from staff from the revenue forecast office.

They will provide a summary of both the economic conditions and projected city revenues.

To ensure that the forecast council is fully informed and able to have a full range of questions to be addressed.

Staff from the city council central staff and budget office city budget office are also here.

Welcome to participate in the briefing and ask questions as well.

The presentation will include a formal recommendation from the forecast office regarding the forecast that is being presented today.

And as a reminder, the role of this forecast council is either to confirm.

Or reject.

The recommendation after the presentation, we'll have the opportunity for discussion of the forecast before we make that determination when I again, thank you for being part of this discussion here today and really reiterate our appreciation for the independence of the forecast office.

And I'll turn it over to director noble to walk us through this presentation.

Thank you Chairman Skater.

We have a good deal of material to cover.

So I think I am just going to dive right in, share my screen and put up the PowerPoint.

One moment.

All right, could all see that I'm going to dive right in, as I said, so just to give you a sense of where we're headed today.

Um, so outline is actually very familiar.

We've used the same structure for the last few meetings.

So, the 1st, part of the meeting, I'm going to provide a high level summary of what we've seen both nationally and locally on the economic front since since April.

Obviously, those developments are part of what's informing the forecast update.

We'll then shift to the second part of the presentation, where we'll be looking at the economic forecast.

So, not the revenues, but the economy as a whole.

There are two components there.

One is the national economy.

So, I'll be summarizing the national forecast that underlies our work.

That's from our national forecasting Subscription to S&P Global, just as a reminder to you all and to the public as well, past meetings, we've talked about the IHS market forecast.

They got bought out by S&P Global.

So, we are now using their proper name, but it's the same underlying same underlying forecast agency.

I'm then going to shift and turn this over to my colleague, Jan Duras, to talk about our regional forecast.

We use that national forecast as an input to our regional modeling, but it's going to be important, actually, today we'll talk about that, that the regional model doesn't just follow the national model and is designed to capture things that are going on in our local economy or that we expect to be going on that are different.

So that'll be an important point, as you will see.

And then the final portion, perhaps the one you're most anxious to see, is the actual revenue forecasts themselves, both for the general fund revenue streams.

We'll particularly join there by the budget office to go over some of the revenue streams that are more directly under their purview.

Then we'll also talk about the non-general fund revenues, including jumpstart and real estate excise tax.

Those are the ones that are used for general purposes, and then some transportation-specific revenue sources as well.

So, that's the layout and I'm going to dive in again.

So.

We have since about a year ago, maybe even a little bit.

little bit before that, been talking to you about expectations of a slowdown.

At first, that was an expectation for a recession.

So a year ago, April, we were expecting a recession that could hit late in 2022 and early into 2023. That then has gotten pushed out over time as the national economy seemed to be stronger than had been anticipated.

In April, when we were here last, we started to talk about the idea of a soft landing.

And evermore, and that will be a theme in this forecast, that is evermore the expectation, that rather than bracing ourselves for a potential recession, although expectation had been for a short one and a mild one, expectations and forecasts are now that we're actually going to cool the economy off without going into a period of negative growth, which is really the definition of a recession.

That's what we're expecting, and the data that we've seen since April and the developments since April at a national level reinforce that notion.

And that's what's shown here.

And I just want to highlight some of these.

So the first chart on the right focuses on the labor market.

The bars show job creation, the number of jobs created per month.

And what you can see there is since April, the economy has continued to produce roughly 200,000 jobs per month on average, a little bit more.

And at the same time, it's not hard to kind of squint your eyes a little bit to see a trend line downward in those orange bars.

So the rate of job creation has been cooling over that time, which again, given where inflation has been, and the goal to bring inflation under control, that's actually a good outcome, arguably.

You can see that the line there is the unemployment rate, and it's been relatively stable.

So we've been creating jobs, keeping unemployment stable.

That implies that we're essentially creating as many folks entering the workforce as there are new jobs.

And we'll talk a little bit more about the workforce as well.

If there's a concern that still pervades in terms of the labor market, it's on wage growth.

Things have stabilized, but stabilizing a situation where the labor market remains tight.

There are still, there are more job openings than there are, than there are necessarily people looking for a job at any given time.

The result has been a positive pressure on wages.

And in general, one might think that's a good thing, but that also creates positive pressure on inflation.

And the Fed has been anxious to bring inflation under control.

So that persistent wage growth, if there's a concerning factor in this, that might be it.

Shifting though to talk more about inflation, the chart on the bottom again shows patterns of inflation and the work of the Fed to control inflation.

And what you can see is that having peaked as high as 9%, so the green line below is consumer price index for urban areas.

It's a general measure of inflation you hear talked about and written about in the press.

And again, having peaked at 9% a year ago, June, It's come down most recently to 3% in June.

Data today just came out for July.

It ticked up to 3.2, but still obviously much reduced from last year.

And the reduction over the past few months has actually outpaced the expectations.

So inflation has actually cooled off faster since April than most folks had expected.

I do want to note, and it's shown here as well, that core inflation, which is important for a variety of reasons, one of which is the Fed is focused on measures of core inflation or something else that they call the PCE that they use to measure changes in prices.

Core CPI changes in prices, excluding energy and food, which tend to be very volatile.

And it's not excluded because people don't have to spend money on those things, but rather that over time, the core CPI is seen as a better measure of the kind of a long-term trend in prices.

What you can see there is that core CPI has come down.

It was above 6% a year ago, down to 4.6% in June.

And actually the data for today indicate that it's fallen, I believe, to 4.4.

So it's continued to fall even as the CPI, the broader measure, has gone up.

So, so core inflation is coming down, but not coming down as quickly.

One good news there is that we expect that cooling rental markets will help bring core inflation down going forward.

We'll talk more about that regionally as well, but the The, the CPI measures use rental rates as a measure of housing costs and because leases get signed for a full 12 month period, it takes a while for a cooling residential rental market to percolate into the CPI.

So there's good reason to think though, because rental markets have been cooling.

There's good reason to think that that will help bring down both overall CPI and the core CPI going forward.

So.

Just explain that the economy has been doing a little bit better since April than we thought.

And as you'll see, though, we're still going to be projecting a slowdown.

And one might fairly ask why we're still projecting that and might also wonder why, if we've been expecting this for a year, why hasn't it happened?

And I think that that is useful background to have as we think about the overall forecast.

And the short of it is that one reason that the major reason that the slowdown in the forecast, or the forecast still projects a slowdown, is that the Fed is committed to cooling the economy because inflation is still running above its target level of roughly 2% to 2.5%.

And it's made it very clear that it's going to continue to increase interest rates such that it can cool the economy and bring inflation down.

Before we talk more about that, I want to take just a moment to explain a little bit about, and maybe more for the general public as anything, how it is that the Fed's work on interest rates actually affects the overall economy.

And I think it might help understand why it's taken some time to ripple through and actually be seen now in terms of actual economic data.

So the basic idea is that the Fed actually has limited tools.

And the raising interest rates only affects some parts of the economy.

In particular, it affects those ones that rely on borrowed money.

So if you're in the construction industry, most construction goes on with dollars that have been borrowed from a bank.

So you build a building with the borrowed dollars, and then you start generating revenue to pay off that loan.

Real estate, if you're buying a residential property, most people are taking out a significant mortgage to do that.

Automobile sales, a lot of folks are borrowing money to buy automobiles.

All those kinds of things become more expensive as interest rates go up.

So those activities slow down.

As those sectors slow down, they'll reduce employment or reduce wages to the people who work in those sectors.

Those folks will then be taking home less money that will then ripple through the economy and decrease demand in other sectors as well, cooling those markets and bringing down prices overall.

So it's that's it's through that mechanism that the Fed is hoping to to cool the economy.

And they, again, remain committed to doing that.

We saw that in June, they paused interest rate increases, both because they'd seen that inflation was coming down, and because there had been some instability in the financial sector, notably the Silicon Valley Bank, as an example, had gone bankrupt.

Higher interest rates were putting pressure on that sector.

So they took a pause in June, but they raised rates again in July, and there's growing expectation that they will raise rates again.

And the effect of that will be to bring down the growth rate of the overall economy.

So the most recent forecast from S&P Global, which actually are out for July, so these are ones that were published even this week.

They're expecting growth of 2% this year, so more robust growth than had been expected.

And then it's going to slow some for 24 and then and then continue at a lower rate beyond that.

See, there's a question from forecast Councilmember Brindell.

So.

Happy to take that on if you'd like.

Great.

Yes, please go ahead.

Is the, does the Fed, do the Feds make a decision about interest rates based on energy prices?

Their focus has been more on the core PCE and more on something else that they use called the core CPI and the PCE, which is a personal consumption index.

Those are measures that abstract away from the volatility in fuel prices.

So they're trying to look past that into longer term trends.

That said, fuel prices, if they persist, can have effects across the entire economy.

So they're not ignoring that, but there's a lot more noise in fuel prices than there is overall.

Thank you.

So, so again, we've been we've been at this and forecasting some kind of a slowdown for some time.

So why is it taking so long for the for the feds actions to take effect?

And there are some reasons to think that this current situation is is different than in past.

And in particular.

there are some forces that have been pushing the economy the other way at the same time that the Fed has been trying to cool it.

One of those, and this is becoming sort of old news because energy prices are starting to tick up again, but energy prices had been coming down in the early part of this year, and that effectively acted as a stimulus to the economy.

Folks were spending less money on gas, but they had more discretionary money to spend on other things, just to give an example.

Another is that as recently as early in 2021, the federal government was in a stimulus mode, so trying to ensure that we had a robust recovery from the pandemic.

We were engaged in providing additional resources to the public overall.

The Fed is now trying to do the opposite.

There's still some echo from that stimulus.

Individual household balance sheets, as they described, have some extra resource, so people are still spending some of that stimulus.

Another issue that's that's played out somewhat unusually is that the automobile market normally raising interest rates would cool the automobile market because again, people borrow money to buy cars.

And that's certainly a factor, but because the supply chain issues, the entire automobile market had been sort of seized up a little bit for much of 2021. But as those supply chain issues have been resolved, there's pent up demand.

So, automobile sector has been doing quite well, despite interest rates, higher interest rates.

And again, that's a big part of the overall economy.

So it's made a difference.

And then again, as I was mentioning, the labor market has remained tight.

So, a lot of folks left the workforce during the pandemic.

They've been somewhat slow to return.

Most recent data indicates that more folks are coming back to work.

And I don't mean back to the office, but I mean actually re-entering the workforce.

There's also evidence that immigration is helping to increase the overall workforce.

So again, give you some context for why, even with good results overall for the economy, we're still projecting a slowdown that's coming up.

And we'll talk more.

Um, about why we're expecting something even a little bit different for the local economy.

So, let me shift to talk about what we've seen in the local economies in the last few months and kind of and overall on the previous slide, just a quick question.

And I'm sorry, I didn't look it up as we were chatting, but, um.

This morning on NPR, for example, they were, they keep coming back to the same question.

The word everybody keeps talking about is recession recession and never actually came, but things still look gloomy in the future.

And then they noted that the interest rates had continued to fall over the last year, but they had announced something like as.

0.2% increase in interest rate maybe this morning.

I didn't look it up and maybe I have the wrong numbers, but can you comment on if there was anything that was announced today and any new information that affects this trend that you've seen over the last year on interest rates?

Yes, so the news this morning was about inflation.

But so in July, after, again, having taken a pause in June.

Inflation, sorry, not interest rates.

OK, got it.

But highly related.

So the Fed did choose to increase the benchmark rate, as they call it, in July.

So they had paused in June, resumed an increase in July, because although inflation was coming down, they were still seeing that core inflation was persisting.

Presumably, they thought that the financial markets had stabilized enough that they could increase interest rates without further risk of bank failures to be direct.

The news today on inflation was in some ways mixed, but I think overall it's probably actually, from the Fed's perspective, good news.

the benchmark rate, or CPI-U, so the broadest measure of inflation, did tick up.

So having been at 3% year over year, so they measured 12 months preceding that ended in June, it was 3%.

For July, it ticked up to 3.2.

But at the same time, the core rate, so again, taking out fuel and food, continued to decline.

So it had been 4.6, and I think it went down to 4.4.

So that longer-term trend that the Fed is particularly focused on was still headed in the right direction.

That said, again, the growing expectation that the Fed will actually increase rates potentially one more time before year-end, and then wait some time well into next year to see that prices are well under control before they were to start lowering interest rates.

and they will do that slowly.

And so the focus again has shifted from that expectation that we would have a brief and mild recession to actually being able to cool the economy.

And that's really much to be able to cool the economy without inducing an actual slowdown.

And again, we'll see some more of this going forward in the presentation.

So we'll get back to this point.

Just to comment a little bit more about the local economy and to emphasize some of the risks we see.

At a high level, local economy is behaving a lot like the national economy.

On the left here, you can see a comparison between the inflation in the Seattle area and in the US.

Recall that our inflation rate here locally has been running higher than a national level, particularly driven by housing prices.

But you can see also to the right of that graph that our Prices have now been falling and are starting to converge towards the national level of inflation.

And again, expectation is that as the CPI is updated for the newer rental rates, that that number will continue to come down.

On the employment side, we have generally actually in the period immediately following the pandemic, so for 2021, obviously we're maybe still in the pandemic at that point, Unemployment in the city was actually lower than the nation as a whole.

We had a pretty robust recovery immediately following.

More recently, unemployment in the area has been essentially equal to the national level.

So overall, we've been doing reasonably well.

But when we dig in a little further, which is what the next slide does, we do see that there are some risks and some potential differences in the local economy relative to the national economy.

So this is a graphic that in various forms we've shown you on a regular basis.

It shows that employment change, this particular one shows employment change since the beginning of the year.

The top line in the black is the total number of jobs created since the beginning of the year in the Seattle area, just under 25,000.

And then the bars below break out the sectors.

And what's particular of note here is that we're getting job growth in a lot of sectors, but the ones that we are not are particular interests.

So, you'll see, we lost almost 5000 jobs in the information sector.

That's consistent with the layoffs in technology that we've heard that we all heard about.

Another point, although it's not red, the professional and business services sector, which is the third of the blue bars, it's barely added jobs since the beginning of the year, just 200. At the height of the hiring in the 2021 period, that was one of the places where we saw a lot of tech jobs.

Firms get allocated into one of these two buckets, a lot of the technology firms.

The fact that there's almost no growth there is actually a sign of that slowdown.

And again, the other place where we're seeing a loss of jobs is in construction.

And we think, and you'll see this in the next graph and repeated in some other observations, that as the technology sector has slowed, demand for office space has slowed, also work from home is slowing demand for office.

And also just to slow down in general in the rates of hiring mean that demand for residential construction is likely cooling as well.

that those are going to have ripple effects going forward.

We'll see more of that both on the next slide and then also later in the presentation.

Before we leave this, I do want to note that leisure and hospitality have now become the leading area in terms of new jobs.

Despite that very significant addition of almost 10,000 jobs, that sector is still, in terms of headcount, not quite back to where it was pre-pandemic.

There's still some opportunity for growth there.

Again, given what we're seeing in terms of cruise ships and other tourism, a significant driving force potentially going forward as well.

But again, the change in the tech sector and construction are a concern.

This next slide highlights, it's a concern that we're seeing evidence of spreading to other parts of the economy potentially.

In particular, on the left here is a comparison of wage growth, And we already talked about the fact that the national level wage growth has been around 4.5% for the last little while, and that's shown here.

The red line, these are quarterly figures for the Seattle area.

And what you see is that, again, in 2021, as tech firms in particular were hiring up, we had very strong wage growth and we were outpacing the nation.

In 2022, as slow down in hiring and as the stock values in the technology sector, which are part of their effective wages started to fall.

We fell below the national weight in terms of wage growth and actually went negative.

And there was a piece in the Seattle Times a couple of weeks ago pointing out that.

that for the first time in a long time, county-level aggregate income had dropped in 2022. So as that technology sector cools and those high-wage jobs are paying less and or there are fewer of them, that affects the economy of the region overall.

There is less money being spent on a variety of services and goods beyond just that immediate sector.

Again, as I mentioned, we also think that that cooling is affecting and will affect construction.

So it's a little hard to tell where we are in terms of a trend there, but the graph on the right highlights issued, the value of issued building permits compares 2023 in the green to 2022 in the blue on a monthly basis.

These are data from the Department of Construction and Inspections.

And what you can see is it's not true for every month, but for several months, That we're seeing here, the figures for 2023 are notably below 2022 and an aggregate year to date.

So, through July, the value of issued permits is down about 20%.

And maybe even more importantly, if you look at the bigger project, so a 1Million or more, and, you know, a 1Million dollars in construction doesn't buy you much these days.

That's, you know, Maybe you can build a triplex for less than a 1M, but, but not much more.

So, anything of significance is a 1M dollars or more and their projects are down by 35%.

So we're starting again.

We're seeing less.

Less permitting in terms of issued permits, which is undoubtedly going to lead to less actual construction activity going forward.

So these are abstract concerns that we are absolutely seeing in the data.

Right?

No, I think this is really helpful.

Thank you.

And part of the conversation we've been having over the last few months as part of the revenue stabilization work group and a little bit today at city council was related to spurring economic activity.

It's something I brought up here in the forecast council as well that as a tool to spur economic activity, we should be looking at ways to expedite permitting.

But I guess 1 of the questions that I have on this bar chart here is, is this total application submitted or is this applications approved?

This is issued permits, so it's not.

Yes, I just wonder.

Yeah, I wonder, and maybe this is outside of the purview of the forecast office, but if we could compare this to total permits submitted, like, to see if there was a backlog.

And whether or not the same number of permits were being requested this year compared to last year, for example, and if it's just a matter of backlog, or if it's really a matter of permits being down and that being also an indication of where the economy is headed in terms of interest in in developing in this area.

Any Intel on that?

Do have some Intel and also.

give you a sense of how it's hard to interpret the data.

So the value of requested permits, so submitted permits, has actually been relatively constant for this year relative to last year, maybe even up a little bit.

But it's difficult to tell whether that's going to represent a backlog or, because at the end of the day, it's the decision to pull the permit is the phrase that's often used.

So when you pull the permit, it is then issued to you.

You do that when you've got the money lined up to actually build the project.

So, to the extent that higher interest rates are slowing slowing folks down and discouraging.

Bottom line is, it can be that people will submit permits that they will never that they were never never pull so that, you know.

The applied permit applications is a forward looking measure, but it isn't as tight a correlation between that and the actual construction activity as is the issued permits.

So, again, that's why the trend here is a little hard to discern, but we're seeing the permit data suggests that there's a cooling and also we know that office demand is at an ebb because of work from home and from Just overall hiring trends as a, like, so it's kind of it's sort of.

So, confirmation of of of that general observation, but it's an area that we continue to monitor.

I can assure you monitors.

This is actually we get monthly updates from them.

They are tracking this on a regular basis as well.

Um, but there is, there is some level of disconnect between, um, permit applications and permits issued, or at least there can be.

So, with that, we're going to shift and start talking about forecast.

So we've been looking sort of what's been happening in the last few months.

Now, I want to look forward to what we expect to be happening.

And I'm going to do that 1st, by talking about the national forecast.

And then, as I mentioned earlier, I'm going to turn this over to Jan to talk about the regional forecast.

So at a national level, and I wanted to highlight in part how the forecast has been changing over time.

And again, reemphasize this notion of a soft landing.

So on the right here, you can see these are forecasts for employment growth.

And the arrows are indicating that the change over time.

So back in November, we showed you the forecast.

The expectation was for a recession.

So job growth was going to fall negative in 2024, so below the zero line, if you will.

It wasn't going to stay there for long, so it was going to be a short and shallow recession, but that was the expectation.

As of April, it shifted to an expectation of a soft landing.

So the cross out and underline in the title here reflects this is the same title as we had in April, because in April it was news that it was now a soft landing.

Now, at this point, it's still a soft landing, and actually a little bit softer.

That is to say, a more gentle slowdown at the national level.

The national economy has proven more resilient.

But as importantly, inflation is coming down without having a significant slowdown in employment and the like.

So we're getting exactly the outcome that one would have hoped at some level.

Inflation coming down without significant loss in jobs and without a significant slowdown in overall output.

So the forecast has been updated to reflect the realized strength and get this increased probability of a soft landing style slowdown.

And the expectation is that the Fed now is going to be able to manage interest rates to bring down inflation, but do that with slowing the growth of employment, but not actually leading us into a recession.

So again, at the national level, the forecast is positive in that sense.

On the inflation side, forecast is largely unchanged.

Mainly what it's doing is acknowledging the fact that inflation has actually come down faster than originally expected.

So the April forecast is the dotted orange line, and it's hard to see it, but it runs a little bit, it was running a little ahead of, the darker line is the August forecast, and it shows that the expectation as inflation will be a little bit lower through the rest of 23 and much of 2024. But then headed all the same direction to this target rate of two, two and a half percent.

And again, this for a question that was asked earlier, the Fed is really focused on this core inflation and PCE.

But again, they're seeing good news there.

It's still running higher than they would like.

So again, they're going to keep interest rates up.

But the overall expectation is that inflation will continue to moderate, that employment growth will continue, but at a slower rate.

Again, exactly the soft landing that had been desired.

chip gears for a moment.

I want to talk a little bit at the national level about the difference between the baseline and the pessimistic forecast.

One of the decision points is which of these to use as an input to our overall forecast work.

The pessimistic forecast that S&P has developed at the national level is one that's really tied to global events.

The scenario that they play out there is one where the Russians won.

Ukraine escalates from where it is now, and in particular, that would lead to further disruptions in commodities, so food, grain in particular, also in energy.

That would start to drive up prices.

So you see on the right there, the inflation forecast is for a pessimistic scenario with a higher rate of inflation.

With a higher rate of inflation, the Fed will respond with higher interest rates.

Higher interest rates could then create some instability in the banking sector that would then lead to a slowdown overall in credit dependent sectors and cool the economy.

So you get, in that case, you actually get, it's not quite a recession in the sense that we don't see negative employment growth in this particular phase, but the lower graph shows a much slower rate of growth in employment.

But I want to emphasize that this, and then they assign a 25% probability of this, so this is something that could clearly play out.

And in fact, since they developed this forecast, the situation in Ukraine has gotten less stable, not more.

But this is really a forecast that has to do with a scenario that plays out at a global scale.

And the point that I'll return to, it doesn't really capture the risks that we see at the regional level that are different than a national level.

This is a bad news version, but not really the one that we think is a particular risk to the region.

With that, I'm going to turn this over to Jan.

To talk about the regional forecast.

All right, thank you very much.

Um, so next couple of slides, we'll show our updated regional forecast by region.

We mean Seattle metro area because of data limitations.

We cannot really produce detailed forecast for Seattle city.

Um, the model developed and maintained by the forecast office is for the metro area.

So, King and Snohomish counties.

So.

by regional employment, regional income, here we mean the income in this metropolitan area.

The chart on the left here shows the April and the August forecast for employment growth.

You can see that there is the red line in the chart on the left is below the orange line of the Part of it is the revision of the data.

For the second half of 2022, the Employment Security Department of Washington State revised down their employment estimates by about 1.5%.

So we are starting from a lower point.

But as you can see that employment is expected to catch up and essentially by 2024 get to where we were expecting it to be when we were working on our April forecast.

And then from 2024 onward, this forecast features the same kind of soft landing and very, very, very slow growth.

So that's a feature that this regional forecast shares with the national forecast.

And I saw there was a question from Tom Mikesell.

Sorry, wrong camera.

That's okay.

Trying to get it to go right.

There we go.

Hi.

Thanks, Jan.

I just had a question.

So on the graph on the left, so what you're saying is that the actuals are actually lower, and this is data from the Employment Security Department, but that will just catch up right back to what the forecast model would have predicted back in April anyway.

Yes.

Yeah, that's essentially what it's saying.

So, if you were to look at look back at the US employment forecast, if we can go back a couple of slides, what you see in the employment forecast for US is that the red line is above the orange one.

So, starting from 2020, if you're comparing 2024, in the August forecast to 2024. In the April forecast, the employment level is higher than what it was expected to be in April.

This S&P Global revised upward their employment data based on this resilience that the labor market is showing.

So that in part drives the regional forecast and that kind of catching up to the April level.

So we are not predicting to be above the April levels by 2024 because of a downwards revision, but we are still, the model still has that catching up building.

Now we are still taking into account a couple of additional things for regional employment, layoffs in the tax sector, The announced levels have been built into the forecast.

We have, when we were producing the employment forecast, we took into account the permits data, the SDCI permits data, which suggests that the employment growth in the construction sector will be will be slower.

Essentially, they're slower than the national one.

At the same time, there has been an upwards revision for leisure and hospitality sector.

So it's a bit of a mix of several things going on here as a result.

Total employment is expected to be roughly where we're expecting it in April.

So, so is it is it fair to say that the actuals that we start from are pulling us downward, but the.

the variables that you base your model off, which are national variables, are pulling it upward, which is why it essentially converges at the same place beginning in 2024.

Yeah.

Again, we are also adding some other things into the model.

The differences in leisure and hospitality sector are driven by differences in hotels performance, the occupancy rate, the revenue per available room, differences between the regional economy and the national one are part of what would be driving a really strong recovery, continued recovery of leisure and hospitality.

And this particular part of the economy, the regional economy outperforms the national economy, leisure and hospitality, for example.

I might add, too, that if you think through this, the potential effects on the revenue forecast are a little bit confusing or anyway complicated, because we know what the realized revenues are for the first half of 2023. We now understand that there were fewer jobs needed to generate those revenues.

So as we look forward, we think about how the correlation between number of jobs and revenues, it's slightly different than we understood it to be back in April, because there were actually fewer jobs generating the money that we are seeing flowing in, if you will.

So just another example of how the...

it's why we do this with the complicated modeling, because these effects and the secondary effects and the interactions are complex at best.

Yeah, that's a good point.

Now, looking at the regional inflation forecast at the chart on the right here, we see similar sort of revision as for the national forecast.

Inflation is cooling down.

We have revised downward our inflation forecast slightly.

And going forward, we expect it to be somewhere around 2.5% in the long run average.

So just slightly above the national one.

All right, so now, while there has been very little change in in the forecast overall, there are a couple of things that are harder to see in those previous.

Previous slides, we want to point it out here.

So when we are comparing the growth going forward with the prepandemic growth, there are significant differences there, both on the national level and on the regional one.

And part of what I'm going to talk about is driven by that soft landing and the slowdown in growth that S&P Global is expecting.

They're expecting slower employment growth and slower income growth for the national economy.

There is same sort of expectation for the regional economy.

Comparing regional employment growth, looking at that chart on the left, comparing regional employment growth.

Going forward with the pre-pandemic growth rates, we can see that the employment will be growing at a much slower pace.

Pre-pandemic, it was about 2.5 to 3% annual growth.

2024 to 2027, the growth rate there is much smaller, on average, below 1% employment growth.

The model original model takes into account the effect of the layoffs, the effect of a slowdown of a construction sector differences in leisure and hospitality and.

Puts that on top of the expected slowdown, um, because of a solo landing that the whole national economy will be experiencing.

And then the chart on the right looks at the income as a measure of the purchasing power in the region.

This is converted into real terms, so it's nominal growth rate in income adjusted for inflation to obtain the real inflation adjusted regional income growth, again, pre-pandemic and Period and the period starting from 2024 are quite different.

Because of a soft landing, the crows is expected to be much smaller in the national economy.

That's the same for the Washington state and it's the same thing for regional income.

Um.

So going from roughly 5.5 on average real growth before pandemic to 2.5, 3.5% growth in the next five years that's on average 2 to 3% slower growth rate.

And so region is still expected to outperform the national economy by a much smaller margin.

And part of that is, again, slower growth in high-paying technology and professional business sectors, slowdown in the construction sector, overall slowdown in growth.

And you'll see this reflected in the revenue forecast, in the longer-term revenue forecast, and consistent with the message we've delivered previously, that expectation of the rate of growth of city revenues is going to be notably slower in the next few years than it had been in the period pre-pandemic.

So last piece of the regional forecast is to talk about the pessimistic forecast and what that looks like.

So again, back to Jan.

All right.

Yeah.

So these two charts show the differences between the baseline scenario in red and the pessimistic scenario in dark brown color.

comparable in general, they're comparable to the impact of a really significant downturn in national economy.

So instead of a soft landing, pessimistic scenario would mean significant job losses.

It would be still considered a mild recession by general standards, but it would have significant implications on a number of jobs.

And at the same time, the inflation rate would be higher than, I mean, the baseline scenario.

So before we move on to talk about revenues, I have another question from Tom.

Happy to answer.

Great.

Thank you.

Hi, Tom.

So on the prior slide, and I'm not suggesting that this is the right thing to do, but I'm just curious, given that it seems nationally the forecasters keep calling for a worse outcome than what we actually experience.

Is there any context ever where you start to look at the optimistic scenario as something that's worth considering?

Because I know there are, I mean, I've heard there are many different scenarios that are offered by the S&P and we just have these three, which I think are 25% pessimistic, 25% optimistic and 50% Baseline and we, and normally the recognition is baseline, but I'm just curious because it seems like the performance, we always outperform, I guess.

And so I'm just wondering if there's, if there's some kind of sign at which optimistic becomes.

No, I think it's a, it's a, it's a totally fair question and I think you'll see in a moment that me and we've already alluded to already.

In general, we think that there's there's good reason to think that the regional economy will underperform relative to the national economy.

So, in that context, it doesn't feel like the national optimistic forecast is a place to hang our hat if you will.

But if we, if we continue to be in a scenario.

Where the, you know, what we returned to a scenario where the local economy was, was continuing to grow ahead of the nation, the national forecast and our regional model wasn't able to capture that.

Because again, in theory, and ideally in practice, our regional model is designed to take the national forecast and to not just assume that it, you know, that that exact trend will persist regionally, but rather to try to capture more of what's happening here.

I think this is particularly relevant because I'm about to argue that I think we can capture the risks to the regional economy even using the baseline forecast here.

But given that our expectation near term is that we're going to underperform the national economy, now doesn't seem like a time to lean on the optimistic.

But if the reverse were the case, it could well be worth discussion.

OK, got it.

Thank you.

And I think I want to welcome Jeanette blanket ship, um, here on behalf of the city budgets office here today and, um, in the seat for director Julie Dingley.

So welcome.

Um, this blanket ship, please go ahead.

Thank you so much.

Um, I'm curious, uh, this is on slide 14, but whether this assumes that the Fed would, would lower interest rates in the out years, or at least kind of within that window.

Basically, try to understand the underlying assumptions here.

and how that might impact, say, longer-term stagnation.

Yeah, Jan, maybe with more detail, but the expectation is the Fed will start to bring down rates, I think it's the middle of next year, but to do so gradually, essentially moderating those reductions as it's reading what's happening in the national economy overall.

Yeah, that's the expectation.

They're expected to come down gradually over time, but eventually stabilize around 3% and it's going to be just a gradual process.

So.

Starting from 5.5.

will go down to 3% in a year and a half.

By 2026, Q2, it's expected to be somewhere around 6%.

So coming down into 2026 will be the path of reductions.

But again, I think they will be reading the economy as they go, if you will.

But the expectation now is that it wouldn't happen sooner than that either.

And that is part of why we're expecting that overall trend growth to be below what we've seen in the past, again, over that kind of three to four year time frame.

Thank you.

Unless a recession happens and then the Fed will try to stimulate the economy by lowering the interest rates quite significantly and quite fast.

So, to return a little bit to the issue that Tom raised, although maybe from a slightly different angle, what's the most appropriate forecast?

Again, in my head, this was a choice between the pessimistic and the baseline.

So, this slide is designed to give you a sense of where our national forecasters, we provided a a comparable version last time.

I do think it's really helpful to place our national forecasters' projections into context.

So on the right is a graph that highlights a range of forecasts.

The range comes from a survey that the Wall Street Journal does.

They did this in July, but it was based on essentially information from June.

And they look at several economic metrics, in particular, inflation, federal funds rate, unemployment, and then GDP growth.

Those are the ones we've shown here.

I think they actually asked about a couple others.

The gray dots show you the full range of feedback that they receive.

They survey 70 economists, both from the business world and the academic world.

S&P Global, our national forecaster, is the red dot.

The average of the gray dots is the Wall Street Journal average is the blue one.

And then Moody's Analytic is another national firm.

We've actually added them to our subscription base, so we get some information from them.

The bottom line of this is that S&P, and this is consistent with what we've seen in the past, they're well within the midpoint of the range of national forecasters.

They often are somewhat conservative.

This time, if anything, they're actually a little bit optimistic.

So their sense of inflation is bright with everybody else's.

They're expecting their federal funds rate maybe to be a little bit higher.

But they're expecting unemployment rate to potentially be a little bit lower than others.

And they're forecasting GDP growth.

Again, this is 2023 growth to be somewhat higher.

And on that one, they seem to have been right, because the numbers have been updated since this forecast, since this survey was taken.

And in general, everyone is upgrading the GDP figures.

So basically, the point here is that we think S&P is kind of well within the midrange at the national level.

Is there a question?

Sorry that I missed.

Happy to take it.

I think I missed the hand as well.

That was mine.

That's Esther handy.

Central staff director was a mishand.

So, okay, well, we're ready for you next time.

Dr handy.

Thank you.

John had an eagle eyes, so we won't, you won't be missed anyway.

So, so let's talk about our specific recommendation.

So, as we've talked about.

There's good reason to think, and we're telling you there's much that the regional economy is going to face stronger headwinds than the country as a whole, right?

The tech sector has been a key driver for us.

It's slowing down.

Work from home is something that's affecting our economy in some ways more than the nation as a whole.

That's, we think, starting to ripple through to other sectors.

We highlighted construction.

So, so again, we don't, we are our project, our expectation is that local local slash regional economy won't do as well as the national economy for the next little while.

But we also think that our regional model is designed to capture that effect.

And that's really, that's why we use and have developed that regional model.

And consistent with that, and you'll see this when we start to show you some of the revenue numbers, our revenue forecast are capturing the expected changes in that regional economy.

So again, we think we're able to model the differences between the regional economy and the national one.

And another reason, and again, ultimately our recommendation here is to use the baseline.

Another reason is that the pessimistic scenario is really capturing a set of risks that are just different than the ones that we're seeing here, right?

They're modeling short-term impacts of escalating the Russia's war against Ukraine.

The regional issues that we see are really have to do more with changes in the technology sector and kind of the mix of the regional economy.

So, again, we're expecting regional economy to do not as well as the nation, the national 1. we think we've already captured that in our, in our forecast.

And that's why we're recommending the baseline.

As we go forward to show you the revenue numbers, which we're about to shift to will highlight what what things would look like under the pessimistic scenario.

But our attention will be on that baseline situation because again, that that is our recommendation.

So, with that, I am going to shift to actually talk about the revenues and I'm going to dive right into a table that I don't know if you come to know and love, but at least come to anticipate.

So, this is the detailed summary of the general fund revenue forecast.

I kind of walk you through the structure of this table.

That is a lot of numbers.

So, the, the revenue sources on the light on the left are the.

major revenue streams that we are tracking.

Some of them represent categories, particularly down towards the bottom where we're grouping a number of smaller revenue streams.

The city's most significant ones, property tax, sales tax, B&O, utility taxes listed at the top.

The first column of numbers is the 2022 actuals, so that's the revenues we took in last year.

Put there really as a baseline to give you a sense of growth or not relative to that.

The 2nd set is the April forecast.

So those are the figures that we had.

We brought to you last April for 2023. the 2nd column is the new forecast for 2023. and then to the right of that is the difference and I will spend some time walking through the differences between the forecast and what's that showing.

For 2024, we're providing the same, the April forecast, the August forecast, and the difference.

And then the far right is a column that sums the differences.

So you can see the change over the 2-year biennium.

Just to further background here, the revenue streams that are shaded in blue are the principal responsibility of the forecast office, property tax we do in collaboration with the budget office.

Those that aren't highlighted are those that remain largely the purview of the budget office.

I'm going to walk through all of this, but I will turn to the budget office for a couple of these just to highlight some of the changes.

Can you just remind us 1 more time the ones that are shaded in blue are the purview of.

The forecast office in particular, and the ones that are.

The white ones, if you will, are the budget office.

Sorry.

Okay, great.

And then this is again for folks who are watching why we invite CBO and the revenue forecast presenters from the office of economic and revenue forecast to the finance committee the week following these presentations to kind of get the collective view.

But as Director Noble noted, having CBO on the line here today is very helpful.

So appreciate the shared presentation as well.

And I should further add that our economic for the economic forecast for the region, the 1 that we that the forecast office prepared is something that we then give to the executive about a week ago.

So they can develop some of these forecasts because they are some of them are dependent on the economy as a whole as well.

So there is there is input on even those as well.

And that's just to give you that background.

So, walking down the what's changed so that so that 1st difference columns under 2023, you'll see there's about these are in thousands of dollars.

So that's about a 1Million dollars of additional property tax revenue expected in 2023. That's.

Largely a result of just timing of payments in the light.

So generally highly predicted, predictable revenue stream.

And I'll come back and talk about what's happening 24 for 2023 to almost no change in the retail sales tax.

We.

Performed slightly above expectation to date, but not meaningfully business and occupation tax, essentially no change.

Um, on the utility tax, the private utility taxes, um, positive change.

I'm going to turn this over to Sean Thompson in our office.

He's really taking the lead now on our work related to private utilities and you can give some more insights as to what's going on there.

And he may also talk about what's happening in 2024 where you're seeing there's a, a, a decline in those in that expectation.

Yes, thank you, Ben.

As for 2023 private utility tax revenues, we were able to revise it up about $420,000.

Overall, compared to the magnitude of the collection of revenue streams, not a huge change, but the main drivers to the 2023 revisions were primarily new, stronger results for the first two quarters for steam and natural gas revenues.

This is mostly due to a colder or longer winter.

Likewise, we also had revisions within the telephone but ultimately for 2023 is an upward revision.

As for 2024, we had a downward revision of 810,000 with the main drivers behind this being natural gas and telephone.

Outside of these two, for the most part, the remaining private utility taxes such as garbage and cable television were pretty on par for what we were forecasting and hopefully no revisions for those.

But in brief, there's slight revisions upward for 24 or 23 apologies and then downward for 24 but nothing of particular concern.

Thank you, Sean.

That's good on the public utility side.

Actually, some of the some of the same effects here.

So, a cold winter was good news for city light in terms of energy sales.

So that's increased that forecast for 2023 significantly almost no change for 2024. so that's on that side.

Other thing notable here is the change in court fines, significant increase in revenue expectation there.

I'm going to turn this over to Alex in the Budget Office to explain what's going on there.

Good afternoon, Forecast Council members.

For court fines, the significant uptick for 2023 is mostly actual payments that have come in from a backlog of unpaid citations that have been building up during the pandemic.

And just a reminder, the court suspended at the very onset of the pandemic in March 2020, the court suspended the default on collections programs for citations in response to the economic shock of the pandemic.

Those have resumed at the beginning of this year.

And so we've been seeing actual payments that we've now incorporated into the forecast.

And we do expect that to be a one-time spike.

So going into 2024, we see a much smaller increase, mostly due to just an increase, expected increase in citation volume.

So I'll time that question.

Yeah.

Go ahead, Tom.

Thanks.

So thank you.

That's helpful to know with regards to 23. Looking at 2024, we've kind of updated our Like, it's not on this table, but when you reference back to the adopted budget, it seems that the August forecast is now $6 million below what was adopted for 2024. And so I'm curious what the driver is for that, like why we would expect $6 million less from court fines than what was adopted for 2024, or endorsed, I should say.

That's a good question.

would think that it is, um, due to, uh, lower than expected citation volume, because I believe they've really only been starting to ramp up, but I will have to double check on that because, um, Dave Hennis is the one who looks at that in detail.

Great, thank you so much.

Yeah, and Dave is unavailable due to illness, just for the record, if you will.

Um, Uh, grant revenue is up significantly as well.

Um, I don't know, Alex, you have a quick comment on that 1. sure for 23, um, that's.

Due to, uh, FEMA reimbursements as well as some mid year supplemental asks for 2024. um, it's due to a handful of grants that were not captured in April.

Um, and I can go to fund balance transfers as well for 23. it's entirely increases entirely due to transfers of, uh, Clifford funds to the general fund.

And then for service areas and reimbursements is largely just realized departmental revenue.

So they, they don't ahead of time can't always actually predict, you know, how much they will earn from those various charges and reimbursement.

So overall scheme of things, that's a modest upward change, but I did notice it was a hand raised from Brindell Swift.

Quick question about grant money.

I'm assuming this is money we have in hand.

Um, for 2024, and so we don't, we might not know yet how much grant money we have in 2024. Is that correct?

That is correct, and that's 1 of the reasons that the overall forecast for grants, you know, year out is lower than the realized because it's it's hard to anticipate that.

And and again, if you look at the bottom, we've done totals both with and without the grants, because in general, grants are used for dedicated purposes.

And so they don't.

Additional grant money doesn't isn't providing resources to take on news city obligations or address city needs.

So you really need to think about those in some ways differently than the other revenue streams.

We have a question from council member Washington.

Hello, uh.

Director noble, can you tell me it looks like the total general fund coming in for 2024 is lower than 2023. is that right?

That is right, you're, you're getting the point.

I was a highlight at the end, but I'm happy to happy to do it now.

So I would note the 2 red parenthetical numbers at the very bottom of the page here.

Those are measures in percentage terms of the growth of the general fund.

So you can see that relative to 2022. So in 2022, the general fund was 1.74 billion.

In 2023, we expect it to be 1.73, so marginally smaller.

In 2024, expecting it to be 1.67, excuse me, 1.7 rounding, excuse me, 1.68 rounding.

So about $50 million less.

So less total resource, not inflation adjusted, but in nominal terms, less total resource in 2024. If you look up the chart, you'll see that it's largely two factors responsible.

One is the fund balance transfer.

So the use of payroll expense tax and other sources to supplement the general fund is reduced by $25 million, roughly speaking, going into 2024. The other big place is in grants.

So the grant revenue is almost $50 million to us.

It's now more than $50 million to 2023. and barely 20 for 2024. And again, that difference may be a little bit misleading because ultimately there may be additional grant revenue in 24. But the fund balance transfer is for real, and it is notably smaller, and the total resources in 2024 for the general fund are, for the table here, 2.8% lower.

Thank you.

So again, shifting then to just the last category, license permits interest, a big chunk of that $6 million of additional revenue, about two and a half of it is actually additional interest income.

So we are benefiting from higher interest rates and slightly higher fund balances.

So that's some good news.

Shifting briefly to 20, let me talk about the totals then, sorry, for 2023. As I mentioned, there are two distinct totals.

One is the total increment is 31 million, almost $32 million, 31, 7, 6, 6. If you take out grants, though, and again, grants generally have dedicated purposes, just barely $23 million, but that is a positive $23 million of revenue for 2023. For 2024, let me just highlight the blue categories at the top, because I think those are ones where there are meaningful differences from 2023, and particular positive increments for property tax.

That's largely due to increased revenue from the emergency services levy, so that's county property tax, and it results from the fact that we're projecting that the city's total assessed value doesn't, we expect it to decline, the counties overall will decline more and our revenues are based on the relative size of those assessed values.

Bottom line, more money from the county is on the property tax side.

Retail sales and B&O are up relative to our August, excuse me, to our April forecast, because as we are describing, we had been expecting a relative, a period of even slower growth in late 23 and early 24 than we are now projecting.

So with somewhat stronger growth for late 23 and early 24, we end up with higher revenues for these really economically driven sources.

Reading down at the bottom, the net increase there, because again, we don't, Those are the key drivers of the increases about 20 million before in total and only about 17 million 16.9 when you exclude grants, so the positive increment in 24 is smaller than it is in 2023. Adding in total there on the right again, total resource.

Increase over the biennium of 53Million dollars.

Um, if you take out grants, just under 40 at 39, 6, um, and again, the pattern here is.

And particularly on the economically driven revenue sources, those at the top and blue consistent with the forecast where we're basically on track to date for 2023 and the forecast is a little bit better for 2024. Uh, Tom has a question.

Thank you.

Sorry, I'll quit bugging you so much.

Um, yeah, I'm just curious about the drop, um, from 23 to 24 in license permits interest and other from 73. To 63, because again, looking back at the, um, adopted endorsed budgets, those both started at a number of about 48.9Million dollars.

Um, so.

Is that all interest earnings this year or is there something else going on to why we wouldn't expect a similar level of revenue in 2024?

I can jump in.

I think some of that is for 23, there also were a couple of mid-year supplemental ads that were, I think, a couple of million dollars.

And Tom, you feel free to jump in any time.

Happy to have your questions.

Thank you.

So that's the near-term general fund picture.

Before we shift to talk about non-general fund, I did want to take a little bit of a look at the longer-term general fund, in particular, these economically-driven revenue sources.

And the focus here is on sales and B&O.

Because I am conscious of the fact that we've delivered a message expressing significant concern about and warning at some level that we're expecting slower growth going forward.

But the revenue table I just put up puts more It puts more money on the table.

So how do you resolve those things?

And the answer is in some ways in these charts.

So what we're showing here on the left is a focus on sales tax, and on the right is B&O.

The depiction is otherwise identical.

So in the orange, we have the April forecast, and in the red, we have the August forecast.

Those are the twin bars in the upper charts.

And, and, and you can see that in general, the August forecast is about the same for 23 higher for 24. we just show you that we're expecting additional revenue on the sales tax side for 24. It's about the same for 2025, but then for 26, 27 and 28, it's somewhat lower.

And actually the chart that the bars below.

are highlighting the difference at a slightly different scale, and that's out there on the left, highlighting the difference between the two bars.

So it's a positive, a black positive increment in 23, more substantial positive increment in 24, but then negative changes, so reduction in expectations for the out years.

And the same general pattern holds for B&O on the right.

So again, Near term, you know, we were expecting a slowdown in 24, that's disappeared.

So that's put some more money on the table for 24. But the trade off is that we're expecting now slower growth in the years that follow.

And given that, and obviously, we, or maybe not, obviously, we are listening this morning to the discussions about how the overall revenue and balancing picture, this does complicate the long term sustainability issues that the city is facing.

So just again, before we're leaving General Fund, I wanted to highlight that good news short term, but actually, Worst news, modestly so, but, but, but meaningfully so for the longer run as well.

So, with that, I'm going to shift to now talk about the.

Oh, I'm sorry I was going to talk about non general fund sources need.

So 1st, I want to do talk a little bit about.

How the general fund forecast would look under the pessimistic scenario again, that's not our recommended scenario, but I do want to highlight the differences.

So, again, focusing particularly on retail sales and B and O, the, the, the.

Different scenarios will have the largest effect on the economically driven revenue sources.

These are the two most outstanding of those.

And what you see here, again, with the pessimistic on the right and the kind of paler color, not much change in 2023 under the pessimistic scenario.

That's in no small part because we're already in August and much of the revenues have been collected.

Bigger effects in 2024, and that's true for both sales and for B&O.

In 2020-24, the combined effect would be about a $30 million decline from just those two revenue sources.

And per the bullet at the bottom, for the general fund as a whole, under the pessimistic scenario, it would be about $15 million lower in 2023. Again, we're most of the way through this year.

almost $50 million, 48 lower in 2024. So for the biennium, pessimistic forecast would reduce, relative to the figures we just showed you, reduce the forecast by $63 million.

So a notable difference.

Again, not the scenario we're recommending, but did want you to have that context.

So now, shifting to a non-general fund.

So the format of this table is the same in terms of the columns and also in terms of the shading.

So blue are those that are coming from the Forecast office, the unshaded white ones from the budget office.

The most significant news here is on the payroll side and on the real estate excise tax side.

On the payroll tax side, you can see positive increment of 11Million dollars, actually a little bit more than 11Million dollars in 2023 and just over 10Million dollars in 2024. I have the last slide of the presentation, which is the next slide, describes more of the rationale for that.

So I'm going to come back to that in just a moment.

In terms of other revenue streams, admission tax, just up modestly, not a large effect.

Sweetened beverage tax, we're really tracking closely to forecast.

Short-term rental, up slightly, again, reflective of realized revenues, somewhat ahead of forecast.

Significant change here in the real estate exercise tax.

So, for real estate exercise tax.

We have, we are running below forecast and have really run below forecast for each and every month through actually now through July.

We have data.

So.

Again, recall that, well, you can see in 2022, this was a $90 million revenue source.

And we brought the forecast down in April to 55. We are bringing it down again to just under $51 million as an expectation for 2023, and then a comparable reduction for 2024. This is it, what we're seeing here, I think, probably twofold effects of interest rates for sure.

So, and the residential side that's played out an interest way in an interesting way, it appears as much an issue of supply that low interest rates generally mean lower prices, excuse me, higher interest rates generally mean lower housing prices.

And a lot of folks who have own homes, and are enjoying low mortgage rates are not anxious to sell because they would have to be giving up their mortgage.

And they probably perceive that if they were to wait until interest rates come down, they could get a better price.

So there's almost no volume on the residential side.

On the commercial side, there is just so much uncertainty about the value, particularly of office space, that we're not seeing transactions The large commercial office towers, which are significant share of revenues.

So, bottom line, real estate markets are moving very slowly and this is a tax on real estate transactions.

So, we're downward revisions for 23 and 24. I didn't bring a slide, but it's a comparable annual reduction for the remainder of the forecast window as well.

So the net effect over the 6 years is 30 to 35Million dollar reduction.

Other changes are relatively minor and are essentially echoes of things that we've seen before.

So sales tax is up a little bit, but we saw that sales tax overall is up a little bit.

Commercial parking tax up a little bit in 2024, because again, we're expecting more overall regional economic activity in 24 than we were previously.

And then the speed zone enforcement is related to the court fines piece, because it's an echo of that, because a share of those revenues go to that fund.

So, again, big changes here on the payroll side and on the side payroll to the positive reach to the negative.

Just to say a little bit more about payroll.

Do you want to start with a little bit of background?

Just.

Just really to remind you all and to the general public.

So, in terms of this revenue stream, it's.

quite volatile or has proven to be volatile in the time that we've been collecting it because it's generated primarily from the technology sector, although not exclusively, and from relatively few firms.

And again, just to demonstrate that volatility, we collected 295 million in 2021 and only 253, those are obligations, in 2022. So in terms of information we have mid-year here, Firms are obligated to make quarterly payments and candidly, we were, we were hoping to be able to use those quarterly payments as as indications of where where things were headed for the year.

But to date, there's not really been much.

Information, if you will, in those payments, because what most firms appear to be doing and actually are doing is paying 25% a quarter of their previous years obligation.

They don't actually know what their obligation is going to be until the end of the year, because it depends on the annual compensation to folks.

But that's actually not an unreasonable thing for them to do.

It makes sense.

It does mean that we don't know a whole lot based on what we've collected to date.

But the work we have done in modeling, and we showed you some of this last time, is that stock values and presence in the office are both positively correlated with payments of the payroll expense tax.

To date, the return to office is largely tracking what we had expected to see.

Some firms are a little bit ahead, some a little bit lower.

But one thing that's definitely changed since April is expectations and the realities about stock prices, and in a positive way.

So the graph on the right, and credit to Jan for pulling this data together, highlights the expected stock price for these various companies at year end.

The dot is the average of the expected price from a range of stock analysts.

The width of the bar is the range of those analysts' opinions.

And the grayed out ones are what we showed you in April.

And the ones with the red dots are from August.

And what you can see is that for virtually every one of these major firms, and they all pay some amount of payroll expense tax, They are all have all improved relative to their, the April.

So our expectation is that by year end, they will all the stock prices will be higher than we were than they were in April.

And again, the result is we expect for many of their employees that compensation will be higher than we thought it would be in April.

So high stock prices at year end will lead to higher compensation.

And that's why we have upgraded the forecast.

It's in terms of the absolute dollars, it's a relatively modest upgrade.

So it's about 4%.

So we just going back to the actual table here.

It's about 10 to 11Million dollars on a base of about 275, 280. so modest in percentage terms, but obviously in dollar terms, arguably significant, but that is.

It is not based, that upgrade is based not on dollars received through the door to date, because again, we don't think those tell us much.

It's really more about the expectations of where the stock values are headed for some of the major payers.

So that's the explanation for there.

And that is the end of our presentation in terms, we've now covered the general fund and the non-general fund revenues.

And be happy to take questions overall.

Great, I see a handful of questions.

We have Council Member Carnell first.

Hi, thank you Ben and team for this presentation.

Always very insightful.

You talked a lot about work from home and return to office and what we are seeing in the news and in corporate business news is really a push towards that return to office.

Are you seeing that as any kind of factor both on The baseline forecast as well as the actual, we talked about payroll expense tax, but the actual returns that we would see for revenue.

We particularly focused on it in terms of payroll expense tax and that's so and we've been tracking some.

Checking that data in certain parts of the city again today, what we're seeing is largely our, our projections already anticipated return to office folks have been talking about 3 days a week, which rough terms is 60%.

And again, there's variation from to firm, but we're generally seeing that.

I think we think we've also ever more come to appreciate some additional analysis we've done that, that, that work from home is also affecting things like our BNO receipts, the way BNO taxes are allocated, where you work makes a difference.

And again, our projections are no small part trend projections.

So we're, um, our expectation is that that we'll continue to see some benefit from return to office.

Um, uh, but at the same time, you know, the expectation is not that we ended up with everybody back at the work workplace five days, um, five days a week.

Um, interestingly, the, you know, the, on the sales tax side, less an obvious benefit because, um, uh, the, A lot of the spending that was happening downtown, it was probably happening elsewhere in the neighborhood and the data seem to show that we did not see a precipitous drop in sales tax revenue.

Um, actually, because people shifted the consumption of goods, rather than services, we actually saw a pretty strong.

Um, uh, sales tax revenue, even through the pandemic.

Um, so the lack of spending downtown is probably replaced by a certain amount of spending in neighborhoods.

But on net, there's still a loss there.

There's, there's less total retail activity happening in the city.

The recovery of tourism is also helping us on the retail tax front.

Follow up on that.

No, thank you very much.

All right.

Great.

Council member swift.

You're muted.

Thank you.

I have a question about the tech sector and specifically the compensation jumpstart is based on salary.

Is that correct?

It's based on total compensation.

So, and to the extent that stock, the stock grants count as part of the compensation that to anticipate potentially your question.

Okay, so how do, I guess my question is, how do we determine whether growth in tech is translating into new jobs versus compensation?

Well, we're monitoring total employment data that we get from the state, and then we also have wage data.

They come with a significant lag, so it can be hard to know precisely.

Yeah.

Okay.

Thank you.

Of course.

Any additional questions.

Okay, director noble is there a slide that you can come back to to give us the, like, high level summary.

Jumpstart up by 22.5Million dollars over the biennium general fund up by XMillion over the biennium.

Yeah, I was going to go, I'm going to go to the same tables.

I didn't put it.

I didn't put in another summary 1, but yeah, no.

So again, since you're, you're now the forecast Council's now next action is to determine whether you want to approve the forecast.

So I think that is certainly worthwhile.

So what you can see here again, this is a non general fund.

I'll do it sort of reverse order.

The most significant changes here are twofold payroll tax up just over 20Million, essentially 10Million per year.

And again, that's based on expectations about stock prices and where they are headed.

REIT down about $5 million a year, so a decline of $10 million, entirely related to realized revenues and expectations that interest rates and uncertainty in the office market will continue to suppress those revenues.

I think that's really the headline here.

In terms of the general fund, headline is in 2023. Again, setting aside grants, I think that's the best way to think about that.

Increment of about $20 million, but most of that not economically driven.

Some of that is fund balance, a variety of smaller factors.

For 2024, positive increment, again, setting aside grants of $40 million, significant share of that coming from the economically driven revenue stream, so better part of $10 million almost from property tax, sales tax, and B&O.

But then also significant revenue coming from.

Court fines and then also from public utilities.

So, but so bottom line is over the biennium, excuse me, that was the biennial number.

So, but over the biennium increase of 40Million dollars in the general fund.

Um, setting aside grants, uh, uh, the increase for 24. Is about 17Million increase for 2023 is 22Million.

If you think about in terms of ongoing revenues, you know, the addition is probably more in the neighborhood of for 2024 is of 10Million dollars.

That's really the economically driven piece here.

Um, and again, uh, already mentioned what's happening on the.

On the payroll side, and I saw there was a question from deputy director.

Excellent.

Yeah.

Thank you.

Thank you.

I just wanted to flag because for people who are following the conversation from this morning and recent conversations in the finance and housing committee meeting, I thought it might be helpful to also just frame this as it relates to the adopted budget because in general, in terms of the upcoming conversations for the city council and the mayor for balancing.

2024, that will be the relevant number.

And so while this forecast compared to the April forecast, for example, is showing payroll tax revenues up, it is still, compared to the assumptions that balance the 23 budget, it's about $19.5 million below what we balanced the 23 budget and about $21.5 million below what we assumed for the 2024 Endorsed and so I just wanted to provide that framing for the council members.

We'll share a table that shows both calculations, the difference to April as well as the difference compared to November.

But that.

There's 1 point I'll also just note that reach is about 17.4Million compared to the 23 adopted budget and about 14.7Million compared to the 24 endorsed.

So that is.

Just sort of further in the hole for 23 as well as as 24. so those will be some of the pieces of information that the mayor and the council will be grappling with as we move into the budget discussions.

Thank you Deputy Director Panucci.

I think that's really important context.

We purposely not wanting to make things more confusing have made this a reference to the April forecast but in terms of final budgetary decisions obviously the the what assumed level in the in the budget are critical baseline and I think at next week's finance meeting I think that would probably be additional focus as well.

I think that that is very helpful context.

I also think that this slide is good to do a comparison to the earlier forecast in the spring because Some decisions were made based on the revenue forecast in April to withhold funding and not move forward on funding.

So to see an increase, for example, of jumpstart investments, totaling.

You know, I think it was 2022Million dollars over the biennium for jumpstart.

That's a good that's a good indication that that's relative to the spring forecast, but also a flag, I think, to the city family that there's additional flexibility there where they might not have thought it was possible before.

And by flexibility, I don't mean flexibility on the spending of the fund means flexibility on.

How we respond to some of the revenue forecast here.

Um, okay, but yes, thank you for making it very clear as well.

Deputy director that this is good for us to remind ourselves that this is relative to what we had planned.

In November, there are absolutely implications for the existing budget and and prepared or upcoming budget as well.

Additional comments.

All right, questions another opportunity for questions or comments.

Okay, I'm not seeing any at this point.

We do as Director Noble indicated, have the opportunity to make a determination of whether or not we are going to reject or confirm the recommendation.

Item number 3 on our agenda is dedicated to this discussion.

The ordinance that created the office of economic and revenue forecast and our forecast council provided this revenue forecast council with the role to either concur with the forecast council recommendation to approve the forecast.

It's been presented today and as a reminder, approval of the recommended forecast does not require a formal vote.

If there's consensus among this council, the revenue forecast council to approve this forecast, we are deeming it appropriate and we can direct the minutes to reflect that.

However, if there's a desire to adopt a different approach, either a pessimistic forecast, or a more optimistic forecast, we have the chance to make such a motion and put that forward and director noble.

I'm going to turn it back over to you just to summarize here today, because the proposal, as I understand it is to have the forecast council consider has been presented with the baseline forecasts anything else you would add.

No, that's correct.

I mean, the tables you have seen are consistent with the baseline forecast.

We did highlight that one slide to show what, at a high level, what the pessimistic scenario would look like, significant, about $63 million less revenue over the biennium.

But the details you have seen are for the baseline forecast, and that is our clear recommendation.

We think we've been able to capture the risks that we see to the local economy and also its strengths.

Okay, great.

And are there any other questions from either forecast council members or city budget staff, central staff that you'd like to get clarification on before we move forward?

Okay, I'm not seeing any.

I will take that as general interest in accepting the baseline forecast as recommended and detailed in the report that we've received and the presentation.

Offered by the office of economic and revenue forecast.

I'm not hearing any objection to that.

Wonderful so we are going to direct that the forecast council, excuse me, direct the notes to include that the forecast council concurs with the recommendation to accept the baseline forecast.

We will continue to hope for.

Continued optimistic returns and having, um.

Having the last 6 meetings or so of this council continue to slowly show a more positive trend is great, but we want we don't want to be overly optimistic about projecting out the revenue given that this is the basis for the mayor's proposed budget for 2024 and beyond.

And then the council will obviously be looking at the October forecast as we finalize that budget as well.

Anything else from the office of economic and revenue forecast?

I just thought, you know, we'll make sure the meeting minutes reflect that concurrence and otherwise we will prepare for the meeting coming up in October.

Sounds good.

Thank you for all your work and the due diligence to really dig into the local and national trends and your partnership with CBO.

Thank you to CBO for being part of the presentation here today.

We will see you all again for a higher level summary in our finance and housing committee meeting again next Wednesday.

At 930 in the morning, I believe that's August.

17th, and we will have the chance to, of course, field additional questions from members of the public or the council at that time.

I appreciate you all being here today again.

Welcome to our newest council member and deputy mayor Washington and very appreciate very much.

Appreciate all of your participation colleagues in our discussion today.

Uh, after we received the presentation, we know.

The mayor will finish their final touches on the proposed budget again for the viewing public that proposed budget from the mayor's office is presented to city council the last week of September.

We'll see the revenue forecast colleagues again in October.

I thank you very much for all of your work.

And if there's no further questions, today's meeting is adjourned.

Thank you.

Thank you.