Today is Thursday, April 10th, 2025, and this meeting of the Economic and Revenue Forecast Council will come to work.
I'm Council Member Dan Strauss, Chair of the Economic and Revenue Forecast Council.
I'm joined today with colleagues, Council President Sarah Nelson and the Executive, and she arrives, C.L.
Baird, C.L. Bruce Baird.
Mayor Bruce Carroll's Chief of Staff and General Counsel Jeremy Rocca, and City Finance Director Jimmy Carnell, also joint aide from the Office of Economic and Revenue Forecasts, as well as representatives from the city budget office as well, and City Council's central staff.
A couple substantive items today that we can act on.
the selection of a chair and vice chair for the forecast council for 2025. The council president is now on attendance.
Presentation and review of the economic and revenue forecasts.
And I will move to the formal approval of the 2025 work program for the office of economic and revenue forecasts to our next meeting.
Before moving on to items, I will formally adopt the agenda for today's meeting.
Is there any objection to the amended agenda that we need approval of the 25 work plan to the next meeting?
Seeing no objections, I move to adopt the amended agenda.
Is there a second?
Second.
Second.
It has been moved and seconded to adopt the agenda.
Today's agenda is before the forecast council.
This is opportunity.
I guess we already amended it.
There are no objections.
Today's agenda will be adopted as amended.
Hearing no objections, today is adopted as amended.
We'll move on to our first item of, I'm sorry, next order.
This is to select a chair and vice chair for the Forecast Council for 2025. I served as chair last year, Chief of Staff Brockett, served as vice chair for the ordinance that created the Forecast Council and allowed you to elect or reelect someone for both of these positions.
To point out, I would entertain nominations on the floor.
We'll start with the chair.
Are there any nominations for the chair from the floor?
Chair Strauss, I'd like to nominate you to continue to be our chair.
Thank you.
Do we have a second?
Second.
It has been moved and seconded.
Are there any comments before I call the vote?
Seeing that, I'll now call the vote on the roll of nominating Councilmember Strauss and myself to serve as the chair Will Adams, who is calling myself?
Yes, so we'll start with Council President Nelson.
Aye.
Chief of Staff Rocket.
Mr. Carnell.
Aye.
Councilmember Strauss votes, yes.
So we now elect the chair.
With that, I will move on to electing the vice chair.
With that, are there any nominations from the floor?
I will nominate Jeremy Rocca for the full of the vice chair of the forecast.
Is there a second?
Second.
has been moved and seconded to elect Jeremy Rocha as the Vice Chair of the Forecast Council.
Any comments before we take the vote?
I will go on the opposite order as last time, so I'm calling on myself.
I'll go with Council President Sarah Nelson.
Aye.
Director Carnell.
Aye.
Jeremy Rocha.
Aye.
The unanimous vote Congratulations for me.
You are elected as our vice chair.
We'll now move on to the second item, which is actually the approval of the meeting from October 22, 2024. Meeting a copy of the minutes from that meeting on the Forecast Council.
It has been circulated to the members on the website of the Forecast Council.
I would move and seek that second for approval, so I move the approval of the minutes from October 22. Is there a second?
Second.
Thank you.
It has been moved and seconded to approve the minutes from October 22nd, 2024. If there are no objections, the minutes will be approved.
Hearing no objections, the minutes are approved.
We'll move on to the meet with today's agenda presentation of the April 2025 economic and revenue forecasts and recommendation from the Office of the Economic and Revenue Forecasts regarding the 2025 and the 2026 forecasts.
This is a presentation of the economic and revenue forecast led by the staff of the forecast office.
The April forecast date is the first of three revenue forecasts that we will be reviewing this year.
Return to the August and October forecast received and revised forecasts.
The April forecast provides an opportunity to check in regarding revenue assumptions that underlie the 2025 and 2026 biannual budget that was adopted and endorsed by the city council last year.
an updated revenue forecast takes into account the 2024 year-end actual revenues current economic conditions and the changes in the economic outlook since this last year the august revenue forecast will provide the thesis for any changes that the mayor will propose during the 2025 and 2026 in the october forecast will be the final update will form the foundation of the Council's final actions, potentially amending the 2025, but it ended by the 2026. Today's presentation will be led by the staff from the City's Independent Office of Economic and Revenue Forecast.
Just as a reminder, this office was established in 2021 model Based on similar independent forecasting policies, the county and Washington state made purposes to increase transparency and accountability around the city's revenue forecasting process and to ensure that there's no political influence on the forecasts themselves, to ensure that the forecast council is fully informed and able to have a full range of options addressed.
From the city council central staff and City Director Eder here in attendance will also participate in the briefing Staff from the city office is also here to present to you.
We're adding a few things regarding revenue still in the purview of the budget office as well.
The forecast office will present three economic revenue scenarios.
The office will then provide recommendation of which of these scenarios should become the formal forecast.
We will have the opportunity to discuss the recommendation, whether to confirm the recommendation or consider a different forecast scenario.
And before I turn this over to the office, I want to share What we all know is that the geopolitical economic situation has been influx quite a bit in the last seven to 14 days.
And so just understanding that it is different and For those of us who celebrate Passover, why is today different than all other days?
Today is different because of the economic fluctuations of the past 14 days.
I will also share that because the team presenting here today will be in the finance committee next Wednesday, I will ask for us to keep the conversation short so that we can dive into a deeper conversation with more of our colleagues next week.
With that, I'm going to .
Good morning for guest council members.
So this is the outline for the presentation today.
I'll spend some time summarizing the recent economic developments for the U.S. economy as a whole.
Then we'll move on to talk about the national forecast, which is one of the main inputs that we are developing in the regional economy forecast.
We'll look at that.
We'll summarize the performance of Seattle economy in 2024, again, as a starting point for where we might be heading this year, then the next one.
And then in the second part, we'll move on to the revenue forecast.
Before that, we'll again look quickly at the 2024 revenue actuals, summarize where we ended up and talk about the forecast itself.
So there is quite a lot of information here.
Because we are incorporating those here at the actual revenues in this presentation, we have our presentations are usually the ones where there is much more to go over.
My apologies, John.
I'm going to have to interrupt you.
If you could bring the microphone closer to you.
I'm having reports that it's hard to hear you.
I'm hearing you fine.
All right, is this any better?
Lightly, yeah.
Lightly?
Sure.
I can move a little bit closer and speak up.
So let's look at the recent economic development.
There is a lot of talk about tariffs and essentially everything is driven by what's happening with tariffs.
The chart here summarizes there are announcements The chart here summarizes what the economists call the effective tariff rate, which is a single measure to gauge how large those tariffs are.
Essentially, taking all the tariffs that are raised and dividing them by imports, by the value of imports gives a measure of how big of a tax is imposed on these imports.
So there has been a lot of development and it happened quite fast over a couple of weeks and a couple of days eventually.
The green line summarizes what the effective tariff rate would be if the tariff were in place the way they were announced on April 2nd and there were no further changes beyond that.
So the tariff rate spiked before this year.
territory somewhere around three percent that spike goes all the way to 23 percent so it's a substantial increase in the amount of of tariffs imposed and we would have to go back 100 years to see something better what's more important for the forecast itself These announcements were made after the March forecast for the U.S. economy was finalized by S&P Global.
That's a forecast that we are using as a starting point to develop our original economic forecast and to develop revenue forecast.
And so that gap between what the economies believed that there would look like in March and what the actual announcement was shown when we are comparing the purple line that's a large baseline essentially the assumptions about there is where it will go somewhere 10% stay there for a little bit but as you can see the purple line is coming down as the negotiations were expected to take place and the imposed tariffs will be scaled back So, again, between the purple line and the green line, that's 10% plus, 10% plus.
Substantial change between what were the beliefs in March and what the April announcements were.
There's been some developments since then.
Some of those tariffs are now on post, but tariffs on China were increased beyond those April 2nd announcements.
So, yeah, it's really a huge increase that has been summarized by Oxford Economics as dialing it up to the island.
Oxford Economics is It's the source of this chart.
We are supplementing our SNP Global's forecast with additional data from other sources when it provides additional information.
This chart just really nicely summarizes the recent developments and how much they matter.
And they do matter a lot, so there is really a lot of uncertainty regarding the trade policy.
The top panel in the chart labeled economic policy uncertainty index is a single measure that tries to summarize how much uncertainty there is regarding economic policy.
You can see it spiked quite significantly over recent couple of weeks and similar sort of spike that we have seen in early 2020 and the onset of pandemic where there was a lot of uncertainty regarding what the fiscal policy restrictions might look like.
So these are really very uncertain times.
And then the uncertainty leads to leads to all sorts of important impacts on the global economy.
The impact on output prices and employment will not be negligible, but the problem is that it's really hard to assess just how much where it increases, how much of a damage that it might cause to the economy, how much the prices might go up.
Even, again, the announcements change a lot, but it's hard to figure out where we are, where we might be going, and what the timing might be about those changes.
And so the financial markets have been quite volatile at the bottom part.
It's an index that summarizes how much volatility there is in the financial markets.
The main takeaway here is that there is again a spike that maybe not as big as the early 2020s or as big as the spike during the Great Recession, but it's a significant increase in volatility.
So the pass forward is rather unclear, a lot of, a lot is happening and financial markets are still just trying to get a sense of what these all might mean and what the long term implications might be Yesterday markets recovered some of the losses, the trade point It's showing what the closing position of the S&P 500 index was yesterday.
So it's above the bottom, above the bottom of a deep shown by the black line.
But today the loss is continuing, the S&P 500 is down around four or 5% again.
So the sell-off can continue.
So you have direct implications for the payroll expense tax revenue as we'll see when we get to the forecast but there are really considerable wealth effects They are not negligible because a lot of larger population is considering the impact on their pensions, on their savings, on their ability to spend, and so they are going to be hesitant to make any big purchases.
It will be all delayed until there is more clarity of where we might be having.
Same sort of thing with businesses.
Making any sort of investment or hiring decision is really hard because it's really hard to tell what the economy would look like, what the hysterics would look like, any of these needs.
so with that I'm going to move now to the forecast and again the point here is that what we are going to show is what the forecast looked like based on the assumption back in March so there is going to be a baseline scenario and a pessimistic scenario both had some underlying assumption about what the tariffs are and what the pass forward might look like so These charts here show the October 2024 baseline.
That was the forecast underlying adopted 25 budget.
The economy was in very solid conditions.
It was expected to slow down.
So as you can see in the panel on the right side, employment growth was expected to come down gradually.
It's showing percentage change in the employment year over year.
And while it was around 2%, slightly below 2% at the beginning of 2024, it was supposed to or expected to be gradually coming down as those high interest rates were still in place and still affecting the economy.
But the GDP growth was expected to be, again, quite remarkable given the extensive and ongoing monetary restriction policy.
Now, moving on to March and looking at the March baseline scenario, very similar, slight small changes, but same sort of story.
crows expected for this year and the next one.
A little bit of a slowdown compared to the crows in previous years.
A little bit more of a slowdown in employment, but nothing really dramatic.
And that scenario again assumes some amount of tariffs imposed on the trade workers.
Then pessimistic scenario that the S&P Global developed in March was slightly weaker outlook.
You can see that employment actually declines year over year slightly about half a percent decline in u.s employment year over year in 2026 and 2027 nothing really dramatic and really nothing that would be called a recession so in that panel on the left the black line it shows that the real gdp Even in a pessimistic March scenario developed by S&P Global was expected to be somewhere around 1%.
So no recession in a traditional sense of output declining for two consecutive quarters.
So it's something that the economy is referred to as pro-recession, when the growth of GDP slows down, but really GDP does not decline.
What distinguishes these two scenarios is that the pessimistic scenario assumes higher tariffs and assumes a bigger response by the affected countries.
So that would lead to higher inflation and slow crops.
Here's the chart that summarizes the impact on the prices.
So a lot of uncertainty regarding what the Fed might do given the tariffs, they are putting Fed in a very difficult position because on the one hand they would want to lower the interest rate to kind of help the economy and avoid larger job losses.
On the other hand, tariffs might cause the inflation to go up and if the inflation expectations become anchored and long-term inflation expectations start to rise, that would make it hard for Fed to bring the inflation back down.
And so the assumption was that, the assumption back in March was that given the tariffs are now part of the policy of this administration, the Fed will have to keep the interest rate higher for a longer period of time.
So in the panel on the right, the panel, those two lines show the anticipated pass for the federal funds interest rate in October and then the best of the interest rate under the assumption of some tariffs imposed, again, kind of like what that purple line was showing in the chart, what would be an effective tariff rate.
So again, that is keeping the interest rate higher.
to fight the inflation to prevent the inflation expectations.
The inflation looks quite, but dramatically and eventually go back to percent.
In a pessimistic scenario, again, higher there is bigger response of trading partners.
All that implies that interest rate would have to stay higher for a longer period of time to prevent inflation from becoming unencored.
The inflation still arises.
peak somewhere around 4%, but the interest rate eventually helps to bring that down as the long-term inflation expectations are not.
So it's kind of a one-time event.
And if tariffs were imposed immediately as a single event, that would work perfectly fine.
not worry about it too much, but even the amount of uncertainty during the timeline is really uncertain and maybe potentially adding additional tariffs over a longer time, the Fed is more likely to be in this wait and see position.
get a sense of how big of an impact the steroids have on prices, how much of an impact there is on the employment when it will be time to start getting the interest rate.
The main takeaway here is that given that the two scenarios were developed back in the middle of March and given the underlying assumptions about tariffs, even though this baseline scenario was supposed to be the more likely one, The current policies in place and the likely response are more in line with the pessimistic scenario outcome.
So higher theories, higher inflation as a result of that weighting and keeping interest rate higher for a longer period of time, potentially helping them more aggressively than the pessimistic scenario forecast shows, so potentially there may be some larger cost at the end of the year, but definitely interest rate higher for a longer period of time.
So what does that mean for the Seattle area economy and the regional forecast?
We're going to look at that in a second to get a better understanding of where we are.
Here is a quick summary of what 2024 here looked like overall and how it compared to our expectations.
Looking at the third set of bars, the ones labeled employment, they show that the employment group about 0.8% year-over-year in last year, slightly above our expectations from October, 0.1 percentage point above what our forecast was back in October, and 0.2 percentage points above our expectations back when the 2024 adopted budget was developed.
Roughly in line with our expectations, notably weaker as in the international economy, so I'll talk about more in the next slide.
When it comes to regional inflation, that was above national level.
It cooled down faster than the national inflation did, and in general, again, quite close to what we were expecting, 3.7 actual inflation compared to 3.6 forecast from October last year, 3.8% forecast from October 2023. Now, one thing where we were further away from, where our forecast was further away from the actual, actual, is the taxable sales.
So in 2024, taxable sales did not really grow, they remained pretty much flat, 0.1%, so rather flat.
The spending in the city was weaker than in the national economy, so the increase in retail sales that we saw in the national economy did not really translate to similar sort of increases city of Seattle and an additional and a really big part of what happened is the decline in the construction sector we have already talked about it a couple of times construction sector is in downturn it declined 7.1 percent year over year in southern and 24 so that's weighing down considerably on sales types collection construction sector is around 22% that's slightly down from 25, so roughly a quarter, a couple of years ago.
Right now about 22% of overall tax.
Considerable part of sales tax is dependent on the construction sector.
And then the last two very left two bars on the personal income The actual is missing there.
It's not a mistake.
We are only going to get personal income for 2024 in November this year.
So there is significant lag between when we're working on these forecasts.
What we do know is that the personal income in Washington State grew about 5.6%.
So very similar to what our forecast is for Seattle area.
In the past, Seattle area well, let's say 10 years before pandemic, it did tend to grow higher than the Washington states recently.
We have seen a bit of a lag in Seattle area, lagging in terms of employment growth, for example.
But we are expecting to see personal incomes pretty close to our forecast when we eventually see those numbers in November.
So, a little bit more on job growth, since we don't have income data, we are relying on the employment data to get a better understanding of where the regional economy is and where it might be heading As I mentioned when I was talking about those actual forecast for employment growth on the previous slide, Seattle area employment grew at a lower rate than the national economy.
0.8% growth in Seattle area compared to 1.3% growth at the national level.
That's the red bar versus the blue bar for Dr. Monk Farm employment.
Here's how the different industries contributed or weighed down on the overall growth.
Construction sector, again, is in downturn.
Defined considerably in addition to that the information sector is still recovering from those layoffs and so those two combined took the junk out of the growth that we have seen in education, health services and government sectors.
So overall The starting position is weaker for the regional employment forecast.
Very modest growth in 2024 was expected to continue in 2025 and in 2026. That line labeled October 24 baseline scenario is again what's underlying the adopted 25 forecast.
Very similar to what the baseline scenario currently suggests for the employment growth.
So slightly weaker growth still for 2026. It's a little bit harder to see given the scale.
If you focus on the part that starts from, that March 25 baseline scenario is below the October 24 baseline scenario, essentially showing the impact of those territories and how they weigh down on the employment.
So similar sort of stories for the national economy.
Some amount of very slower economy growth, no recession in the baseline scenario, but lower employment growth.
So the recession scenario, the scenario of a recession was the one that the SNP Global considered back in October.
And the brown line labeled October 24 pessimistic shows what that sort of recession assumption back from October would imply for the employment growth, employment declines here in the Seattle area.
And so it wouldn't be a deep recession like a great recession or a pandemic recession, but the number of jobs would decline by about 4.3% between the peak and summer of 2026. So again, that was the assumption that it ended in October.
In October, we made a recommendation to adopt the baseline scenario because given everything that was going on, we did not really expect the recession to be on the books for the next year or this year or the next year.
The economies in general, entering 2024, were putting roughly 15, 20% probability on the recession happening.
which is very low in historical standards the economy was on a very solid position and there were some concerns about theirs but they were really not on anybody's radar back then so moving forward to the current pessimistic scenario the last two The dark brown line shows what the S&P Global's pessimistic scenario would imply for the regional.
So again, what we are doing, we are taking the scenarios developed by the S&P Global, using them as an input in our forecasting models to develop those regional economic forecasts for employment, taking into account all the other things that we have that inform the forecast, let's say, permits issued by SDCI, or the construction sector in the local economy.
March pessimistic scenario again implies some job losses about 1% year over year decline at the beginning of 2027 so that's something in some sense would resemble a mild recession again not a particularly deep one but it would not be a recession in a traditional sense in the sense of national economies, output real GDP declining, again, because that's not the best scenario, the March best scenario assumption is, it's just the pros recession, not the traditional recession of GDP declines.
And nevertheless, it would mean about 1.5% total decline from peak to stroke between the second half of 25 and the summer of 27. So those are the economic forecast.
Now moving to the revenues.
Again, looking first at the revenue actuals to get a sense of where we are starting at the beginning of this year.
A little bit of information of how the revenue is coming in throughout the year.
We are in April.
but typically in April we don't really know anything other than some information on REIT.
We don't have any sense of where the current year actual revenues are heading.
For REIT we have three months of tax collection, so last year it was roughly 20% of the overall revenue for the year.
For other taxes, the only thing that we do have is a sales tax for one month, so less than 1 to 12, so the overall collection that we are going to see throughout the year, and then usually there is a little bit of property tax.
For business and occupation tax, for payroll expense tax, there isn't anything that companies would pay at this point for the current year of obligations because the due dates are only one way later this year.
So what the revenue forecast is informed by is last year actuals and the economic outlook that we went over.
This table summarizes and it's a lot of information in one place.
It's the same sort of information that we send out as part of the 2024 year-end revenue report.
It summarizes our forecast from October and the actual revenues, compares those two and shows where the actuals came short of the forecast.
where they outperformed.
Overall, if you focus on the very bottom line, it's labeled a total general fund without grants and transfers.
Taking out the grants and fund balance transfers, the general fund came in 7.3 million above the expectations, so around a half percent above the forecast.
So small variance, part of it, 2.3 million of that is higher than expected sales tax revenues.
So there were some non-current payments that were higher that pushed the sales tax for revenues above the forecast.
Overall, there is about 0.7% for sales tax.
For business and occupation tax, there was less revenue, about 700,000 less than forecasted, which is 0.2%.
So those two combined came in about 1.5 million above the forecast.
which is around a quarter of a percent from the forecast.
So in general, in line with our expectations from October.
One particularly large number that jumps out here are the grants, and Dave and Alex can provide some information on that.
Oh, sure.
So for grants, the forecast in October was inflated by what we call grant-carry awards.
Essentially, each grant is appropriated fully at the beginning when the grant is accepted.
This is just indicating that a lot of grants are usually spent over multiple years and have not yet been spent and so the revenue has also not been received.
And this just means that that amount is also going to continue to be carried forward into the next year.
Yeah, so that's the reason why those two bottom lines are, where there is a big difference between them.
Taking into account the 45 million less in the grants means that the total general fund, if we include the grants, it would be 38.8 million or 2.2% in the forecast.
And you will see how that affects 25% in the forecast in the second.
Before moving to that, let's look a little bit more closely at those main economically driven revenues.
Again, what happened last year informs the forecast and gives us a sense of where different industry, different parts of the economy are.
So for business and occupation tax, the base is really well diversified.
Professional and business services are a larger share, notably a larger share than the others, but it's definitely more diversified than the sales tax revenue, for example.
What we have seen in this year is a decline in those professional business services, trade and information sectors.
a large share of revenue is coming in they actually declined year over year there was an additional 11% decline in the construction sector so overall the performance was weaker than say a year before that and definitely weaker than a long-round average.
So for trade information sector and professional and business services sector, they declined combined Overall, the ex-obligation in these three sectors declined by a combined 2.7%, after growing 9.1% in 2023, and after growing on average about 8% in the period of 2010 through 2023. That's somewhat concerning for the outlook as well.
For the sales tax, the 2024 actuals again came in slightly above the expectations because of some non-crime payments.
What that implies for 2025 is, it doesn't really imply that we are going to see, that we should see a higher, that did not compel us to revise the forecast much higher.
Our expectations are to a large extent formed by the outlook for the construction sector.
Again, it's about 25, 22% of revenues right now, so roughly for trade accounts for a third of our revenues and again as you can see it declined last year people are again possibly quite quite hesitant to make large purchases car sales are significantly down tariffs might be again something that might compel some of them to make a purchase before those areas are in place.
But for the overall 2025 year, it's certainly not something that would suggest a larger growth in this sector.
So overall, just like for business and occupation tax, there's a large amount of taxpayers, 20,000 for business and occupation tax, roughly 70,000 taxpayers for sales and use tax, relatively diversified revenue sources and not particularly concentrated revenue sources.
So the top 10 taxpayers, they account for They account for 20% of the business and occupation overall revenues and they account for about 11% of sales tax revenues.
So that's quite different from the payroll expense tax.
Oh, one more thing I guess that might provide some idea of what the sales tax revenue are heading, where they are heading before we get to payroll expense tax.
shows the overall year-over-year growth in sales tax revenues.
That's the black line.
Sales tax revenues have grown considerably in 2022. There were a lot of spending on goods.
The economy was recovering, so leisure and hospitality revenues were up.
construction sector, there were still some projects in the pipeline that were finishing up, but as they were getting to the completion, you can see that the sales tax revenue started to decline as the construction started to really weigh down on the overall sales tax growth.
Starting from the second half of 2023 sales tax revenue has been mostly declining year-over-year with some exceptions that happened early 2024 and this November spike here and it's partially due to some non-parent payments partially due to eventually a credit amount of there is on some fun loading of purchases.
For the single months that we have in 2025, so the very last point on the black line, sales tax obligations declined 5% year over year, so 5% down in January 2025 relative to January 2024. And again, a large part of that is the construction sector.
Those individual bars, they stack up to the total and they show which sectors are weighing down, Yellow bar is the construction center.
I'm getting feedback again that your audio is difficult to hear.
I can make out what you're saying, but I think that's because you and I had this discussion beforehand.
I'm going to ask you again if you could bring the microphone closer to you.
I'll make an editorial comment here for the group that I think that we need to, in working with the vice chair, to understand a better forum for these meetings.
I know that we moved the forum to the mayor's conference room as an improvement over 370, but I might recommend that we use council chambers, which is already set up for Seattle Channel and has individual microphones.
So for the listening public right now, also be aware that we will be having this presentation again next week in council chambers.
So if there's something that you're not hearing today, you have another opportunity to receive this information and yon.
I will also request for the future meetings that rather than having your bullet points show up one by one that they just all appear at once or not at all.
So I'll turn it back to you and let's continue through.
Thank you.
So the final of the three main facts is the payroll expense tax.
Here's what 2024 actual look like broken down by industry.
It's a quite different revenue source compared to the other two that I talked about.
It's only paid by less than 500 companies and it's really highly concentrated.
The concentration has gone up.
in the last couple of years.
Right now, the top 100 companies, top 100 businesses account for 93% of the revenues.
About 75, so about three quarters, is just 10 companies.
Nine of those are in the tech sector.
One note here is that tech sector does not mean the information industries.
The classification in this charge is based on the NAICS codes.
and what people consider tax companies to be, or companies that would show up in trade, for example, Amazon.com services.
They would show up in professional and business services that would be AWS.
So not necessarily companies in information sector.
They are in those three sectors that we often talk about and focus with these presentations, the trade, the information, the professional and business sectors.
So it's a highly concentrated source that's very hard to forecast and this is where our forecast was quite off for last year.
Our baseline scenario forecast was 406 million.
Pessimistic scenario forecast in October was 361 million.
The actual revenue for the year was 360 million.
So that means about 46.7 million below The baseline scenario forecast is 11.5% gap and about 1.2 million or 0.3% less than the best scenario forecast.
The table at the bottom shows how those forecast errors compare to the accuracy of our forecast in the previous years.
In relative terms, it's about the same magnitude of the forecast there.
We have seen 46 million more in the previous year in 2023 actuals.
So that was about 17.3% above the forecast.
The year before that, the actual collection was 26 million below the forecast.
I think that's about 9.5% gap.
The very first year was particularly imprecise.
We did not have a good source of information to import the forecast.
Eventually, the collection was close to 300 million, and the forecast year was 100 million, almost 100 million, so 47 and 7%.
So in terms of the relative size of the error, it's definitely much larger than the one for the sales tax, for the business and occupation tax.
A little bit more information here on What we believe the reason is why the actuals underperform the forecast.
We have talked in the past how why we believe the stock prices are an important factor and why payroll expense tax revenues are quite dependent on the stock prices.
That was one of the main inputs in the forecast.
The chart here summarizes the expected stock price performance for a couple of large tech companies.
The great dots show the expected year-over-year growth back from October, the expectations for the year-over-year growth as we were getting to the end of the year.
the blue dots are the actual year-over-year growth in 2024 so in general stock prices grew in line with expectation outperformed in most of the cases that's again something that is hard to put together with our assumptions about the role of the of the stock prices for the payroll expense tax revenues.
In addition, one has to take into account the fact that the collection, the 360 million in payments, are not all payments for 2024 obligations.
There were some payments for the previous years, and only about 347 million are payments for 2024 obligations.
So that means that the growth was actually even smaller and 14.2% total was around 11.3% and about 6.5% of that is essentially because of higher tax rates that were in place starting in 2024. So adjusting for those non-current obligations, adjusting for the increase in the tax rate, the growth of the obligation, the growth of the tax base is only around 4.5%.
Again, very hard to square with the performance of the stock market and performance of the stock prices for those main tax payers.
So in addition to that, the 2024, stock price growth was even stronger than the year before.
Looking at those same companies as in the previous chart, but rather than looking at their growth of their stock prices in 2024 and comparing it to the expected growth, this chart now shows how stock prices of those companies evolved over time.
2024 was a particularly strong year for the stock market.
Meta, still Facebook in this chart, the stock price for Meta grew close to 100%, so almost doubled year over year.
For Amazon, the growth was 50%.
Again, given what we believe the role of restricted stock units is, what the role of stock prices is for the payroll expense tax revenues, that is somewhat of a challenge to with the actual with the actual revenues.
So what we did, we looked at the data, the new data that we now have available.
We have entered into a sharing agreement with the employment security department, which provides us with access to total payrolls and payrolls by employee for companies in King County.
So one thing we can do is we can look at companies that are main taxpayers for payroll expense tax and compare the growth or the change in the payroll expense tax revenues paid by the companies with the wage growth of those companies in King County and with some additional effort and in some cases we can go more closely at the change in the in the payrolls the total wages paid in the city of Seattle specifically And so this chart tries to do that sort of comparison.
So you know that we have seen a strong growth in the stock prices and even our assumptions about how stock prices matter for wages, we were trying to understand whether the total wages in King County grew with what those stock price movements would suggest.
That's what the blue line shows.
The blue line here shows the year over year change in the total wages in King County only for the top 15 payroll expense tax payers.
We are trying to do adjustment here for different tax rates in different tiers because highly compensated employees, their compensation are subject to higher tax rates.
So we are taking that into account.
and calculating again year-over-year change in the wages in King County in 2024 which came for those top 15 taxpayers based on the estimates somewhere around close to 35 percent again also taking into account that 6.5 percent increase in the rate so let's say 30 percent slightly below 30 percent so that's significantly more than the growth of the tax base, the growth of the VED, payroll expense tax revenue, which again, looking only at the current 2024 obligation was 11%, just before the fact that we received some payments for 23, some payments for 22. that crosses only around 11%.
So wages did grow again in line with that expectation that stock prices, when they are growing fast, the wages of the taxpayers, those companies are growing fast.
The thing that we are now trying to work on is figuring out why Seattle tax base has been growing much weaker, much, much slower than .
So finally moving to the revenue.
If we could go back to that last slide just before we move on, I just want to confirm my understanding that when you're running these numbers, the 2024 actual versus forecast, this was up until December 31st, 2024, is that correct?
So what we have right now, and that's a good question, what we have right now are the data for, from the employment security department goes through the third four, so we have the first three quarters of 2024, What we did, we looked at how big of a shared first three quarters historically are in the overall annual compensations and estimated the total 2024 annuals.
So total compensation for the whole year to have reasonable apples to apples comparison.
estimating the overall wages that were paid in 2024 we'll only know that in a couple of weeks from now when the forest water data when we receive the forest water data from employment security department
Okay, thank you.
Just to clarify, and maybe a yes-no answer is what I'm looking for here, is that this information is not representing any data from January 1st, 2025 through today.
Is that correct?
No, this is really just information for 2024. We will have the first quarter data on wages and employment in summer.
before we were going to have some sense of where 2025 year is heading.
Okay, thank you.
I just wanted to clarify that because I know that even some of us here at the city and the private employers changed their work from office requirements on the first few weeks of January of 2025 and just confirming that this representation does not include that data or information.
Is that correct?
That's correct, yeah.
So in addition to the employment security data on total wages, we are incorporating the estimates of some measures of the return to the office.
We have data from Blazer AI, which is location analytics company that provides aggregated anonymized data on the workforce presence so we can keep track of what fraction of workers are returning to the office and what trends there are.
And we have seen in past upticks when major employers change their policy, move to three days in the office.
And we are starting to see that effect.
You mentioned the additional employees coming to the office starting from January 25 are showing up in the measure of work price presence.
That's another input in addition to the stock prices and in addition to the new ESD data.
So that's what will be incorporated in the forecast in August.
Thank you.
Let's keep moving on.
I just wanted the record to reflect that this does not include 2025. And Jan, I will ask you again to get that microphone closer to you.
Thank you.
So we are now finally moving to the April revenue forecast for 2025 and 2026. The table here summarizes the general fund revenues.
The first column are 2024 actuals that I went over.
The next two columns are showing the current forecast, the April forecast.
As you can see, again, focusing on the very bottom line, focusing on the total general fund revenues, excluding grants and transfers.
We are forecasting gross in total general fund revenues of about 2% and gross of about 2.7% in 2025 and 2026 respectively.
So the baseline scenario assumes a modest amount of gross.
What's more important for budgeting purposes, however, if that The forecast has been revised down relative to the adopted budget forecast.
So those three additional columns in the table that just showed up, they show the difference for two years, the dollar amount difference and the total two year difference for individual revenue streams.
Overall reduction is about 9.5% without grants and transfers for two years and it's essentially coming up in the second year so the first year revenues are slightly higher 3.8 billion above the adopted budget forecast but the second year 2026 is about 3.3 million below the previous forecast it's a broad-based reduction essentially driven by the slower economy grows than part of the regional economy forecast.
So that's the reason why the sales tax, while the business and occupation tax are down about 5 million, 4.5 million combined over the two years.
I want to note here that the forecast office is responsible for relatively small number of revenues in this table those highlighted blue the rest of the revenues are the forecast for those are overseen by the city budget office so Dave and Alex can provide some additional information on the reasons for property tax, parking years, and afforded fines.
Great, thank you.
So for property tax, about two-thirds of that is attributable to lower AV assumption than prior for the adopted budget.
And a reminder that in 2026, well actually fall of 25 here, we'll be voting on the renewal of the EMS, the medical and EMS And that will be coming in at proposed at a 25 cent rate and with AV dropping 25 cent times less AV gives you less revenue.
About a third of that though is the general expense levy and that is due to declining new construction assumptions.
Moving down, excuse me, not much to see in utilities.
Maybe a comment about parking, Joe?
Sure.
Yeah, I can handle that one.
Parking meters, you can see, are down with this forecast.
And that is mostly related to moderating of the rate increases that happen quarterly around the city.
In fact, the rate increases have been sort of neutralizing over time, and this most recent one that took effect in around March 10th of this year actually saw an overall rate decrease in the city of about 3.5%.
So we had twice as many areas of the city saw decreases as saw increases this time, which suggests we may have plateaued in our demand for parking in some of these areas.
And the outlook for future rate increases reflects this now.
Great.
Moving microphones here.
Great.
A comment quickly about the licenses, permits, interest income line.
That decrease in 2026 is entirely due to reduction in our cash balances in the cash pool attributable to the general fund.
Um, and so we're, we're maintaining relatively high for us interest earnings at about 3.6%.
Uh, but, uh, our, our cash balances that contribute to the general fund are, have decreased at the end of 2024 primarily.
And then we have service charges and reimbursements, which we have a comment about.
Yeah, so there was a notable reduction in the internal service rates for SDHR last year that was not captured in last year's forecast.
So now it's more effective here.
And this category, service charges and reimbursements, is a lot about internal flows of money between departments, between funds within the city for allocated costs and so forth.
So that's what we have now, grants.
Oh, and grants, this ties back to the 2024, what we saw, a shortfall in grant revenue.
So again, that's just appropriation that has not been used for a lot of these grants carrying forward again and worse in Maine.
So that was the baseline scenario.
Moving to the second one, the pessimistic scenario forecast.
Again, first two columns summarized the 24 actuals and the April forecast.
Again, what we have here is not a decline in revenues year-over-year in 2025 or 2026. There is a modest growth in revenues forecasted in the April forecast update.
Again, where the reductions are and where we are seeing less revenue is when we are comparing the April forecast with the adopted budget forecast.
Now those reductions, those downward revisions are much larger than in the baseline scenario.
Again, this is the scenario where we, for the S&P Global, It's not a recession forecast, it's just a slower economy grows, higher impact of tariffs, tariffs which have a larger impact on the prices that push the employment grows down and because of that, because of timing when these changes will take place there is a significant reduction especially in 2026 so it's about 40 million overall reduction in forecasted revenues driven to a large extent by a Darren Ward's revision in sales tax in the business and occupation tax
Yeah, essentially the same story.
With gloomier outlooks and more uncertainty, all boats are falling.
Nothing been particular in any given line item here to explain it other than a more negative forecast from the region and so forth.
So that summarizes the pessimistic scenario for general fund.
Moving on to the non-general fund revenue, looking at the baseline scenario first.
Again, the payroll expense tax revenues came in below the forecast at $360 million.
For 25 and 26, the current April baseline scenario forecast is $373 million and $391 million.
So that's the downward reduction of 67 million for the first year and 75 million for the second year.
That's essentially basically taking into account the lower base that we are starting from.
The ESD data that we are now incorporating into the forecast is one part of the story.
The second part, the second reason is the slower stock, weaker outlook for stock.
market.
S&P Global was expecting the SAP 500 index to grow about 5.5% back in October.
That has been revised down in that March scenario, baseline scenario to a 2.2% or so.
This baseline scenario is trying to take into account the recent developments.
So we were looking at The individual stock prices of those main payers, what happened over last week, how it might affect the overall changes throughout the year, what the output might be, and that's another reason why this particular revenue stream has been revised down so significantly.
Admission tax revenues, again, there was a little bit less revenue in 2024. That's part of the story.
The other part is less tourism, fewer people likely to visit Seattle, wealth affects people being less likely to spend on travel because of concerns about where the economy might be heading.
For REIT, the downward revision in 2026 is the result of higher interest rates that will be placed for a longer period of time.
And that limits the amount of sales and decreases the amount of REIT revenues collected from the other revenues that the budget office is forecasting.
Sure.
So, um, sweetened beverage tax, uh, it just generally reflects, uh, 2024 revenues came in below forecast.
And so it just essentially reflects the downward revision.
Um, but there are signs of, um, you know, wage effects, inflationary effects that may have some impact on, um, on consumption of sweetened beverages.
There's even an article in the New York Times about people are bringing their lunch to work more than buying out now.
So who knows?
But that's that.
Short-term rental tax is pretty small.
Uh, the vehicle licensing fee, uh, again, a small change.
Um, this assumption about new car purchasing, new registrations being added to existing, um, just a slight downward revision, and then the commercial parking tax,
this reduction is due to a base effect so there was less activity in 2024 than expected and so that's cascading into 25 and 26 and the other piece is that growth rates across these two years have declined just a little bit due to weakening tourism
Finally moving to the non-general fund revenue and pessimistic scenario outlook.
Similar story, similar reasons, just larger reductions because those effects of tariffs, these economic slowdown, it's weighing down on those revenue streams even more for payroll expense tags in particular the assumption about where those stock prices might be heading the outlook is more conservative in the pessimistic scenario again informed and what we believe realistic even what we have seen in the last seven days and how much the uncertainty the future uncertainty might be still weighing down on the stock market in general so to summarize the forecast and move to the scenario recommendation The S&P Global's forecast that served as the main input assigned 50% probability to the baseline scenario and only 25% probability to the pessimistic scenario forecast.
That was back in March, back before all the announcements regarding tariffs on April 2nd, before the recent changes over the last couple of days.
where the outlook has really deteriorated and deteriorated quite fast and quite dramatically there are certainly a lot of risks to the forecast regardless of which scenario is going to be approved the amount of uncertainty is really remarkable whether we are looking at the policies implemented on the federal level state proposals regarding tax policies.
Whether we are looking at the local changes, we have a new tax that's in place starting this year.
All those are going to have impact on the job process in Seattle that's hard to quantify, that's hard to assess, and they are certainly not things that would compel us to revise the forecast that were considered there to be a lot of upside trades.
Washington State and Seattle in addition are quite dependent on trade and tourism.
The trade policies, the impact of all that's going on on the amount of travel from Canada the wealth effect for US citizens, how much they might be spending on travel has to be taken into account.
High interest rates are going to be in place for a longer period of time and they will weigh down on construction sector even further.
So all those things essentially mean taking them as a total.
What do we see here are recent developments both considerable risks to the forecast.
The current outlook that's more in line with the pessimistic scenario than the baseline scenario outlook, and because of that, the Forecast Office is recommending to use the pessimistic scenario revenue forecast for the April 2024 official revenue forecast.
Thank you, Director of Congress.
Is there anything further in your presentation?
I'm happy to take any questions and provide additional insights.
Okay, thank you.
We are going to open the floor for colleagues that have any questions.
I will start with the forecast council members, Dr. Carmel, Dr. Rappin, Council President Nelson.
I will also remind colleagues that we will have this presentation back in Finance Committee next week.
House President, floor is yours.
Thank you very much for this very thorough presentation, although it's disheartening, I appreciate the work that went into it.
And so, just to repeat what I heard, based on your presentation, the three main, I'm focusing on the payroll expense tax, because that's a big change in the forecast, so PET, I'll say.
Based on the presentation, the main determinants of PET revenues are stock prices for companies that are subject to the tax, or the large payers at least, the wages paid to impacted employees, and the number of jobs in Seattle that are subject to that tax.
And then the presentation also showed that in 2024, wages and stock paid to employ, those two factors, wages and stock prices were up, so that leads me to conclude, or is it reasonable to conclude that it's the number of jobs in Seattle subject to the tax that is driving the changing forecast?
And I, so, I ask that because even if Granted, this forecast is not taking into account return to work from January on.
What matters is that they're returning to work in Seattle and we do have some leasing information and other indications that those jobs are going to other municipalities.
I'm thinking about, I was reading the GeekWire article about MEDA's policing activities in Seattle versus the east side, etc.
So is that a general conclusion that is reasonable?
So for 2024, we do believe that the big part of why we missed the forecast is the, that we did not factor in completely the change in the number of jobs located in Seattle.
You mentioned Meta.
Meta has not renewed some leases in South Lake Union and moved thousands of employees out of those buildings and they are, expanding the fragment.
That's in addition to the 10,000 jobs that have already been reported as lost in Seattle in Amazon over the last couple of years and the expansion of Amazon in value.
So that's a part of why the 2024 actuals are below our forecast.
That's our belief based on the overall data and our sense of the data.
For 2025 and 2026, we are now starting with the lower base.
And that's a part of the story in addition to that, the outlook for stock prices is weaker.
So the reductions in the forecast are not just taking into account the new source of data that we have in employment, what we have learned over last year about the employment, but also taking into account the downturn in these low prices, and that's a significant part of the story.
A follow-up question if I may.
So do you track the number of jobs in other municipalities in King County?
And this could maybe be an offline or a next meeting question, but at some point I'd be interested in knowing between stock prices and number of jobs, which is more determinative.
We do, we have done some work with Sean recently trying to get some publicly available data in addition to deployment security data.
So we are tracking the changes in the employment, how Bellevue, the Redmond, and Seattle have come to our main taxpayers over the last couple of years.
So, yeah.
Okay, thank you.
Thank you, Council President.
Any further questions, Director Carnell, Staff Rocket?
Seeing none from the Forecast Council, I will also note and confirm with me, Jan, I believe that the jumpstart tax has only been in effect for four years, collected for three.
Is that correct?
Yeah, it's been in place.
The first collection came in in 2022. So for 2021 tax year.
So we have four years of collection.
Four years of collection.
Am I correct that the most prudent analysis is a five-year smoothing analysis to understand trends in taxation?
That would be a reasonable approach.
that smooth out some of the changes under normal circumstances.
Yes, you have to take into account how standard those five years have been, whether there have been any changes in the policies, for example, that would cause changes in the behavior.
It's really hard in a relatively short history to use averages.
There's additional things we have to do.
Thank you.
I bring that up just to note that because this is still a new policy on the books that we won't have enough data to even engage in a five-year smoothing analysis to understand law firm trends.
With that, colleagues, I will move us on.
So within the ordinance here, We do not need to vote on opting the recommendation from the forecast office.
And you can leave it there.
Thank you.
If somebody does have a proposal to not opt to the recommendation, which is the pessimistic scenario, we will take a vote.
Generally and overall, I will say that this is not news, but it could be much worse.
I think it is prudent for us to adopt this pessimistic scenario because we do still have another few revenue forecasts before the final budget is created.
We have a revenue forecast before the mayor's office heads creates their proposal and then another revenue forecast before the council finishes their work.
And so I think it is prudent and in the best interest for the city of Seattle and our residents.
We had up the recommended optimistic scenario.
Are there any comments, questions, concerns on that?
I'm seeing none.
So I will move to adopt the 2025 forecast offices work.
Sorry.
I will move to adopt.
this scenario as recommended forecast office is there and so let me so it's in the wrong place of my script I already moved on in terms of the forecast if we concur with recommendation of the forecast scenario and the formal code is required all the original legislation was to remove any risk of political influence the forecasts and receiving recommendations from staff of independent experts is the best way to achieve that and with that, are there any objections to receiving and approving the recommended semistic scenario?
Not having heard any objections, I'm going to direct the Forecast Office to record our concurrence with the recommended forecast in the meeting.
With that, I believe that that brings us to the end of our amended agenda for today, colleagues, and for the general public.
I understand we try to make improvements on the meeting format here by moving to the conference rooms.
And Vice Chair, I would like to work with you before the next meeting to work out the technological issues here.
Absolutely.
I've already looked at our wonderful folks at the Department of IT to see if we can make it a better research experience.
Fantastic.
With that, colleagues, are there any questions, comments, concerns for the general director?
Seeing and hearing none, we are adjourned.
We have reached the end of our formal agenda.
Before adjourning, I want to remind everyone that we will have two additional meetings this year, one in August, one in October, to receive updated forecasts.
Our next meeting will take place on Monday, August 4th at 9.30 a.m.
If there are no further questions, we will be adjourned.
Hearing no further questions, we are adjourned.
Thank you.