Select Budget Committee 41724

Good morning.

The April 17th Select Budget Committee will come to order.

I'm Dan Strauss, Chair of the Committee.

Will the Clerk please call the roll?

Councilmember Kettle.

Here.

Sounds like we've got some feedback somewhere.

Did you say Kettle?

Here again.

Councilmember Moore.

Present.

Council Member Morales.

Here.

Council Member Rivera.

Present.

Council Member Wu.

Present.

Chair Strauss.

Present.

Six present.

Thank you.

And Council Member, Council President Nelson is excused until she joins in a few minutes.

Colleagues, it is now 9.33.

Swarth, my apologies.

Okay, let's just call the roll again.

Good morning.

It's our first Select Budget Committee of the year.

It is April.

I don't know that we've had a Select Budget Committee this early in the year ever before.

So we're going to just take a pause and roll once more.

I see you there, Councilmember Saka, as well.

It is 9.32 a.m.

I'm Dan Strauss, Chair of the Select Budget Committee.

Will the Clerk please call the roll?

Councilmember Hollingsworth.

Present.

Councilmember Kettle.

Here.

Council Member Moore.

Present.

Council Member Morales.

Here.

Council Member Rivera.

Present.

Council Member Saca.

Council Member Wu.

Present.

And Chair Strauss.

Present.

Eight present.

Thank you.

Eight present.

Council President is excused until she joins us in a minute.

This is the first Select Budget Committee of 2024. I'd like to take a moment to set some cultural expectations of my committee.

Please, colleagues, raise your hand or give me an eye signal if you'd like to be recognized.

If I don't see you, just say, Chair.

and I'll come and recognize you.

Right now, this is gonna be a very calm meeting.

Once we get to the fall, it might not be.

So I'm trying to set these expectations today.

For participants, if you are interested in showing appreciation for any public speakers or anything that's going on, we ask that you do not applause because it takes more time.

Please do wave your hands.

It has become a very effective way.

Colleagues, each of you, this is a team sport.

We could not review and examine this budget without each of you playing a key and essential role.

And so much like Vice Chair Rivera did this week with her report on the libraries and their budget, I'm asking each of you to look into your the departments that report to your committees and review their budgets to make sure that we are getting all the facts correct and that we've got all of the information possible because it takes all of us.

And I really want to thank the City Budget Office.

They've been extremely helpful in partnering with us.

I want to thank the central staff who work for City Council.

The amount of work that they've put in already this year is The script says unprecedented.

I've stopped using that word since the pandemic.

But to really say, I don't think that we have had this level of review, if ever, definitely not in the last decade.

And so with that, we've got a couple agenda items today.

We have a briefing and discussion on the April economic and revenue forecast.

This is a recap from our forecast meeting last Monday morning.

And then we will have a briefing and discussion on the 2024 budget discussions overview.

I also wanna take a moment to recognize Council Member Saka is joining remotely and I appreciate you doing so Council Member Saka.

I personally, I'm a five days in the office type of person.

And when it comes to taking care of your parents, taking care of your kids, having health issues.

I know last council president Deborah Juarez did not come in person for health reasons.

It's really important that while we all come together here in person, that we also recognize the flexibility that is needed to care for our families and ourselves.

And so council member Saka, I just, I thank you for leading by example and caring for your family today.

Mr. Chair, I would ordinarily love to be there and join you colleagues in person, but today my middle son is home sick.

And so I am primarily on point.

My wife took primary point yesterday while I shared my transportation committee meeting and Now I get to join this important meeting remotely, but I appreciate you, Mr. Chair, for your flexibility.

And we need to normalize this kind of thing as well for working parents to carve out time to care for their kids and stay home and take meetings and join late and be remote and go into office.

So in any event, thank you.

Absolutely.

I realize I went off script there.

ITEMS ON TODAY'S AGENDA BRIEFING DISCUSSION ON THE APRIL REVENUE FORECAST AND BUDGET DISCUSSIONS OVERVIEW.

BEFORE WE BEGIN, IF THERE'S NO OBJECTION, THE AGENDA WILL BE ADOPTED.

Hearing no objection, the agenda is adopted.

We will now open the hybrid public comment.

We will take in-person speakers first, followed by folks online.

This will be a cultural norm throughout the year.

We will start with folks in person, moving to folks online.

For the general public, if we have more than 15 or more than yeah more than 15 people signed up we will revert to one minute if we have more than 20 signed up we will revert to 30 seconds so this will happen throughout the entire year so that folks are not caught off guard at the last minute with how much time that they have we have online leonard jerome leonard we see that you are not present but we also see that you're speaking about the comprehensive plan so you might have signed up for the land use committee which starts at two Clerk, how many speakers do we have signed up today?

One in person and the one remote person you discussed.

Thank you.

Each speaker will have two minutes.

We will start with the in-person speakers.

Public comment period will be moderated in the following manner.

The public comment period is up to 20 minutes.

Speakers will be called in the order in which they registered.

Speakers will alternate between sets of in-person and remote speakers.

When the speakers hear a chime, They have 10 seconds left, so please wrap up the public comment.

Public comment period is now open.

We will begin with the first speaker on the list.

Clerk, do you have the list for me?

Oh, it's Alex Zimmerman.

Good morning, Mr. Zimmerman.

We have one speaker in person.

Mr. Zimmerman, please.

Hi.

Sir, please stop.

You have repeatedly failed to direct your comments to an item on the work agenda.

you are using offensive and harassing language that has been described in the past.

I ask you to stop using that language and revert to your public comment.

Yes, thank you very much.

I very appreciate it.

Yeah, I want to speak about agenda because what has happened right now with Seattle, with Seattle from my understanding is corporation, American corporation.

It's very important because I'm businessman and I have corporation before.

It's very interesting.

How have you come to this approximately $300 million debt?

How is this possible?

Can you explain to me?

Yeah, I'm totally confused.

Who, CEO or mayor in this situation, you know what is mean with this almost $300 million debt?

Mayor.

Harold, how you can bring a boss, a CEO, you know what is mean, what is for many year before, destroy this corporation, destroy the city.

And right now, he a CEO.

I never see like this before in my entire life.

By definition, this idiotic, absurd situation.

We need changes.

How is this possible?

And you, sir, I'm so sorry, you four-year here in this chamber, you guilty for bring us to $300 million still.

Why you chair here, huh?

Look how many people we have this.

Why they chose you in Chase Harrell who bring us to this $300 million debt?

Corporation, Seattle, 750,000 people.

We have 300 million debt and controlling by who?

People who are doing this job for a long time brings us to this collapse.

I don't understand another word.

And again, they are against control us.

This, by definition, idiotic situation.

It's not idiotic situation.

It's a crime.

You in Herald, you supposed to be in jail for this $300 million.

In all corporation, what is this guy?

Thank you, Mr. Zimmerman.

That is your first warning for using offensive and disruptive language in our chambers.

Please be advised.

Seeing as we have no additional speakers signed up present physically or remotely, the public comment period is now closed.

Thank you all.

The first item on the agenda today is a briefing and discussion on the April economic and revenue updated forecast.

Clerk, will you please read the short title into the record?

Agenda item one, April economic and revenue forecast update for briefing and discussion.

Thank you.

I chaired the forecast meeting last week and received this briefing at the Economic and Revenue Forecast Council on Monday, April 8th.

We are joined again today by Director Durris, Interim Director and Chief...

I didn't realize you're still interim.

I'm going to call you Director.

Director and Chief Economist, Office of Economic and Revenue Forecast, and David Hennis from the City Budget Office.

In addition, we have Sean Thompson, Alexandria Zhang, and Joseph Russell.

Sean is from Forecast Office.

Alexandria and Joseph are from the City Budget Office here so we can introduce the whole forecasting team, have them available to answer specific questions of council members.

Director Durst, please take it away.

Good morning, council members.

Director, you're going to need to bring that microphone right up to your face.

Just like at the O.K.

Hotel this day in 1991 where Teen Spirit was first performed on stage, you just got to eat the microphone.

Okay.

Second try.

Good morning, council members.

My name is Jandres.

I'm director of the Office of Economic and Revenue Forecasts.

I'm here to present our April update.

This presentation is an abbreviated version of what we have presented on April 8th to the forecast council.

The presentation is divided in three parts.

The first part is an update on the economic developments, both for the national and the regional economy.

The second part then goes to the outlook for, again, national economy and the regional one.

And the last part focuses on the April revenue forecast.

You can move the microphone.

Just pull it forward.

The reason why we are doing it this way is that the revenue forecast is developed in two steps.

The first step is developing an economic forecast for the regional economy, which then serves as an input to the forecasting models that we use to develop the revenue forecast.

Before we dive into this presentation, I would like to first spend a few moments providing some background on the forecast office and explaining our role, the role of our office and the role of the CBO in developing the forecast.

Our office has been established in 2021. It was created as an office that's independent from the executive and legislative branch.

The main goal was to provide, was to improve the transparency and accountability for the forecasting process, as well as to provide the same access to both branches to the resources, the analytical resources that we have when developing the forecast or various economic analysis.

A lot of effort has been put by a large number of people setting the foundation for the office and then setting it off In the last two years, I would like in particular to thank our former director, Ben Noble, who served as the inaugural director of the office and was really fundamental in really setting us to a really great start.

So it's a big loss for our office as he departed and became director of central staff.

It's a big gain for the central staff.

Now, our office is responsible for forecasting roughly $1.2 billion in revenues, not just general fund revenues, but we are also responsible for payroll expense tax, the REIT, the admissions tax, and the sales tax for transportation benefit district.

And then there is a large number of revenues which are still the responsibility of CBO.

So CBO prepares the forecast for other revenue streams and oversees the forecast developed by departments in situations where the departments are in the best position to develop those forecasts.

Dave, you want to add?

And Director Duras, maybe let's take a moment to introduce everyone at the table.

Sure.

Yep.

Good morning, everybody.

My name is Dave Hennis.

I'm with the city's budget office.

I'm the manager of the economics and revenue team.

And then Alex, why don't you go ahead?

Sure.

Good morning, council members.

Alexandria Zhang.

I'm an economist with the city budget office.

And I'm not sure, Joe, are you on, are you online?

And Sean can introduce himself in the middle.

Hello, and good morning, everybody.

My name's Sean Thompson.

I'm with the Economist with the Office of Economic Gravity Forecasts.

Thank you, and we're not...

And I could, in absentia, the other member you mentioned earlier, Council Chair Strauss, was Joe Russell.

He's on our team as well from CBO.

Wonderful.

All right, so if we can now move to the economic situation update.

provide some mostly backward-looking overview of how the regional economy did compared to the national economy.

The reason why, again, we want to spend significant amount of time monitoring the economy condition is that there's a large number of economically driven revenues that determine the overall collection.

Over time, when we started with the April update, there is very little revenue collected for the current date.

Most of the revenue that's coming in in January and February is accrued to the previous year because those are the obligations for 2023. So as of the April forecast, as you can see in this chart, there is essentially no revenue for payroll expense tax or the business and occupation tax collected for the current year.

Very little amount of sales tax, property taxes, and rate is kind of a little bit higher, but still only 20% as of the April forecast.

And going to August and October, as you can see, the amount of overall revenue the share of that total revenue goes up but by the time of october forecast we still have only collected about 50 of the revenue and the rest is coming after we provide that last update and as you can also see there is a significant amount of variance among those revenue streams for some We have less than 50% of revenue for payroll expense tax, in particular, and the business and occupation tax.

So understanding the economy condition is really crucial, really important in developing that revenue forecast.

Looking back at 2023, when we were going into 2023, the prevailing opinion among economists was that we are going to see a recession.

and there was more than 50 chance of a recession occurring fortunately the economy outperformed the expectation avoided the recession there was quite strong uh economic growth um employment for for the region was first expected to decline 0.3 percent going into 2023. But then over time, we have improved our forecast as the conditions suggested that the labor market is quite strong.

And in the end, the employment grew 1.3% in 2023, outperforming our expectations from fall 22, and was roughly in line with the expectations in fall 23. All that said, while...

The job market outperformed our expectations in regional economy.

Regional employment grew slower than the employment in the U.S. as a whole, about 1% slower.

In addition to that, local inflation was higher than on the national level.

And Director Duras, before you move to the next slide, can you share, and I know why, but can you share why personal income doesn't have a 23 actual?

Yes, sure.

Yeah, as you can see, there is a bar missing for personal income, the red bar.

for 2023 actual personal income is missing because that information will be released only in November 24. So official estimates for personal income in 23 are only released after we come with the last forecast update in October.

And so we have to rely on personal income for Washington state to develop.

the estimates of a personal income in the region, which then serve as one of the inputs for revenue forecast for City of Seattle.

Now, looking a little bit closer at the employment, and the reasons why regional employment underperformed the national economy.

The chart here shows the decomposition by industry on the total employment growth shown at the top.

The blue bars are for United States.

The red bars are for Seattle Metropolitan Division.

That's King and Snohomish counties.

Our economic forecasts are, in general, forecasts for the regional economy, not the economy of city of Seattle because of limited data availability.

Pretty much all the data that's available is only available at the county level.

There are a few exceptions, but, again, most of it is available at county or...

or a regional level, so we have to work with what we get.

And this is one particular example of that.

So the decomposition by industry then shows that the reason why regional employment grew slower than national one was the tech sector slowdown and the layoffs in information and professional and business services sectors have weighted down on the overall employment growth.

offsetting those strong gains that you can see for manufacturing, where the regional employment grew faster than the national one, and leisure and hospitality, where, again, the region outperformed the nation.

And so those decompositions, those bars, if you would stack them on top of each other for individual industries, you would get the total amount.

So those tiny bars, they show how different industries, again, contribute to the overall growth, which industries have grown and which were offsetting that growth in 2023. And so, those layoffs in tech sector seem to have bottomed out, and the outlook is for the tech sector to have stabilized We are not expecting further, significant further negative effects on the overall employment growth, as you will see in a couple of slides further.

There are some negative factors that will be still...

still causing headwinds to the regional economy, and a particular concern, or one of our particular concerns is the construction sector.

You cannot really see, or it's hard to see from that small red bar for the construction sector how much of of a downturn that sector has experienced because it's, first of all, just a contribution of that sector and it does not show the development over time.

But from the peak in summer 22, the employment in construction sector has now declined by roughly 4.8% as of December 23. That's a notable decline of regional employment in the construction sector.

Director Duras, before we move on, understanding that that is a reduction in the construction industry within Seattle from last year, is that correct?

That's the reduction in the employment in King and Snohomish counties.

These numbers are for the metropolitan division because there aren't the data for city-level employment is not available on a month-to-month basis.

So this is overall employment in King and Snohomish counties.

Thank you.

Is my understanding correct that we have been the fastest growing city in the nation for a number of years and this is a reduction from that?

Yes, that would be...

That's true.

There has been a significant construction boom, and now we are coming to the other side of the hill.

We may still be employing more people in the construction industry than other places in America, but we are seeing a decline because we are still slowing.

Is that a correct understanding?

We will have to look at the comparisons for...

No, for that, but yes, that's a fair assessment.

For a layperson, that's generally correct.

It's a fair assessment.

And then I'll also take a moment to note here, manufacturing outperformed the United States here in Seattle.

Trade held constant with the United States, and that is these two industries can only occur in the industrial and maritime zoned areas.

This last year, we passed the strongest maritime and industrial zoning protections since...

actually, probably ever, but the last time that they were changed was 2007. And if we reduce the zoning in these industrial and maritime areas, we lose the ability to engage in that manufacturing and trade elements that we're seeing on this chart right now.

In the good times, when construction is booming, when tech is booming, we don't necessarily notice the industrial and maritime additions to our economy because everything else is so much larger.

But in economic slowdowns, it's manufacturing and trade that remain constant and buoy our economy here.

And that's really the important.

Thank you for letting me editorialize here.

Just wanted to call attention to the importance of our maritime and industrial lands, the Port of Seattle that connects to I-90, that connects to the heartland of America and Boston.

Vice Chair, please.

Thank you, Chair.

I just wanted to point out here that the sharp reduction in demand for office space has impacted obviously vacancy rates and that some of that has been impacted by Seattle workers lagging the national trends on return to office.

It's something that I've talked and many of us have talked about a lot since we've been here and I wanted to point out because the things that we say are based on real data and real impacts to the economy in Seattle.

And so I wanted to note that as well from this particular slide.

Thank you.

Well said, Vice Chair.

Anyone else?

Thank you.

Director Drosch.

So we have a few more things on that particular last point on the return to the office.

We have access to aggregated anonymized cell phone location data that allows us to analyze the trends in employee workplace presence and track how fast the return to the office continues.

This data is used to inform payroll expense tax and in a slightly different version, also inform admissions tax forecast.

As you can see in this chart, there has been steady, slow but steady return to the office across the city starting from 2022. For 23 in particular, we have seen a significant increase in employee presence at workplace attributed to Amazon's move to three day in the office in spring 2023. And then you can see that It can be clearly seen in that red line for South Lake Union, where the employee presence has grown from around 50% in January 23 to somewhere around 75% by the end of 23. So these comparisons, these lines, are the comparisons of the employee presence in that particular month relative to the same month in 2019. So 100% would mean the same amount of employee presence on the workplace as in pre-pandemic.

Now, moving on to the second point, second related point here, one more thing we are seeing in the data is higher office vacancy rates, and that, again, has implications for how much construction activity we are expecting in near terms.

The chart compares office vacancy rates for United States, Seattle metro area, City of Seattle, and Seattle central business districts.

As you can see, pre-pandemic, City of Seattle, was very low in terms of office vacancies rates.

They have been lower than in the U.S. as a whole.

That has changed significantly, and we have seen a large increase in office vacancy rates.

We have not seen the worst of it.

This is the forecast.

This chart includes the forecast by CoStar.

And if you compare where we are right now, let's say for city of Seattle, the office vacancy rate is somewhere below 20%, but CoStar expects two more years of vacancy office rates that will be increasing and peaking somewhere in early 2026. And for the city of Seattle, the expectations by CoStar is that it's going to be somewhere around 25% office vacancy rates.

So there is obviously a lot of uncertainty related to this forecast, as we've pretty much ever seen today.

The uncertainty is really large, but it clearly...

illustrates the risk that the city of Seattle is facing compared to other parts of the region.

There is going to be a significant amount of competition where exactly these employees are returning to the office.

When the leases for the office space are expiring, companies will be re-evaluating which leases to renew and which to let expire and where exactly to allocate the workers.

Now, moving on to the Outlook.

First, a general context for the forecast.

Our office developed three scenarios, baseline, pessimistic, and optimistic scenario forecast, and then recommends one of those scenarios to be approved as the official revenue forecast.

During the April 8th meeting, the forecast council has adopted the baseline scenario forecast, which we have recommended.

We have used pessimistic scenarios several times in the past, in 2020, in 2008. But right now, our overall assessment is that the baseline scenario is the most likely future outcome, and there are in particular concerns that the US national forecast, which serves as a starting point, is either overly optimistic or pessimistic.

We have accounted for those various risks to the regional economy that might cause development in the region deviate from the trend that we are seeing for the nation as a whole.

Again, the bottom line, baseline scenario has been adopted and is the most likely future outcome.

And Director Duras, just like a moment, colleagues, throughout the pandemic, the forecast office had incredible accuracy with their forecasts.

We outperformed the state, actually, in our ability to forecast the economic situation ahead.

Thank you, because of Director Duras, Ben Noble, and Sean, appreciate you all.

I know that there was a blip that we're about to present, but I think that that's something that we just couldn't see, and I just wanted to take this moment to recognize the accuracy that you've been able to provide us with the economic forecasting that we've needed to create these budgets.

Thank you.

Thank you very much.

So looking at the outlook for U.S. economy first, and again, I will be focusing on the baseline scenario because that's the one that served develop the regional economic forecast and then the revenue forecast.

The S&P Global, that's the provider for that U.S. national forecast, assigns 55% probability to the baseline scenario, 30% to pessimistic, and 15% to the optimistic scenario.

So, again, the baseline is the most likely to occur with more than half, with more than 50% chance.

The faint red line presents their forecast from September 23, and then the dark red one shows their forecast from March.

So the difference between the two is how their outlook for employment growth has changed, how it has been revised since we have presented our last forecast in fall 23. Labor market in particular has outperformed expectations, has shown great resilience, and that's why S&P Global revised up their employment growth forecast by roughly 1% for 2024. As you can see in the chart, Starting in the second half of 25 and in 26, there is very little employment growth projected, and the employment is not expected to decline but kind of stay stable.

as the impact of the interest rates are working their ways through the economy.

Very briefly on that pessimistic scenario, the outlook, that pessimistic scenario has the expectations of a shallow, rather mild recession built in.

There would be some employment, some job losses incurred in that scenario, but it would not be a prolonged recession.

So overall, the outlook, is not particularly stellar growth, but the economy has really continued to outperform the expectations, showed a lot of strength despite the tightening of the monetary policy.

The Fed is expected to pivot towards interest rate cuts later this year, but again, if you are following the news, The recent readings on the inflation rates came higher than expected.

The recent employment growth numbers were higher than expected, and that is, in general, just making Fed more cautious, and they are going to, they're trying to obtain more confidence that the employment is coming down towards 2% in a sustainable way.

So we're likely to see some delays in those interest rate cuts, which again might, if that plays out the way how it seems to, that construction sector slowdown might be longer than what we are currently projecting.

So that said, based on that March forecast, here is how our regional employment outlook looks like.

The faint red line is, again, the forecast from fall, and the darker red line shows the revised employment growth forecast.

It's year-over-year changes, so we are projecting We are projecting employment growth of around 1.9% in 2024. The reason is, again, we have seen stronger than expected gains in manufacturing and leisure and hospitality.

We are expecting that tech sector layoffs, the effects are mostly gone.

And despite the weakening outlook for construction, are expecting employment growth in next few years.

Not particularly strong again, but growth nevertheless in the baseline scenario.

For a pessimistic scenario, just like the national economy, it's a scenario where the economy goes into a recession and there are some job losses associated with that.

Not a long recession, but a recession nevertheless.

Unless there are some questions, we can move on to the revenue forecast.

Seeing none, please.

I think this is what everyone's been waiting for.

First, again, a little bit of a context on different revenues that we are forecasting and focusing primarily on those large economically driven taxes by showing them by industry on this slide.

The yellow bars show the contributions of different industries to the sales tax revenue.

As you can see, a large share is coming from the construction sector and the trade sector, and together they account for more than half of total sales tax revenue.

So it's not a particularly diversified revenue stream, much less diversified than business and occupation tax.

For business and occupation tax, professional and business services constitute a larger share of overall revenue, but it's, in general, more diversified revenue stream than sales tax.

And then finally, the red bars here show payroll expense tax and show that this particular revenue stream is very concentrated with just 500 companies paying this tax.

It's a revenue stream that's coming from only a limited number of companies.

The top 100 of them contribute about 90% of the revenues and about 70% of revenues are just top 10 firms, most of them in tech sector.

Here I want to point out that tech sector and information sector are not the same thing.

Some companies that are considered to be tech companies operate in that professional and business services sector.

Cloud services, for example, would be there.

Online retailers would be found in trades rather than information sector.

So again, payroll tax, just 500 companies, that compares to about 25,000 or so taxpayers for business and occupation, and almost 70,000 companies, 70,000 taxpayers for the sales tax.

So on their own, each of these revenue streams has a tax base that's quite different from the other.

As a whole, they are quite diversified, and that's one of the strengths when it comes to The revenue sources, they are not overly reliant on, say, property tax and sales tax.

So unlike King County, City of Seattle has a much larger variety of revenue streams and generally is much better positioned to face the challenges that might be coming in 2024, 5, and 6. This slide now compares the 23 actuals, revenue actuals for the general fund with our forecast for 24. The middle part shows both the adopted 24 budget forecast from fall 23 and the revised April forecast and shows the difference between the two.

Starting from the very bottom, from a total, you can see that the forecast has been revised up from 1.7 billion to 1.74 billion, so roughly 45 million extra.

A large part of that is the upwards revision in grants, so the line below that shows then the total without grants and transfer because those two revenue streams are quite different in their nature, and I think Dave can provide some additional information here on what exactly motivated that provision in the forecast.

Sure, thank you.

So the grants, and as you know, grants are sort of one-to-one, right?

We do the work, we get reimbursed for the grant amount.

So the reason we separate them out is because they don't contribute any additional flexible dollars that could be programmed for other things, right?

So grants, there's a lot of carry-forward grants and then the Q1, quarter one grants.

So when departments receive a grant, they have to go through the grant acceptance process And so what we've captured so far in this is the quarter one grants to the city.

And the remainder are carry forwards of previous grants that were not completely spent.

And so we're moving that money forward to reflect the activity that occurred in previous years.

It has not, that will be, not completely, but will be worked out in 2024. And then we'll get reimbursed in 2024 is what we're showing here.

Thank you.

And Director Durash, on this slide, looking at the payroll tax, I'm seeing a negative number here, although we saw that it came in above expectations.

I'm noting this.

Is it correct that this is because of the restrictions that we've placed on the payroll tax and this is just the general fund projection?

Is that correct?

That's correct.

So the line, the draw for payroll tax just only shows the payments for 2021 obligations.

The payments for those obligations and refunds on whatever has been paid before, they are still deposited or in case of refunds, they are affecting the general fund.

Starting with 2022 obligations, those are going into payroll expense tax fund, but 2021 continues to be going into general fund.

And that negative 3.4 million shown for the April forecast is due to some refunds that have been requested and has been approved.

We have expected it to affect the 2023 revenue.

That's why the adopted forecast has zero But the refund has been finalized only after December 21st, and so it's affecting the 2024 general fund.

It's revenue that's not accrued, and that's the reason why it's showing up in 2024. Now, moving to those main economically driven revenues and looking a little bit more what's motivating those differences in the forecast for retail sales tax, we have revised the forecast down because for 2023, actual revenue underperformed our expectations.

The construction sector slowed down, started to occur a couple of months earlier than we were expecting, and that was one of the revenue streams where the revenue were below our expectations.

That led to the revision of a forecast together with just a slower pass of...

interest rate cuts that we are expecting in the revised construction sector outlook as a result of that.

For business and occupation tax, the $4.5 million downward revision is, again, primarily due to refunds.

It's not that we are expecting less economic activity.

It just happens that there has been larger than typical amount of refunds that were requested and approved affecting the 24 general fund those are refunds for paying for obligations from past years it's again typical for city to receive refunds requests and it just happened that this particular year there is a larger than usual amount of significant significant or medium-sized refunds.

They just accumulate to quite a lot in general.

But as you can see, going forward in 25, 26, we are predicting both of these taxes to grow so that downward revision is for 2024, but...

25 and 26, both revenue streams are expected to grow.

Both of them are expected to grow above the rate of inflation and for business and occupation tax, again, because it's a quite well diversified revenue stream that grows is 5 and 7.5%.

So very solid, very strong growth.

The 24 is obviously quite different from that, but the overall outlook reflecting that outlook for the employment growth is for the revenues to grow.

The very bottom part of this slide compares the annual growth for general fund as a whole and compares it to the inflation rate for Seattle area.

As you can see, for 25 and 26, those two are roughly comparable.

For following years, there has been...

or for previous years, I'm sorry.

For previous years, those comparisons are more complicated.

There have been a couple of additional factors which, for example, are behind that 0.9% decrease between 2022 and 23. Mercer Mega Blok was 60 million of, one-time revenue that increased 2023, 2022, and as a result is causing this apparent decline between 22 and 23.

And then if I could just draw your attention to a couple of things.

Property tax, we're at minus 2.6 million difference in 2024. That's due to an error on the part of King County.

We have what we call a refund re-levy.

These are levy amounts that should have been paid by taxpayers, but because of...

The actions they took to adjust their assessed value or what have you that changed their tax amount that we were not able to collect.

And what happened this year is that King County failed to levy our refund that we should have And so this happens every year, the refund re-levy.

But this year, they forgot to include it in our levy amount.

So that will be included in 2025's levy amount.

So that's not a loss there.

It's just a deferral for us.

But we have to recognize it in 2024. And then, as you can see, going out 2025-26, we have the adjustment for that amount.

$2.5 million coming in and coming out.

We returned to trend in 2026. And then the other thing I wanted to mention was the public utility tax, which of the $15.5 million increase in 2024, about $8 million of that is due to accounting issues that were resolved, but after the year closed.

And so what we ended up with is placement of money in years when it's all going into 2024 rather than into 2023. and so going forward uh we there's an adjustment for that as well um and the money's not gone it's just put into a different year and then i'm not sure if there are questions about any of the others but um colleagues any questions seeing none let's uh continue i think this is the meat of the discussion but

I think we're a little over time.

Vice Chair.

I'm sorry.

I'll make it a quick question, but I just want to test.

I'm trying to make sure I have these correlations accurate in my head.

But in terms of the stability of the fund sources, Jumpstart versus General Fund, what I heard you say was General Fund is a more stable fund source because it's more diversified.

And on the Jumpstart...

Vice Chair, can you...

Oh, can you not hear me?

I did the same thing.

Sorry.

I have a very loud voice, so sometimes I can't tell if my other people can't hear me.

Anyway, what I was saying is I just want to make sure I heard correctly that the general fund is a more stable fund source because it's more diversified than the payroll jumpstart.

And in part, the Stability of the jumpstart tax is impacted by what I'm reading here.

The technology sector appears to have stabilized from their layoffs in the latter part of 22, but their demand for office space is still low.

Leases are not going to be renewed, so we don't know what's going to happen there and where those employees maybe might go, which would have a further impact on the stability of the jumpstart tax.

Is that correct?

Yes, that's a very good summary of a couple of slides that are coming.

Okay, I just want to make sure I'm reading this accurately and that I heard what you said accurately.

Thank you so much.

Thank you, Chair.

Thank you.

Yeah, so we can now move to the payroll expense tax and some other select other revenue forecast.

Council Member Nelson?

Just wanted to take this opportunity now that I've finally logged on here to say that I am present.

Thank you.

Thank you for joining us.

So for payroll expense tax, the forecast has been revised up by about 70 million.

The forecast for 2024 has been revised up by roughly 70 million to almost 400 million for this year, and then exceeding 400 in 25 and 26, which would make it the largest revenue stream larger than payroll tax, BNO, and retail sales tax.

Right now, they are approximately same in size, but that can change significantly.

That said, there is a large amount of uncertainty regarding the forecast for payroll expense tax, and there's two more slides on that following this one.

Before getting there, very quickly on REIT, we have not revised significantly real estate excise tax, still around 50 million, so about half of what was peak of more than 100 million a couple of years ago the high interest rates are cooling down the activity and there's just less sales of homes there has been very little in terms of sales of commercial real estate a part of that is that it's hard to assess what the actual value of office space is and in general this is not a good time for for buyers unless some speculative reasons um to purchase more office space so overall rate revenue are down from that peak but there is very little change in the forecast for 24 we are expecting the recovery once the interest rate starts coming down and there is expected to be more activity and people buying and selling homes more than they are now for Sales tax for transportation benefit district, the $2.5 million downward revision is motivated by same factors as the downward revision for sales tax construction sector that's cooling down.

And in case of the trade, the other important sector that's contributing to the sales tax, people are shifting their expenses from purchasing goods to services, and services are...

Not all the services are subject to the sales tax, which, again, contributes to that downward revision.

So now moving to a bit more detail on the payroll expense tax, the reason for that large upwards revision in the forecast is the change in the outlook for stock prices.

What we have found And I have to say here that we have only three years of tax collection for payroll expense tax, so there isn't that much data to use for the analysis.

But our work so far suggests that the tax base for payroll expense tax moves significantly with stock market.

The reason is that a lot of tech companies pay their large part of the pay to their employees as a form of a stock grant.

So whenever stock prices are down, the value of those stock grant goes down.

And we have certainly in past seen in those three years, we have seen larger than expected collection in 21. before the revenue decline in 2022 and then outperformed our expectations in 23. So the chart on the right here shows the year over change in average stock price for select companies for some of the large companies, not because they are the taxpayers for payroll expense tax.

They are here for illustrative purposes because they are known to have a significant presence in the region.

As you can see, the year over year changes in stock prices, they vary a lot year to year.

They went from, on average, 40% growth in 21 to a decline of around 5 to 10% in 22 before, again, on average, growing 20% in 2023. Now, given that there are...

Given that there is just a handful of companies that...

that pays significant share for the payroll expense tax.

The movements of stock prices for those individual companies affects the revenue quite a lot and changes in the outlook then feed in the changes in our revenue forecast.

The chart here, those blue dots show 23 forecast for year-over-year change in stock prices back from Fall 23. That was almost at the end of the year, so the actual changes in stock prices are not dramatically different from what the Wall Street Journal analysts were expecting in fall 2023. Looking at 2024, and that's what's informing the forecast for the current year.

The outlook from fall 23 is shown in the faint red dots and lines.

The dots show the average expected change in stock prices.

averaging out across those analysts and looking at their average expected pass going forward.

The line connects the low and the high estimates.

So each analyst provides a low and a high estimate.

And as you can see, there is a very large amount of uncertainty in their forecast.

That uncertainty has decreased to some extent since fall.

The red dots and lines show the current outlook for stock prices of these companies.

The dot is, again, the average.

The low and the high end of the line are the low and the high estimates for the stock price changes for 2024. Overall, the outlook has improved.

Those dots have moved to the right.

again, leading to an improved outlook for the payroll expense tax.

And it's not just those individual companies, but the S&P Global, which is, again, the company that provides us with the forecast for U.S. economy, expects S&P index to grow about 20% in 2024, and that has been revised from essentially zero growth in September 23. So those forecasts do change a lot, and again, given what we have seen in the past and how closely the changes in payroll tax follow changes in stock prices and leads us to essentially revise the forecast in quite significant ways.

Now, one thing that...

Our forecast does not incorporate directly or some additional sources of uncertainty.

Those are rising vacancy rates and the uncertainty regarding where the employees are going to return to the office in the region that's beyond of what we can forecast.

And the companies are still re-evaluating their need for office space and where exactly they want to to locate those workers.

One thing that has been recently reported is that Amazon employment for Amazon has declined by about 10,000 employees since peak in 2020. And that was the employment for City of Seattle.

And that happened at the same time when the company increased their number of employees in Bellevue.

And with Link, with Lytral, that will connect Seattle and Bellevue, there might be an additional risk for this particular revenue stream, in addition to those climbing vacancy rates, which again suggest that there will be quite significant competition among where exactly the employees are returning to the office.

Thank you, Director Durosh.

Anything else from your end?

And I see we've got Vice Chair Rivera, and at the end, Council Member Kettle would also like to have some questions.

Anything else from you, Director?

We are happy to address any questions.

Thank you, Vice Chair.

Thank you, Chair, and thank you for this presentation.

My quick question is on the Wall Street analysts' projection on the decline of the stock market, about 2% in 26. I understand you said the factors for the expectations on payroll tax being employment and vacancy rates.

In terms of the decline of the stock market projection, 2% in 26, what factors are contributing?

Are they similar factors or how analysts come to, since it's supposed to, it's expected to grow 1% in 25 and it looks like it has grown in 24, why the projection that it will decline in 26?

Okay, yeah, so for 2024, the projection, and it's now the projection of S&P Global.

The chart on the right shows the projections for individual stock prices by Wall Street Journal analysts.

Those figures in the bullet points are the S&P Global forecast for the S&P 500 index as a whole.

So it's a slightly different source.

But what the S&P Global is forecasting is...

a very strong growth in 24, and then followed by essentially no growth.

2% decline, that sort of forecast can change easily to small growth, given how much they are revising their forecast.

Their current thinking is that those interest rates are going to continue to affect the economy, and the employment growth slowdown and overall economic growth slowdown will start to show up in the next couple of years.

mostly focused on interest rates then?

Yeah, it takes a while for the interest rates to work their way through the economy, affecting the employment and overall economy growth.

Thank you.

Thank you, Vice Chair.

Council Member Kettle and then Council Member Saka.

Yes, thank you very much.

Thank you, Chair.

Thank you very much for giving this briefing.

I really enjoyed it.

I love following the numbers.

I shouldn't say it out too loud.

And I've been following these different pieces.

And I have to say that now, I've always kind of followed like the Fed and so forth.

But now, as a council member, I have so much great, better understanding of what the Federal Reserve Chairman is trying to do with respect to keeping inflation low because it plays havoc in so many ways for city governments and to include our upcoming budget discussions.

And I'm mindful, too, that, you know, I'm anticipating some type of cliff because of those industries that are so sensitive to those rates, particularly the real estate side of things, and then, by extension, construction.

And I'm also mindful of CPI in terms of the local.

I think we've had inflationary pieces long before the national uptick in inflation because of the local economy being so hot.

And I'm not sure if that's something that I don't see the city government really been talking about that over the past decade.

And I think that's something that we should be mindful of.

And now it's real because we have the broader national economy.

INFLATIONARY ASPECTS COMING INTO PLAY.

I FOUND YOUR BRIEFING REALLY INTERESTING, TOO, BECAUSE YOU POINTED TO THE POINT IT'S MAINLY A REGIONAL APPROACH IN TERMS OF THE NUMBERS, BECAUSE WE CAN'T GET AS SPECIFIC AS SEATTLE, REGARDING INFORMATION, FINANCIAL, AND PROFESSIONAL BUSINESS SERVICES, BECAUSE, AS YOU NOTED, THERE'S SOME SHIFTING THAT CAN HAPPEN, BUT THAT WAS A REGIONAL NUMBER, SO THAT KIND OF SUGGESTS THAT, YOU KNOW, THERE'S SOME DOWN TICK GOING ON.

IT'S NOT JUST AN EAST SIDE, WEST SIDE KIND OF QUESTION.

It is more of a broader impact.

So that's something that we should be mindful of.

So thank you for that.

It's helpful.

And I also want to thank...

Chair Strauss on the industrial maritime piece because we need to understand what the port needs to be viable 100 years from now.

We need to ensure, and we cannot escape our geography and our topography, if I said a million times, because, you know, aviation, tech, all these things kind of ebb and flow, but we will still be a port, and all those different industries will still require international trade as maritime trade.

And so thank you, Chair Strauss, on that.

And we really need to push that and to maintain the diverse economy piece.

But my concern really comes down to, like, the commercial and the commercial real estate side of things.

And, you know, a lot of what we're seeing is, and this is not going to come out in these briefings, is the impact of public safety.

Because this plays out in so many things.

We talk about return to office.

We talk about work from home.

But public safety has such a huge piece on that.

The public transportation piece is that.

We heard yesterday in our, you know, in...

public comment about, you know, taking the bus into downtown.

These are the things that we need to tackle because this goes to, you know, some of these numbers that are dry, you know, that we're seeing and it's going to, you know, give us headwinds in terms of the budget exercise.

And so we need to activate downtown, downtown activation plan, much like South Lake Union is.

And this goes to what Amazon's done and other corporations have done.

And so we need government for the Central Business District.

I heard this yesterday.

We need the Central Business District to come up, and the government needs to show leadership on this return to office piece.

And the legislative side's doing it.

We need the executive.

I'm not saying exactly what numbers.

And then also the county.

We should be clear.

We need King County for the Central Business District.

We need King County for the downtown, and we should say that out loud.

But, of course, we need to do our part on the public safety side related to on the street, on public transportation, and this will play out in a lot of different ways.

And we also need to be doing this for tourism because, as your number suggests, the tourism piece is going to be huge for us.

particularly if it's not just pass-through.

We need to have them stop here for days before they go to Alaska, and when they come back, spend some more days here.

And so, we need to have this kind of central business district, the central waterfront, you know, Seattle Center, the whole combination going forward.

And of course, There's this thing called FIFA World Cup, too, that we need to be mindful of.

And I'd be interested in your thoughts, by the way, regarding World Cup planning and what you think in terms of that's going to impact your numbers.

But just to close, bottom line here is that we do need budget reform.

You know, Chair Strauss has started this regarding, you know, how we've been doing the grant side of things.

But we need a bottom-up review on the budget reform.

It's a good governance piece.

We should look at how we can do things better and We should leverage the expertise of our own, you know, central staff personnel behind you, yourselves, the CBO generally.

And I will say, as an Evans school, I always think of what would Professor Justin Marlow, Dwight Dively say in terms of how we should do our budget process better?

And I think this is an opportunity because we're forced to do it because of the deficit.

to make changes in terms of bringing good practices to our budget exercise.

So if you have anything on that to say, I would love to hear any recommendations you may have.

That and the World Cup.

I would like to know in terms of your expectations in terms of impact on the forecast.

Yeah, so a quick, that I forgot to mention when I was presenting this slide on return to the office.

Seattle was, there was a net inflow of employees into Seattle pre-pandemic.

During daytime, a lot of employees are essentially commuting into the city.

And it's exactly those employees that are what we are kind of concerned or what's at stake here.

For sales tax, there is very little difference if a person goes to a Starbucks, comes to the office, goes to a Starbucks in downtown rather than going to a Starbucks in a different neighborhood.

But those employees that are coming into a city, commuting from, let's say, an Amazon employee commuting in from Medina or from Sammamish or Mercer Island, those that are coming in and spending in the city of Seattle are contributing to the sales tax that's collected in the city of Seattle.

In addition, for business and occupation and for payroll expense tax, the amount of tax base depends on where the economic activity takes place.

So a worker that's coming to the office, performing work here rather than performing the work at home in Medina, makes a significant difference for the BNO for payroll expense tax, and those are the kind of things that need to be kept in mind here.

On the other point, for tourism, admissions tax has performed above expectations in 2023, and we have revised up our forecast for the admissions tax.

Again, there has been There had been a very strong cruise ship season.

A lot of tourists came in because of all the events taking place last year.

Seattle Kraken had a successful year, and the renovated Climate Pledge Arena is drawing a lot of visitors.

And so those kind of things are definitely a positive sort of development for not just downtown, but Seattle as a whole.

visitors to the extent that they are not crowding out some activities that would have taken place otherwise they are increasing the revenue and for FIFA we are starting to look at the impacts and it will be important to try to try to account for that potential crowding out effect.

The visitors that are coming in for FIFA might be replacing some of the visitors coming for other reasons.

There is going to be definitely more visitors.

The extent to which that will translate to, say, sales tax, additional sales tax revenue might be limited.

The tax rate is relatively low, so the city collects 0.85% on taxable sales activity.

So to generate additional...

additional $1 million in revenue, you would need more than $100 million of additional spending.

So for sales tax purposes per se, there might be very little impact, but for the overall economic growth, for the employment growth, those kind of events are certainly very important for local businesses.

It's something that helps the local economy on its way to the recovery.

Thank you.

Director Durush and colleagues, my apology.

I'm going to take responsibility for this.

I did not prepare you correctly for this presentation.

We had about 30 minutes reserved for your presentation, and we're about 70 minutes right now.

The meat of this presentation was intended, and that's my fault.

I'm taking responsibility.

You've done an excellent job today.

Colleagues, I do still see Councilmember Saka and Council President Nelson with questions.

I will also highlight this was intended to be a recap from the forecast meeting that occurred last week.

In the future, I will be inviting everyone to the forecast meeting.

because that's where it's a little bit more appropriate to be going into this level of depth.

I'm going to check with Council Member Saka and Council President Nelson.

Council President, I know you were in attendance last at the forecast meeting.

Colleagues, are you able to hold your questions?

I'll hold, yes.

Thank you, Council President.

Council Member Saka, would you like a last question or can you hold it?

Okay.

I will hold it in the interest of time.

Thank you.

Mr. Thank you.

Colleagues, any other questions for Director Durosh and the Office of Forecast?

I just want to say, I didn't cut you off at the 30-minute mark because the information that you have is so important and you do such an excellent job at forecasting.

I didn't want to break you up midstream.

So from here to you, deep appreciation for your work.

I'm sure that my colleagues will follow up with you offline.

Any final words?

Thank you very much for this chance to come here and talk to all of you.

I appreciate you.

Thank you.

Yeah.

And colleagues, we will now move on to the next agenda item, agenda item two.

Clerk, will you read the short title into the record?

Agenda item two, 2024 budget discussions for briefing and discussion.

And colleagues, I know that everyone has received this presentation, and I did not prep Director Duresh appropriately to say that he probably should have come and met with each of you to the side.

So thank you for doing your pre-work.

I was gonna ask for a show of hands, but I know that everyone's received their presentation.

done their homework.

I really appreciate you there.

Um, today we have Ali Panucci, our Deputy Director of Central Staff, and Tom Mikesell, uh, one of our analysts.

Last, uh, just yesterday we passed the Grant Acceptance and Appropriations Ordinance.

This was in Finance and Native Communities Committee.

It was noted that, uh, EDEN CZEK, WHO IS OUR ANALYST WITH THAT, COULD NOT SPEAK TO EACH OF THE GRANTS BECAUSE EACH OF THE GRANTS FALLS WITHIN THEIR OWN PORTFOLIO, WITHIN THEIR OWN DEPARTMENTS.

THAT'S THE SAME REASON WHY I ASK AND STATE THAT THIS IS A TEAM SUPPORT.

I'M RELYING ON EACH OF YOU TO BE VERY AWARE OF THE DEPARTMENTS THAT REPORT TO YOUR COMMITTEES.

IN THE SAME WAY, ALI AND TOM ARE GOING TO BE LEADING THE CHARGE, AND WE RELY ON EACH CENTRAL STAFF MEMBER for their respective portfolios when it comes to budget.

Here we are, April 17th.

We have started our select budget process.

This has never been done before in our recent memory, and Ali and Tom have been working diligently, meeting with you and answering questions.

With that, since you all have received the presentations, I'm gonna ask you to hold the questions until the end so that Allie and Tom can roll through this.

Allie, over to you.

And colleagues, I am so embarrassed to ask for more time today.

I'm going to be a real stickler about starting on time and ending on time.

Do folks have a hard stop at 11.30 or do we want to go till noon?

I do, Chair.

You have a hard stop?

I do.

Okay.

Is it okay if we continue till noon?

Please.

I mean, fine.

It's fine.

Thank you.

Thank you.

Colleagues, we're going to run this committee until noon.

This does create scheduling conflicts in my own life, but this is important work.

Allie, over to you.

Thank you.

Good morning, Chair Strauss, council members.

I'm Allie Panucci of your council's central staff.

Good morning, Chair Strauss, members of the committee, Tom Mikes of the central staff.

So today, Tom and I are going to learn how to use the computer in real time here.

Okay.

We will walk you through a deeper dive on the projected general fund deficit and how we got here.

Highlight again some of the tools the city could use to address the deficit and provide an overview of work central staff has or will be preparing to facilitate council's review of the city budget in preparation for your fall budget discussions and deliberations.

And then I'll briefly describe some additional presentations we have been working with Chair Strauss on to tee up in this committee or finance committee in the coming months related to budget.

It won't cover all things that will happen in Chair Strauss's committee, but it will highlight the budget-focused discussions.

And I'll just note this presentation really is a good complement to the revenue forecast.

That is one side of the equation.

In this presentation, we start to build in some of the expenditure side.

We don't yet know how inflation is going to fully impact expenditures in the future, but it starts to bring both sides of the equation together.

And so with that, I'm going to turn it over to Tom to walk you through some information about the general fund projected deficit.

Thank you, Ally.

So committee, the next three slides are going to be a process of showing you the problem statement for the general fund, which is the largest city fund, and then some additional information on how we got into this state.

So I'm kind of working backwards from the problem statement.

The chart that you see on the screen is the general fund forecast based on the adopted budget with a few modifications.

One of the modifications is it doesn't include any carry forwards, which kind of obscured the picture in 2023. Also, it doesn't include fund balance, which has been used to balance the budget.

in the current budget.

It's not included in the future years because there is no fund balance available.

But otherwise, this shows, as of the adopted budget, the revenues and expenditures to the general fund projected through 2027. And some key things stand out.

One is that the revenue line, which is shown in blue, is lower than the expenditure line shown in orange in all years.

So that's indicative of the financial problem that we have in this fund.

And in fact, in 2023 and 2024, even though we have, in nominal terms, a balanced budget, it's balanced because we're using fund balance.

And so what is fund balance?

Fund balance is essentially, in prior years, revenues came in higher than forecast and spending was lower than the budget.

So that generates some one-time cash that can be used to support spending, but it's only available until it's used up.

And in this financial plan, it's used up in 2024 and it's zero available in 2025. So that explains part of the reason why the lines diverge and get farther apart moving into 2025. Another reason why the lines get bigger moving into 2025 is that there are some one time balancing strategies that were deployed in the 2023 and 2024 budget that are not assumed in this plan based on current law.

So those include an underspend assumption of $20 million, which is basically saying, for example, we have a budget of $100 and we're only gonna spend $80 of it.

And so that kind of generates some organic savings in the fund.

That's not assumed for 2025. So that's part of the reason why the gap grows bigger.

The other key reason is the 2024 budget relies on $85 million transfer in from the jumpstart payroll expense tax.

This is something that has been used in budgets since the tax was adopted to help balance the general fund.

It's been done regularly on a one-time basis.

The law has been amended in each budget process to provide those funds to the general fund.

However, that expires for 2025. That isn't a decision under current law.

Of course, different decisions can be made.

But for the purposes of this chart, we're showing the current law picture.

So after you take out the fund balance that's not available in 25 and beyond, you take out those one-time balancing strategies, you can see that the deficit grows to about $241 million in 2025. And then it continues at essentially that same level in the future years.

One thing I do want to point out is that This number does include the impact of the recently settled coalition bargaining agreement, which is about $10 million in 2025 and grows to 15 in 2026. It does not, however, include the full impact of some other labor agreements that are not currently settled, largest of which is the SPOG agreement.

So once that information is settled and available, that will be included in future financial plans.

One final thing, this hopefully is becoming a familiar display for you.

It's something that we have been using for the last couple years to demonstrate the sustainability issue in the general fund, and we plan to continue to do so with our next update of this financial plan being in the May Select Budget Committee meeting, May 15th.

And we'll include things, including the revenue forecast, update that you just heard this morning from the Forecast Office and CBO, and also any legislation that's adopted.

I'm just going to put a more...

I'm not asking a question, colleagues.

I'm not breaking my own rule.

This is a number that changes regularly, which is why there's an approximation.

And I think that I'm just pointing that out, that this number has changed a number of times, even in the three months of this year.

Indeed.

So how did we get here?

So this chart shows some of the underlying skeleton of the city finances, so some key fiscal drivers.

It includes, on the income side, the ongoing revenue growth rate.

And so when I say ongoing, I differentiate between ongoing and one time.

One time essentially means it's only available on an intermittent or temporary basis.

Once the money is spent, that's it.

It doesn't continue versus something that's ongoing where it's a program that's intended to be provided year in and year out until a decision is made to discontinue it.

So this chart shows for revenues in the blue line, the ongoing revenue growth in three distinct phases, as well as the growth in inflation tracked by the CPIW, which is the inflation rate that's used in labor contracts.

So we're basically showing the underlying drivers in our city's income to the general fund and the kind of key cost inflation that affects our expenditures from the general fund.

And then compares in three phases that are shaded.

First, the pre-pandemic phase from 2013 to 2019, the pandemic phase shaded in blue covering the years from 2020 through 2022, and then the first year post-pandemic in 2023. It doesn't include anything beyond that because everything beyond that is a projection, though I will kind of tie into the presentation that you heard earlier in the committee meeting today to kind of indicate how that information interfaces with this and really doesn't help us necessarily build our way out of this deficit.

So just looking at the pre-pandemic phase, you can see very clearly that the revenue growth rate is a couple hundred basis points, so a couple percent higher than the underlying cost inflation.

So the price of our government services is not growing as fast in each of those years compared to revenue.

So what this means is we were having very brisk income growth to the general fund, but the cost of adding new services was fairly inexpensive.

So that enabled this in the city to expand the program offerings from the general fund in each of these years to keep up with growth in the city.

In fact, the revenue growth ranged from 3.6% to a high of 9.6%.

On average, it was 6.2% over those years.

In contrast, the inflation rate was very low.

It ranged from a rate of 0.9% to 3.4%, on average, 2.2%.

So you have a 6% growth in income and a 2% increase in the prices that you pay, you can see very clearly that that's a good situation to be in.

Unfortunately, 2020, we're hit with the pandemic, and you can see clearly that the revenue growth in that year, or I should say revenue decline in that year, was 9.7%.

which is kind of looking back in past, that is significantly greater than the revenue decline that we saw in the Great Recession.

That was really a fairly minor decrease that we saw in the Great Recession.

So this is a sort of unique challenge for the city that we experienced in the first year of the pandemic.

And also, we are going from in 2019, a growth rate of 7% of revenue to a decline of 9.7%.

So that is like a 17% shift in the momentum of revenue growth.

At the same time, inflation did not let up.

It still ticked along at about that 1.9% that we'd been seeing in the prior years.

And then, as you will recall, significant amounts of federal stimulus, which were very helpful for city finances, were provided by the federal government and the Federal Reserve.

And while helpful to provide COVID relief and COVID aid and to help people manage through the pandemic, we did have a supply chain issue.

So the economy was ill-suited to meet the demand that was being added by the federal stimulus.

and so prices started to rise.

And you can see in the orange line, inflation ticked up to 5.2% in 2021, and then it grew to 8.8% in 2022. So we have experienced, over the last few years, inflation levels that we hadn't seen for decades.

I think it was early 80s since we'd seen inflation this high.

And plus, this is in contrast to the prior 10 years where we were seeing inflation of around 2% per year.

revenues got cut out from underneath us our costs did not go down and then started to accelerate in kind of historically high levels so that that is where the problem really started to form was in that pandemic period and in fact if you look at 2021 revenue growth did actually pick up fairly rapidly to 8.6 percent in that next year But when you take it in the context of a 9.7% decline in the prior year, you're essentially running in place over those two years.

So you're not really gaining any ground while your costs are starting to build.

And then in the last year of the pandemic, we did see inflation actually, again, higher than revenue growth by a couple hundred, 300 basis points or so.

So that in itself is not a sustainable situation.

Not as bad as the...

the 9.7% decline, but it shows that even when revenues were growing, the cost of services was really kind of eating most of that growth out from underneath it.

And then moving into 2023, the first year post-pandemic, we essentially had high revenue growth, but we had high inflation.

And then to kind of interface with the news you heard earlier today on the general fund revenue kind of summary table that you were shown, what stuck out to me is that the inflation and revenue growth are essentially keeping pace with one another, which in and of itself is not a bad thing.

However, it does not provide a lot of room to add new services in a good situation, and it doesn't dig you out of a fiscal hole when you're faced with this type of a challenge.

So that's kind of a to attach to the information that we heard today and to kind of understand it's not the worst news, but it's really, we would like to really see the experience that we had pre-pandemic happening now because that would really give us a lot of assistance to meet this challenge.

And I will just say, linked at the bottom of this slide is a paper that we did earlier in the year that kind of gives it more of a narrative of this fiscal history.

And now this next slide ties those underlying growth dynamics to the adopted revenue and expenditure budgets from 2019 through 2024 to show you really two things.

One, just how the revenues shown in the green line did not keep pace with the adopted budget shown in the stacked bar charts.

And then second, to show, you can look, if you see in the stack charts, there are three colored categories that are provided here.

One is the 2019 base, and we use 2019 for two reasons.

One, prior to that, we had a change in budget systems, so it makes it difficult to kind of parse out the information in this same way.

Our new system is is more flexible and it's easier to do these types of categorizations.

But second, that was the last year we had a structurally balanced budget.

So as I was explaining, the expenditures are broken into three categories, the 2019 base, then as shown in orange, baseline and technical changes.

So these are things like annual wage increases, vendor contract payments, things that are submitted by the budget office for keeping the budget up to date with the increases in our costs and other legal requirements that we have to meet.

So these are kind of, it's all a policy decision, but these are viewed as more a updating the budget to keep current with cost growth.

And then in orange, I mean, in gray are policy changes.

So these are areas where the budget was amended to either expand or add new programs.

The key takeaway here, so as you move from 2019 to 2024, you can see how those different categories grow over time.

And the blue category is not going to grow.

That's just the 2019 base.

Orange, however, is where we've seen the most growth.

By 2024, that represents about three quarters, about 75% of the total growth over those four years.

So that is just the budget being amended to keep up with the inflation that we were looking at in the prior slide.

And then the gray represents the policy decisions, and that is about $90 million by 2024. And that includes things like Clean Cities Initiative and Unified Care Team, some of these budget choices that have been made to keep up with emerging problems during the pandemic.

And as well, I would say this includes human service provider contract adjustments.

And I want to highlight those because those contract adjustments are responding to the same sort of inflationary factors that we were addressing in the kind of baseline and technical change category.

So in a way, the orange category is us keeping up with our internal city costs.

Those human service provider contract increases are allowing those contract providers to keep up with the same cost pressures that the city was seeing.

And then finally, just to kind of sum this chart up, you can see over time, given the underlying growth dynamics, unfortunately, the green line is below the top of the stack bars, indicating the budget deficit in 2024. Thanks, Tom.

We've done a deeper dive into what is the problem, and now the next question is, what are the tools to address the problem?

Would you like me to, okay, keep going, okay.

And so we've organized this into three buckets.

I won't spend a tremendous amount of time on this because we've talked about some of these tools and we'll have some deeper dives on some of these specific tools in future committee meetings and certainly in internal discussions with all of you, but they're grouped into three buckets, expenditures, revenues, and restricted funds.

And arguably the restricted funds bucket is part of the expenditure and revenue problem, excuse me, revenue tools, but there's been enough focus on conversations about locally restricted funds and what role they will play in addressing the general fund deficit that we've separated it out.

On the expenditure side, pausing the growth, the executive has already implemented a hiring freeze this year and is looking at new spending carefully before moving forward with that as one strategy to help save some money this year that can help mitigate some of the struggles in balancing the 25 and 26 biennium.

Some other tools, many of which really do require partnership with the executive.

I mean, all of these tools do, but some of them are better implemented or developed by the executive, but it's important for the council to weigh in on which tools you're interested in pursuing and be a partner in thinking through how that might help address the deficit.

So that includes things like early retirement programs that in the short term might not save money, but it is a good strategy to retain younger and diverse staff.

And in the long term, we'll save some money on wages.

Making those underspend assumptions permanent that Tom mentioned.

And then of course, looking at reductions in programs or services to reduce our ongoing expenses and or consolidating departments or lines of businesses.

If there are efficiencies that could be implemented through those actions and that might include savings or just providing better service to the community.

On the revenue side, of course, you could adopt new revenues.

Another strategy would be to not add new spending, especially ongoing spending of actual revenues outperform forecasts.

So in the pre-pandemic years, when we saw that big separation between inflation and revenue growth, if we had made big investments in one-time things at that time, rather than expanded ongoing services, we might be having a different conversation today, although also acknowledging there was the city was responding to needs and so not an easy job you all have before you.

And then also looking at our fee policies, some city services are a fee for service and looking at whether or not those, programs are achieving cost recovery periodically.

The city will review those.

Sometimes there are reasons to not increase them for cost recovery, but it may be worth reviewing them and seeing if adjustments could be made to help address the gap in the general fund.

And then of course, review spending on locally restricted funds.

I've listed some of them here.

These are funds that have specific spending restrictions, but they've been imposed locally by the city.

And so council has authority to amend how those funds are allocated and invested.

I'll just note that that's also not easy choices.

Many of those funds have been programmed for ongoing expenses.

And so all of that is part of the expenditure exercise.

So this just summarizes some of what was covered today.

It's a hard story, but I think at this point, we've covered it so many times, it's probably going to be everyone's elevator speech.

Inflation, if we were playing bingo, inflation would be the word of the day.

And so that is accounting for much of the growth in expenditures and what is impacting our revenues.

So that have not kept pace with those inflationary increases.

And so there's a mix of tools for your consideration that we will be digging in with you all throughout the year.

And so you'll be ready to make decisions this fall when you receive the proposed budget.

So this, we're gonna transition a bit.

Do you want me to just keep going through the rest of the presentation, Chair Strauss?

Yes, please.

I'd say at 1115, I'm going to ask for questions from anyone who has to leave at 1130. And I know Vice Chair Rivera is one of those folks.

I just want to take this moment.

This budget review in the past will then lead into the budget review of current situation and future meetings.

This is the review and examination of our city budget that has not been done before.

The definition of audit is a review and examination of your work.

So for anyone who wanted an audit of our budget, this is it.

Take it away, Deputy Director.

Thank you.

Thank you, Chair Strauss.

Okay, so to facilitate the council's review and examination of the city budget, we are preparing a 2019 to 2024 budget review.

It provides details on each department's budget and describes the relevant programmatic expenditure changes focusing on key drivers of growth.

The intent really is, as Chair Strauss said, to provide the information to be able to have those informed conversations about how to address the structural problem.

And again, because of the projected deficit in the city's general fund and because the mayor and the council are reviewing the jumpstart payroll, expense tax fund, I'm just going to say jumpstart fund, that's a lot of words, policies to determine if that will continue to be used to help balance the general fund.

The focus of our analysis is really on the general fund and jumpstart fund, and we group all other funds together.

So we do cover the entire budget, but the focus really is on those two fund sources, given their importance in these discussions.

But we are happy to dig in with you on other funds if you have questions.

And again, really the goal is to help identify and refine priorities and figure out which levers you are interested in pulling on to address the structural deficit.

Throughout the review, we separate out the operation and capital budgets for departments.

This slide just gives you a picture of the split between operating capital.

It's about an 80-20 split in the annual budget.

We do this because capital spending really is a bit of a different animal.

It varies from year to year based on the status and schedule of the projects being pursued.

And these changes don't necessarily reflect policy shifts.

It reflects a lot of things going on with the construction market and how and when projects can be delivered.

But budgetary changes over time can represent areas of focus determined by a department strategic plan.

So we do include a review of the capital budgets, but we've separated out those sections of capital departments from their operating budget.

And then throughout the review, as I said, we present the data separated by the general fund, jumpstart fund and other sources.

So this table is a snapshot at the city wide level to provide a sort of broad look at the five year period, showing that since 2019, the city's budget overall has increased by about $1.7 billion.

That's a 29% increase over the five year period, which represents an average annual increase of about 5.8%.

This is during a period of time when average inflation was about 5%.

So again, barely treading water there.

And as Tom highlighted, this is primarily driven by baseline and technical adjustments responding to historically high inflation.

The majority of the budget growth, when you're looking at just sheer dollars, occurred in the budgets of a few departments, Seattle Public Utilities, Office of Housing, Seattle City Light, and Human Services.

And again, the primary driver is inflationary and a lot of that is having to do with the cost of labor.

Most of the programs and services provided by the city rely on workers to deliver those cities, particularly the programs and services delivered by the general fund.

So the personnel costs for city workers across all funds comprise about 32% of the 24 budget, 38% of the operating budget when separating out capital, and over half of the general fund budget.

And this excludes other costs that might be associated with a position.

So for example, if you have a position that requires you have access to a vehicle, In order to do your job, this doesn't include those costs.

So a lot of our budget is to pay for people to deliver services to other people.

And then of course, there have been some new and expanded services supported by new sources of revenue.

For example, the jumpstart payroll expense tax revenues account for about 19% of the growth in this period.

So that is a significant portion.

There are also new levies that were approved that represent some of the growth in the budget across all funds.

And then of course, there's been spending supported by one time revenues.

And I'll just point out at the bottom here is the total FTE growth.

And I think this really reflects like overall, the number of employees in the city hasn't increased significantly in this period, but the cost of paying for employees has increased.

So that's what is driving much of that.

And I know that we've reached 1115, but you've got about three more slides.

So Council Member, Vice Chair Rivera, I'll pass it over to you at about 1120. Fantastic.

Take it away, Deputy Director.

These will be very brief.

The next two slides show budget growth at the citywide level, looking at it framed in the six policy areas.

What we have done in the Central Staff Budget Review, we've organized the information consistent with how the City Budget Office organizes the budget book so that we are...

swimming in the same direction in how we look at the data and present information.

And so this just shows when looking across the entire city budget in just sheer numbers, the utilities and transportation program area saw the biggest increase.

These are capital departments that comprise about 50% of the 2024 budget.

And with both the four major utilities and a major capital department of transportation, you expect those to be large budgets.

So the increase is not...

that really a surprise.

Going to the next slide, this is the same framing, but looking just at the general fund.

Looking at this slide, you can see public safety comprises the majority, about 50% or over 50% of the general fund.

budget and when looking at where the most growth has occurred that's in the education and human services policy policy area it's about 120 million dollars of increase over the five years followed by the public safety category that grew by about 109 million so this is just a initial look at some of the review we're doing but again we'll be providing a detailed look at every department It won't tell you everything that has happened, but it's another layer of information so we can get in conversation and understand where your priorities are and focus some of our future analysis.

And this just summarizes much of what I just said, so I won't repeat it here, but it's there for your reference.

You can run through these bullet points just to put the cap on your presentation.

Okay.

So again, you know, grew by about 1.7%.

These bullet points just outline what I went over.

That's about 5.8% per year during a period of high inflation.

Most of the budget growth occurred across those four departments.

Introduction of new revenue sources is also a significant portion of the citywide And then looking just at the general fund, given that's where the most questions are before you, that there was about 26% increase or 5.2% per year.

So also barely, you know, tracking.

And then the majority was in the human services department and the fire department when looking at departments, followed by growth in our finance general, which is the non-departmental budget, the parks department, department of transportation and public utilities.

So like I said, this is a initial discussion.

We've been working closely with Chair Strauss to identify key presentations for future committee discussions.

This will include another look at our 2019 to 24 review, looking at somewhat at the department level, sources of city revenues and associated restrictions.

So we'll do a full look at all city funds and what the associated restrictions are.

And then there will be a specific presentation on providing the background on the Jumpstart Fund and some of the policy decisions that have informed spending to date to help you think about what your policy choices may be in the future.

And then we will update the general fund balancing analysis, as Tom said, based on the forecast update and how 23 ended.

And we will be working to finalize and then present a fall budget calendar as well as the process But again, that we are coordinating closely with Chair Strauss and we'll share that as soon as we have that ready.

Thank you, Deputy Director, colleagues.

Again, my apologies for not managing our time well enough in the future.

I would prefer us the ability to ask questions as we go along.

I think the conversation is always better than a one way than two way conversation.

Understanding where we are today.

Thank you for holding your questions.

Vice Chair, I know that you have a hard stop.

I've got a number of questions.

I'm going to hold most of them, but I would like to turn the floor over to you.

I appreciate that, and thank you, and no need to apologize.

As far as I'm concerned, this is an important conversation.

We don't always know how many questions are going to get asked, and they're important.

So I really appreciate the opportunity to ask the questions, and I'm sorry, colleagues, I know I've already asked a number of questions, and I'll try to be quick on this one.

This is more of a point to underscore that Tom made that I think is really important to the budget discussion in general, and that is this idea of the one-time ads.

Because once a one-time ad continues, it no longer is a one-time ad.

It's just an ongoing.

And so the tricky part about that is if you want to know when it was added as a one-time, you really have to go back into previous budget for that department to see when was that added as a one-time.

And then the other tricky part is often when it's added in subsequent years, we don't always have the outcomes by which we can measure why it was added in subsequent years.

So I really just want to daylight that, because if you're looking at your department and you're curious about certain things that had been added one time, what they are, you have to go back some years to find that.

And then also you have to talk to the departments about this outcomes piece, because like I said, Just generally speaking, we don't always do the outcomes exercise we should be doing when we then make the decision to continue it as an ongoing ad.

And so this is why I'm going to also say that it's tricky to call things one time and it's also tricky to call things pilots because at the City of Seattle, at least those things tend to continue on.

And so I just flag it for you colleagues as you're looking at your departments and their budgets.

And I very much appreciate the exercise central staff is engaged in.

in terms of looking back a number of years to help us as we have this discussion and review our particular department's budgets that we look at as we do our committee work.

Thank you, and thank you both for this excellent presentation.

Thank you, Chair.

Thank you.

And I see a number of folks have their hands up.

I've got a number of questions that I would like to tick through rather quickly.

If you could go back to slide two.

I also have Council Member Morales, Council Member Moore with questions.

Just want to focus on this.

This is the exercise of this year.

what we have on this chart, which is closing the structural deficit.

Because if you go forward one more slide, you can see, when I say that we've known about this problem since 2019, we've known that it was a potential, if we stopped being the fastest growing city in the nation or, INFLATION INCREASED, WE WERE GOING TO BE IN A LOT OF TROUBLE.

AND SO IF YOU COULD GO BACK TO SLIDE TWO, THIS IS JUST OUR GENERAL FUND.

AS DEPUTY DIRECTOR AND TOM HAVE POINTED OUT, THIS DOESN'T TAKE INTO ACCOUNT ALL OF THE FUNDS AVAILABLE TO THE CITY.

AND THIS HAS BEEN PATCHED, THIS WHOLE HAS BEEN PATCHED WITH ONE-TIME FUNDS, IF YOU WANT TO GO TO SLIDE THREE NOW.

As you see, I've said this before, 2020, it wasn't just a 9.7% decrease.

It was a 16.7% decrease of revenue growth because we went from a high of 7%.

We could have made really hard decisions during the pandemic when we were working virtually.

But I can tell you, being able to work with all of you in person at City Hall has increased the productivity here.

It's increased the communication.

It's increased collaboration.

I am personally very glad that we are waiting to make these hard decisions in the quote unquote post-pandemic period on this chart.

This does show, and speaking about the previous presentation showing that where we are today, we have sales tax down, real estate excise taxes down, jumpstart is up.

That is just where we are.

So it's, without jumpstart, we would be in a very problematic situation.

I can't underscore that enough.

If we could go to slide four, and Councilmember Moore, if my questions don't get to what you were asking, we'll slide over to you.

Orange, gray, and blue.

Where does the program or thing fit?

And I ask you this because orange is inflation, gray is our policy changes, and blue is just the 2019 baseline, not including inflation.

Is that correct?

Yeah, that is correct.

So that is a constant.

So the blue does not include the 5% average inflation that we've had over the last number of years.

And so when I look at, we had the human services provider pay increases for our contracted human services providers.

So they are performing a city duty but because they were contracted through a third party, they had wages that did not match city employees that were very, very far below what we're used to paying here.

Would that have fallen into policy changes, or would that have been baseline technical changes, growth in planning reserves?

CHAIR STRAUSS, SO I BELIEVE THERE IS SOME PORTION OF THAT INCREASE THAT SHOWS IN THE ORANGE, BUT THE PREPONDERANCE OF IT WOULD SHOW UP IN THE BLUE.

SO ALL OF THESE TERMS ARE BUDGET TERMS THAT ARE USED IN THE BUDGET BOOK, THE CITY BUDGET OFFICE'S BUDGET BOOK.

The policy change category includes mayor policy proposals and all of council's policy adjustments.

And so there were some elements of the human service, urban services contract provider growth that were included in the baseline technical phase.

And then there were additional elements of human service contract growth that were provided in the policy phase.

Yeah, and I would just add, like, for example, I think it was, let's see, it's 24. I think it was in fall of 22 when council was contemplating the budgets, the biennium budget for 23 and 24. There was a policy proposal from the executive to cap that inflationary increase.

And so the proposed budget didn't provide an increase for those contracts that tracked with current inflation projections.

It was capped at 4%.

And the council modified that proposal and added additional funds to allow for those contracts to be adjusted to meet the historically high rates of inflation.

And so...

where is the line between policy and baseline technical?

It's more of an art than a science, and we are really just trying to stay consistent with the coding used by the city budget office, so we're comparing apples to apples.

But even in their phase of budget adjustments, it is, in some cases, you know, it's again, more of an art than a science.

And so, and as Tom said, at the end of the day, all of these changes are at your discretion are a policy choice.

Those changes that are increasing expenditures because costs are going up would just, if you rejected those proposals, it would mean that we are paying more for less service.

And that those are the hard choices that you'll all be grappling with.

Thank you.

So when I, during the pandemic, increased the funding for fresh bucks, food access that doubles somebody's EBT or food stamps benefit, it doubles that.

That would have been in a policy change, is that correct?

That is correct.

Even though that dollar couldn't serve that individual as far during the pandemic?

That is correct.

Thank you.

I am going to hold all of my other questions.

And I see Councilmember Moore did that.

I know you had a question on this slide, so I'm just going to pass it to her and then over to you.

Thanks.

I just have one quick question.

So the orange area, does that include the labor contracts?

Yes, that would include city employee costs, labor costs increases.

Okay, thank you.

And I'll just note here, this is based on adopted budget, so that orange does not yet reflect the cost of the recently approved coalition.

So it would be like the 25 budget, that orange section will be larger to reflect those wages.

I'm sorry, that'll be coalition and SPOG and...

Yeah, and any other.

I just used coalition because it's the most recent one.

But any contracts that close this year are not yet reflected in these numbers.

Thank you.

Council Member Moore and I are having wavelength symmetry here.

We have a number of upcoming contracts.

Council Member Morales and then Council President Nelson.

Thank you, Chair Strauss.

You already answered a few of my questions about this particular slide, but I do have a couple more.

The orange section includes growth in planning reserves.

Is that right?

That's correct.

Okay.

And why does that keep increasing?

So, Council Member Morales, the planning reserves are kind of a structure in the budget where the City Budget Office, in consultation with Central Staff Director and the Labor- Labor Relations Policy Committee.

reserve amounts for various things where the costs are either under development or under negotiation, but they're not yet included in the appropriation request.

or the appropriation proposal from the mayor.

They are included in balancing because they are estimated costs for the city, but they're not yet in the appropriated budget.

In the financial plan, those amounts accumulate over time until such time as those costs become effective in the budget or the labor agreement is signed, at which point they become part of the appropriated budget.

So for the purposes of this particular graph, those are all included because those are all obligations against the general fund revenue in each one of those years.

So I am recalling, well, I don't recall when exactly I saw it, but I know there was a presentation from CBO in the last six months or so where it looked like spending was dramatically increasing, but it was because the planning reserves were sort of compounding in the way that it was presented.

So can you talk a little bit about It seems to me a better way of us getting some real transparency around that is to appropriate planning reserves every year rather than to sort of hide the ball, so to speak, and put it in it towards the end.

So can you just talk a little bit about that process and if there's a better way for us to understand what we're really dealing with?

Yes, absolutely.

Two graphs prior to this is the way we show the problem statement.

We're using the same numbers that CBO uses to describe the problem, but what we do in this graph is build in the annual growth in those planning reserves as a cost, as opposed to showing it as an accumulating balance over the years.

The reason we do that is because it enables you to see very clearly kind of in kind of just common sense terms, our income is this and our expenditure is this in each one of these years.

When you accumulate the planning reserves as a below the line item, you don't really see that picture very clearly.

I mean, I kind of think like I have a degree in public finance and I sometimes have to wrap my mind around why it makes sense.

And so I'm more familiar with the approach where you just show your annual income against your annual expense and look at the gap.

And that's how you can identify the sustainability challenge that you have.

Appropriating the planning reserves in the budget would just simply add more transparency to the budget decision.

When you look at the financial plan provided by CBO, there is a budgeted expenditure line and a budgeted appropriation line.

And then if you look at that kind of the budget surplus or deficit, it's positive.

But then you have to go a few steps down and look at the planning reserves and see what the status of those are to kind of get to the unreserved ending balance.

The more technical terms you add on, the less clear it is.

But again, it's just a different approach to how you look at the kind of general fund finances.

We're, again, as I was saying, kind of pulling in the same direction, fishing in the same pond, so to speak.

But it's just more clear to show it the way that we show it.

It explains the challenge better.

Yeah, I appreciate that.

And I have one more question, Chair, if I could.

So on that previous chart, then, can you just confirm that this chart does not include revenue from levies and how we account for city services here in this presentation, services that are provided by general fund versus provided by levy?

So, Council Member Morales, this would include one levy, and that would be the general expense levy to the general fund.

But other than that, it doesn't include any of the special levies, the housing levy, the transportation levy, those special.

Those are accounted for in what we call special revenue funds, where the legal parameters around how those revenues can be used are more controlled for how they're spent in each year.

So this is only including the portion of the levy that is intended to go to the general fund for general expenses.

Yeah, I guess the only point I want to make there is that when we're looking at what baseline services are provided, all the services that are provided by the $600 million a year in levy revenue that we get aren't included in these basic government services.

Yeah, that's right, and you might recall, and I think maybe Chair Strauss referenced it early in the year during the legislative session, there was a property tax proposal to increase the cap on how much a city can increase their general property tax levy to generate more more general fund.

And so because of that cap, in part, there have been these specialized levies that aren't just about large capital investments necessarily, but are funding some basic operating services.

So to your point, this expenditure line isn't showing anything.

This is just the general fund, so it's not the full cost necessary for basic operations in many of our city departments.

The Office of Housing, for example, I don't think receives any general fund.

or very, very little in their budget.

And the Department of Transportation receives a small portion of their overall budget.

So that is an accurate summary.

Thank you.

Any further questions, Council Member Reynolds?

Seeing none, Council President Nelson, followed by Council Member Sacco.

Thank you.

Before you go, Council Member Rivera, I just have to say I appreciated your comments because they sounded a lot like what I've been saying for the past couple of years to watch our one-time funding sources and ongoing expenses, et cetera.

So I'm struck by the...

It seems as though the...

Given that the...

That our revenue growth seems to be tracking with inflation, that basically means that not only...

We're taking in more revenue, but the cost of goods is also going up.

And so it seems as though there is a flat growth.

Is that...

or a slightly negative growth.

And I believe you said something like, Tom, this doesn't really help us dig ourselves out of it, meaning the hole that we're in.

So to understand better what is happening with future projections for 2025, I was just going back and looking at the previous presentation.

The revenue sources that indicate economic growth that would be a good positive sign, not just the increased cost of goods due to inflation, but that would be the B&O and the sales tax.

Is that correct?

And I see that in their slide on page, they don't have the page numbers, but we're negative in those departments as a result of the April forecast, but those numbers aren't changed for 2025 and 2026. Will you be...

Does your graph for 2025 and 2026 showing the gap accommodate those figures in stalled or decreased growth?

Council President, so no.

The answer is no.

So it gets worse.

Not yet.

We mentioned that there will be an update to the financial plan, this graph, in May, and at that time we'll include all the new information.

And I'll just add what I said at the beginning, which is, and that will try to marry both the revenue side of the picture that was presented this morning alongside looking at our expenditure, because also in the table that summarized the changes in the general fund that the forecast office presented, you saw at the bottom, basically the same takeaway, we're treading water, that there is growth in the out years in sheer numbers, but it isn't at a rate that is greater than what they're currently projecting for inflation.

Got it.

And then returning to the issue of the colors of the bars, okay, could you go to that blue, orange, and gray?

I take the position that Most things are policy choices.

So if a policy choice, so for example, Chair Strauss was mentioning our contracts with external providers.

As soon as we make a policy decision to increase a contract by a certain amount in annual adjustment, that then goes into the base and becomes blue for the following year, correct?

I mean, it does in the way that we build the budget, but in this case, the blue line is held steady.

It's just to show essentially comparing if you combined the blue and the orange in the 24 bar, it's showing what we were paying for and what the cost is in 24 to pay for the same services we paid for in 2019. But if we were starting at, you know, 23 as our base comparison, the orange and the blue would be combined into one bar.

Cause that would have been the bait or yeah, that would be the base and we'd build from there.

So it's a point in time analysis.

And as Tom said, 2019 was the last time we were structurally balanced.

So, and it's where we have the best data.

So it seemed to work.

Got it.

Thank you.

Any further questions, Council President?

Nope.

Council Member Saka and then Vice Chair will come back to you.

All right.

Yeah.

Thank you, Mr. Chair.

And thank you, Ali and Tom, for this really insightful presentation.

Let's stay on this slide.

I love this slide.

It is sort of like the punchline slide.

And thank you for the hard work that went into kind of categorizing and like help depict visually and chart visual format.

what is going on in the some of the underlying circumstances the intended circumstances at issue here uh and very helpful from my perspective and also i appreciate your acknowledgement that this is definitely more of an art rather than a science i personally um you know share the the general view and sentiment expressed by council president a moment ago that 100 percent Of of our spending is is a policy decision and that changes year over year and.

And, um, you know, we can after all, we can only spend what we make.

Every year, and, you know, like that, that revenue fluctuates.

And so it is important for us incumbent upon us to minimize to the full extent possible the human impact.

and optimize our spending for the most impactful services and programs, but everything's a policy choice.

That said, again, I do think this is helpful in terms, like for me personally, as I, you know, better unpacked and to help me decipher exactly what's going on here and conceptualize it.

On, and I also plus one, the comment of Council Member Rivera about like, I think you need to be mindful of how frequently we leverage quote unquote one-time spending sources to fill holes and cover shortfalls in programs and departments in certain areas because it's no longer one-time and we need to think more critically about how we do that.

So, comment.

Question is, and also on this slide here, Tom, I appreciate how you, like, you know, attempted to go into some illustrative examples of how, like, certain of these sort of buckets, what might be impacted or included in that.

So, on the gray policy changes bucket, you mentioned a number of things, including The unified care team, which can you help me better understand that and unpack that?

Because as I understand it, and it uses the 2019 adoptive budget as a baseline and you built on from there.

But as I understand it, I think isn't the unified care team essentially just a rebranding of a program that has existed in the city since 2017 at least that has performed substantially similar services and function?

And so I'd just be curious to better understand how the Unified Care Team funding would be considered a quote-unquote policy change under this current framing.

Maybe I missed something.

And Deputy Director, good question.

Council Member Saka, excellent question.

Spot on.

I will say that fundamentally the Unified Care Team is different than the teams that we had previously.

And so I just want to...

Yes, we've been addressing homelessness since...

before 2017, but there was a fundamental shift from the navigation team that was closed, that was opened, the hope team.

The hope team is part of the unified care team, but is not the entire unified care team.

Over to you, Deputy Director.

Thank you.

I was going to cover part of that, so I appreciate that history.

And so I would say there was a base budget in 2019 for the then called navigation team that would show up in the blue portion of the bar.

Since then, that function has been modified, refined, and improved.

additional services have been added so during the pandemic for example the unified care team was created or actually i don't remember if it was during or post pandemic but either way as it exists today that when the the base budget that existed in 2019 would show in the blue and any inflationary increases to that but there have been additional and significant expansions in expansions including budgets for sdot the transportation department the public utilities and parks so that work with the staff and teams that Deputy Mayor Washington has led in the Human Services Department.

So enhanced services, more responsive cleanup, and that sort of thing.

And so it's both and.

The original budget shows up in blue.

The expansion of those services responding to community asks would be included in the gray portion of the bar.

Got it.

So the base, the core function of the program, you can call it whatever you want.

Policymakers have that right to do and rebrand it as appropriate to match policy values at the time.

But the core function remained the same.

But like we added some new features, the core functionality remains the same of whatever we want to call it.

But we've added some new capability and some new features, which therefore have increased the cost.

would that be an act like a fairly accurate restatement of what you said that's correct and you can sort of think of like the the blue and orange part is paying for what we were already doing in 2019 the gray part is for those expand that expansion so both more people to respond to the issue and more services to respond uh respond to the issue and i will say the detailed review and examination in the budget document that we're distributing and we'll talk about in committee in a few weeks, we'll trace some of that when looking at the Human Services Department budget, and there's an attachment that highlights those investments across several departments.

Again, and Councilmember Strauss can, I'm sure, share more details of some of that work with you all offline.

Councilmember Saka, any further questions?

No, thank you, Mr. Chair.

I'm going to riff off of your question, though, because it was a very spot on question.

And so if I wanted to expand the unified care team, which has the same core functions that navigation team, but does much more because it expanded how we address homelessness, which has resulted in better outcomes.

So more funding for that team has resulted in better outcomes.

If we wanted to expand it from five-day service to seven-day service, that would be gray or would that be orange?

That would be gray.

Thank you.

We are 13 minutes over.

If I can do math, I can't.

We are 17 minutes over.

Council Member Rivera, I see you have an additional question.

We gave you early questions because you said you had to go, but you're still here.

Love you very much.

I'll pass the floor to you, but we're going to try to wrap up pretty quickly.

Thank you, Chair.

I see none of my other colleagues had their hands up, so I went and had my hand up, but I would see to any colleagues that have a question.

Colleagues, I don't want to take up all the time.

I appreciate that.

I did want to stick to this same conversation we're just having.

Thank you, Council Member Saka, for raising that excellent question.

I want to say that obviously the orange piece is inflation.

We can't do anything about that.

Obviously, we can do about the policy.

But here's the trick about that.

I am very supportive of UCT.

You're correct.

We're seeing great outcomes with that particular team.

If we're going to expand something in the gray, we can always reduce something in the blue.

And this is the piece that I think is really critical is we can't just say that because we need it, it needs to go in the gray and then we're further expanding the gray.

We need to look at something that is not working well or as well.

It doesn't have to be in the UCT capacity, just in general.

And then we can make the policy decisions about what we should expand.

But those things need to run together because just because we're making a policy decision that we need to expand something that's working well doesn't mean we don't engage in the exercise in the let's look at the other things.

Are they also working well?

And if they're not, perhaps then we should make changes there in order to accommodate expansion of the thing that is working well.

Thank you for indulging me in that.

I have to leave, but thank you very much.

I appreciate your comment.

And as nine separately elected officials, we all have the prerogative to do many different things.

I, as your chair of this committee, endeavor to facilitate this conversation, some difficult decisions in ways that will serve Seattleites the best.

Council Member Moore, I see you have your hand.

Just on a light note, I would note that when retired Judge Anne Ellington first was on the bench in her first criminal motion, she said, well, I see I have to choose between colors and numbers.

So I find that we are now engaged in a blue, orange, and gray conversation here.

So thank you.

Thank you, Councilmember Moore.

Some levity is always welcome.

Any further questions before we conclude this section of the presentation?

I'm seeing none.

This does, I've got some more updates.

Hang on tight.

I really wanna, again, appreciate council central staff for engaging in this budget review and examination, the work that you've been doing with each council member.

I also wanna really highlight and thank the city budget office because this partnership between council central staff doing their work, in parallel tracks with the city budget office, truing up last year's budget, preparing for this year's budget.

They are working hard.

Central staff is adding, this is truly one Seattle.

We are adding capacity to do this review and examination.

Our next committee, may 1st is a finance native communities meeting we will be briefing the bills that will be voted on in the next select budget committee so all are welcome to join the next fnc meeting and if your schedule does not allow i ask as always to please receive the briefing ahead of time because this is how i am meeting my goal of briefing and voting on bills in different meetings so that you're not caught off guard while at the same time moving us forward expeditiously.

So our next finance native communities meeting is May 1st.

The next select budget committee meeting is scheduled for May 15th.

Last question for the dais.

Does anyone know what teen spirit was?

Yes.

Of course.

Well, some folks do.

It was deodorant.

Fun fact.

Commemorating Teen Spirit being performed on stage for the first time today in 1991. This concludes the Select Budget Committee for May 15, 2024. Thank you for attending.

We are adjourned.

Thanks for that, Wendy.

Thank you.