The City of Seattle is facing a big budget crunch this year, with the Mayor and City Council staring down a deficit of approximately $230 million. Several of our newly-elected Council members campaigned, in part, on how they would address this situation, often promising audits before raising taxes. But as next fall’s “budget season” approaches, none of them has come up with good answers. The deficit is an incredibly difficult problem, and there certainly aren’t any quick or easy solutions on hand.
How did we get into this situation, which had developed over many years? The crisis centers on one big bucket of money in the city’s budget: the General Fund. General Fund dollars are unrestricted. The city can spend them on almost any legitimate purpose, so they are the best kind of money to have. This year the General Fund budget is about $1.7 billion. There is another $6.1 billion of restricted-use funds in the overall city budget. About half of that is City Light and Public Utilities revenues for services and they must stay inside those businesses. The rest is scattered across the 40-odd city departments.
Whether money is restricted-use depends on its source: the state Legislature controls what the city is allowed to levy taxes on, and often attaches restrictions so that money collected is used in ways that benefit those who pay them. For example, fuel taxes go to roads and other transportation infrastructure; real estate excise taxes (REET) are plowed back into infrastructure that helps mitigate the effects of growth.
The vast majority of the city’s funds come from four sources: property taxes, utility taxes, business & occupation (B&O) taxes, and retail sales taxes. The latter two reflect economic growth; the first two track general population growth.
In the late 2010s, Seattle saw strong economic and population growth, which led to revenue growth in all four of these areas. At the same time, the city’s budget experts warned that this revenue growth was not sustainable. In part this warning was an acknowledgement that the economy would ve cyclical. It was also a reflection of a hidden worry – inflation.
In Washington, property tax growth is limited to 1% per year plus the value of any new construction. Even when inflation is as low as 2%, property tax revenues can’t keep up without a significant amount of ongoing new construction. Since so much of the general fund revenues come from property taxes, this was a ticking time bomb.
Then in 2020 the time bomb went off, when the COVID-19 pandemic hit. The economy sputtered, construction activity shut down, and the city’s general fund revenues went into freefall. To make matters worse, inflation spiked. We can see in the above graph that B&O and sales taxes crashed in 2020 and are still working their way back to 2019 levels. Meanwhile property taxes and utility taxes are slowly declining as a revenue source.
To fully appreciate the problem, we need to look at city general fund revenues and expenses in inflation-adjusted dollars:
The revenue numbers look a bit funny in the middle, because of the effect of two new revenue sources — federal pandemic aid, and the new, inartfully-named “jumpstart” payroll tax (which didn’t actually jumpstart the city’s pandemic recovery, and now lives on as a perpetual tax). But now the federal pandemic aid is all used up. With the payroll tax revenues baked into the budget (most of which is currently restricted-use; more about that subject below), we can see the long-term trend that was forewarned: a double-whammy with higher inflation and decline in general fund revenues. Things are expected to get better starting in 2026 when inflation should be almost back down to pre-pandemic levels and the economy is predicted to have fully bounced back.
In the meantime, our elected officials resisted any appearance of “austerity budgeting” and chose to keep spending flat. True there were some good reasons for this during the pandemic: the City employs over 11,000 people and layoffs would have their own economic consequence. Also, there was a greater need for both human services and public health services. But the way the money was spent didn’t reflect the one-time nature of the federal pandemic funding, and it created expectations for ongoing spending that exacerbated the widening revenue gap.
So we are stuck with a $230 million funding gap in the city’s general fund for the coming year. How do we fix it? There are only two levers to pull: increase revenues,or decrease spending. Unfortunately, neither presents obvious ways to fully bridge the gap.
With so much of the revenues coming from only four sources, the options are limited. For instance, increasing property taxes would require a voter-approved levy lift. Both property and utility taxes are regressive in nature, so increasing either or both would make the city’s upside-down tax regime even worse for low-income residents. At a time when the local economic recovery is still not robust, increasing the B&O and sales taxes doesn’t seem wise (plus, sales tax is also regressive).
On the expense side, some of the newly-elected councilmembers have called for a “full audit” of the budget. They are now backing off that pledge for good reason: an audit is unlikely to find more than pocket change. As for the spending side, the general fund expenses are not evenly spread out across the city departments: of the $1.7 billion budgeted for this year, $1.5 billion is in just seven departments.
MAJOR DEPARTMENTS’ GENERAL FUND BUDGETS, 2023 (In $thousands)
The other 35 or so departments have a total of about $200 million in their budgets. You could completely eliminate the general fund budgets for all 35 of them and you still wouldn’t solve the budget deficit. Any attempt to meaningfully reduce expenses needs to take the lion’s share of the money from some combination of these seven big departments.
The Mayor and City Council ran on campaigns of restoring the police department, so that’s apparently untouchable. One could argue that the fire department is too. Many of our elected officials also campaigned on “reclaiming” our city parks, so they presumably can’t cut the parks budget. Even if they had the political will to do so, in practical terms they can’t because the separately funded Parks Levy requires the city to spend a minimum amount of general fund dollars directly on parks every year (currently $118 million), and the city is already very close to the minimum amount ($120 million).
The majority of the SDOT budget ($706 million in 2024) is not general fund dollars, but rather restricted funds from REET, state and federal grants, and the separate transportation levy. The $58 million in general fund dollars is split, with $25 million to mobility operations, $13 million to maintenance, $5 million to bridges, and $15 million in general expenses.
The Human Services Department’s general fund dollars are likewise distributed over several programs. The biggest chunk, $105 million, goes to addressing homelessness (most of which is directed to the King County Regional Housing Authority). The rest is split across programs for the elderly, youth, public health, affordability, and safe communities.
As for Finance and Administrative Services, only a small fraction of its total budget ($450 million) is general fund dollars ($62 million). The vast majority goes to indigent defense services, jail services, and a pool of money that pays out claims against the city. None of that is really discretionary spending, and in reality all three are likely to overspend their budgets this year.
That leaves Human Resources, the size of which is directly proportional to the number of employees working for the City. Most of the Human Resources general fund expenditures are pension contributions and various insurance coverages (the City mostly self-funds employee health and disability insurance).
And so we encounter the bottom line on spending cuts — the only options that seem at all viable are broad, fixed-percentage spending cuts across all departments (not sparing any, not even SPD) and layoffs. If we allow for exempting certain departments, we quickly discover that all the money is in the seven with the best rationales for an exemption from cuts – and we’re back to square one.
There is one more piece of this puzzle worth examining: the high-earner payroll tax. The City Council could have made all the revenues (expected to be around $300 million this year) accrue to the general fund, but instead they passed an ordinance codifying restrictions on its use. They did, however, make an exception, allowing a certain amount – around $90 million—to be transferred to the general fund for each of the first few years if the city’s other revenue streams didn’t recover quickly.
At the moment, it appears that 2024 is the last year that transfer will happen; the city’s revenue projections for 2025 and beyond make no allowances for further transfers. But while the remainder of the payroll tax revenues is spoken for, that $90 million is as yet unclaimed. Since the City Council restricted payroll-tax revenues by ordinance, the new Council can un-restrict them using the same mechanism, or simply extend for a few more years the original set-aside.
That covers $90 million of the $230 million deficit. The remaining $140 million, however, is still a huge chasm to fill. Re-directing more of the payroll tax won’t be easy; right now it’s funding affordable housing and services ($136.5 million), economic revitalization programs ($31.6 million), the Green New Deal ($20.1 million) and the Equitable Development Initiative ($20.5 million). There would be political hell to pay for cutting any of those.
The city’s Revenue Stabilization Work Group suggested two new potential progressive taxes: a local capital gains tax, and a “High CEO Pay Ratio” tax. The latter is a nice feel-good measure, but as a practical matter it won’t raise $140 million – not even close. A capital gains tax would raise more, but it would almost certainly face a voter referendum and would take at least a couple of years to implement.
In short, there are no quick and easy fixes that fully address, in a sustainable way, the City’s general fund deficit. The Mayor and City Council have an impossible task this year. Don’t be surprised if they offer up a few sacrificial lambs such as the Center City Connector Streetcar (which has almost no money currently budgeted to it, since it’s still in its planning phase) and then try to kick the can down the road with some one-time plugs.
No matter how much elected officials try to address the deficit through spending cuts, the root of the problem will remain: the revenue streams that feed the General Fund are neither reliable nor sustainable in their current forms. Fixing that will require the state Legislature to get involved, since ultimately Olympia sets the rules for how Seattle taxes its residents and businesses.
Scary article indeed, but I am confident that our new SCC will do their best to fix the problem. How much money does the pot tax go to the city? Thanks
I can try to hunt that down, but if any does, it’s restricted-use funds, not unrestricted GF dollars.
I wish the funds would support security for the pot shops. If the feds won’t protect these shops, it’s up to local/state sources.
It seems like the council could immediately amend the restriction on the use of the $300 million annual funds from the “jump start” high earner payroll tax. Why not put it all in the general fund?
Aside from tax increases, this is really the only viable option, along with some across-the-board budget cuts (like a directive, say, for a 3-5 percent reduction across all or most departments, with each department director tasked with coming up with those trims).
Kevin writes:
” Re-directing more of the payroll tax won’t be easy; right now it’s funding affordable housing and services ($136.5 million), economic revitalization programs ($31.6 million), the Green New Deal ($20.1 million) and the Equitable Development Initiative ($20.5 million). There would be political hell to pay for cutting any of those.”
No doubt there will a lot of carping from the “no austerity budgets” left if those funds are repurposed to backfill the general fund deficit, but that constituency opposed most of the current CMs anyway, so the political cost of agitating them for this new Council may not be as great as one might think at first glance.
Anyway, there’s no other pathway, even if this Council does decide to raise some taxes and make some cuts.
I’m completely with Sandeep on this: “No doubt there will a lot of carping from the “no austerity budgets” left if those funds are repurposed to backfill the general fund deficit, but that constituency opposed most of the current CMs anyway”. So let’s do it.
Voters have approved both the Social Housing initiative and the funds for it, so that covers the first part (affordable housing and services). The feds can kick in for the GND and the EDI: it might make Congressmember Pramila Jayapal actually have to get off MSNBC and do some actual Congressional work to fund her priorities in her home district.
They could, but they would be effectively de-funding the programs it currently funds. Either way, they are still making huge cuts to existing allocations, either programs funded with GF dollars, or programs funded with payroll tax dollars.
Kevin, please take a look at the MFTE (multifamily tax exemption) program as a revenue solution. Because the program takes the value of new construction off the tax rolls for 12 years for benefitting building owners, the city lost $174 million in 2022 alone. That’s the number in the most recent Office of Housing report. The 2023 report is due soon and the program is up for renewal this year.
Lifelong NIMBY wants to jack up the cost of housing for renters. Incredibly unsurprising from someone that attempted to halt a project that provides affordable housing in their own neighborhood.
You imply that tax money the city essentially gives building owners, the owners bestow in turn on their renters. If that’s the point of MFTE, I propose that the city cancel the exemption, and instead split the money they’d have given away with the tenants. I bet you’d be surprised how much better off both parties would be.
Right, because the MFTE program has has solved our citywide affordable housing problem and the $174M in 2022 of foregone tax revenues lost for the benefit of building owners was worth it!
In fact MFTE largely produces units in the 80%AMI range, which is NOT where the largest affordable housing need is (try 50% AMI and below). It’s been a giveaway program for years, and has not solved the affordability problem by any stretch of the imagination.
The program is ineffectively structured and Council would do well to revisit this longstanding developer giveaway.
Tax the Airbnbs that have siphoned off hotel taxes.
Did a hotel write this?
Airbnb hosts pay a higher tax rate in Seattle on short-term rentals than the big hotels do on their rooms.
The City is currently preparing to spend tens of millions of dollars renovating office space in the Municipal Tower over the next 2-3 years. While the existing spaces are old they are perfectly functional, and it seems foolhardy to be spending on this. Surely this could be deferred or canceled to help close the gap.
To Shocked…I presume anonymous you are referring to me, but please identify the affordable housing project that you accuse me of opposing. Homestead Community Land Trust is developing two mixed income condo projects in Phinney and other than asking them to comply with code requirements, (which they subsequently are doing), I have not opposed the projects.
To Donn, you are onto something. The extent to which the rent reduction on the majority studio and 1 bedroom apts in the MFTE program compares to the tax exemption value to the owners should be revealed in an evaluation of MFTE that is underway.
Thank you for your great work over many years, Irene.
Crazy spending! No results framework! The City seems to throw big bucks at lots of problems without defining outcomes expected. Then, when problems get worse, they have not defined the problem they are addressing with data and evidence-based approaches. Having examined a couple of huge “violence-prevention “ contracts recently, the city and county are spending many millions without analyses of the who, what, why of the problem. It follows that the “how” to address the problem amounts to throwing darts, sending dollars to CBO’s with little responsibility for results. Generally, they report things like how many people attended a meeting or how many memorial services were attended, not crime reduction in defined geographic areas or among defined age groups. So, the strategies fail and more money is thrown at the problem with predictable results. For example, what outcomes are expected from the “shot spotter?”
This behavior did not start with this administration but certainly continues unabated so the budget will continue to bloat.
I mention this just to draw attention to basic governance. I also think passing a budget with an inherent $200 million deficit and then asking departments to cut 5% out of their budgets is a lazy approach to building the city budget. What impact will the recent labor agreements have on the deficit?
Bottom line, before we ask the State or Federal government to bail us out or impose new taxes, let’s clean up our act and manage to results.
Thanks to Kevin for the best City reporting.
Seattle has 5 Charter departments, police, fire, library, transportation and parks. All these services within the city boundaries and sufficient taxes to pay for them. Schoenfeld is correct, the problem started in the past. The Great Society in the late 60’s with the Model Cities program and Federal dollars for demonstration grants, added new services. The grants in housing, health, education, law and justice and social services went to nonprofits who lobbied to continue the programs when the Federal funds ran out. These services are based on need and the city cannot control the demand. The major mission creep has finally caught up with the city. The Parks District, Library Levy, Jump Start tax and sales tax help escape the problem for years. The city strives to solve national problems on a local tax base in a mobile society and now come the tough choices.
Developer impact fees could be used to support parks, streets, etc. With a new city council. . .
As someone who worked in corporate America, i suggest that the City of Seattle should consider wage and hiring freezes, headcount restrictions, and department restructuring. A little belt tightening for a fat organization.
Would something this apparent put the budget in order? Or at least help?
And why not?
The Mayor instituted a hiring freeze last month. And, after negotiating for nearly a year (after proposing a mere 1% pay increase, which was an effective pay DECREASE due to inflation), the Mayor recently signed a modest pay increase with the city’s many unions.
However, previous mayors, especially Ed Murray (elected November 2013, quit late summer 2017), added entire departments. Over the past decade, the City added employees exponentially faster than the population increased.