2023 Budget Suggestions is Here

For those of us in local government finance, it seems like we’ve barely had time to catch our breath after completing the annual financial report before we are deep in budget season. During the month of July, I’m busy working on the annual update of MRSC’s signature publication since 1944, Budget Suggestions. The 2023 edition is now available for free on our website with updated revenue projections, information on new legislation that might impact revenues, and a review of economic trends.

State Shared Revenue Estimates

During my 14 years of working for local governments in Washington, I used the MRSC website on a frequent basis, but somehow, I was unaware of Budget Suggestions until I began working at MRSC (when it then became my responsibility to update the publication). If you are new to local government in Washington State or are unaware of Budget Suggestions, you will definitely want to check this publication out, if only for the state shared revenue estimates.

To determine state shared revenue estimates, MRSC takes the Office of Financial Management’s population estimates, revenue projections from various state agencies for liquor sales, motor vehicle fuel tax, and criminal justice appropriations, and then calculates the estimated revenue distributions to Washington cities, towns, and counties. Budget Suggestions has a full discussion of these revenues, how the distributions are determined, and any spending restrictions on the different types.

To see the 2023 estimate of your local government’s share of these revenues, visit our State Shared Revenue Estimator.

New Legislation

2023 Budget Suggestions also includes information on new legislation, including:

• Increases and changes to the cannabis (marijuana) excise tax distributions;
• Expanded taxing authority for transportation benefit districts and border area fuel taxes; and
• The continuation of last year’s “fiscal flexibility” bill, although as currently written it is set to expire at the end of next year’s budget on December 31, 2023.

Help with Forecasting

One of the areas many local governments can struggle with when developing their budget is forecasting their revenues. The COVID-19 pandemic made this even more of a challenge when developing budgets for 2021 and 2022, and 2023 still presents challenges for local government finance department.  I can remember at the beginning of the pandemic going to a webinar put on by my predecessors here at MRSC, Toni Nelson and Mike Bailey, and hearing the phrase “It depends” repeated several times in reference to the outlook of the various revenue sources for local governments in Washington State. What does that same outlook for 2023 look like? It depends.

How local governments have fared during the pandemic has largely been dependent on the composition of their revenue sources. For instance, local governments that have a revenue base consisting primarily of property taxes and sales taxes generally fared better, revenue-wise, than those local governments with a greater dependency on tourism.

When determining what to budget for revenue, the process should include a consideration of historical data for your entity — looking at the composition of revenue sources — a review of what economic forecasts and data are saying, and then use of your best judgement in compiling this information to determine the budget of your different revenue sources.

2023 Budget Suggestions also provides a preview of the implicit price deflator, which impacts next year's property tax levies for those taxing districts with a population of 10,000 or greater. The official number won't be set until September 25 (and we will post it to our Implicit Price Deflator webpage and in our e-newsletters), but as of late July we have a pretty good idea of what it will look like.

The United States Economy in 2023

For the U.S. economy as a whole, there is discussion of a possible recession in the near future, as evidenced in articles on Kiplinger, Forbes, Deloitte Insights, and Morgan Stanley. Although there are differing opinions on when a recession could occur and for how long it might last, with rising interest rates, inflation, and lingering supply chain issues, many experts feel a recession is likely sometime in 2023. Other factors that could impact the economy are the war in Ukraine and new COVID-19 variants.

The Washington State Economy

MRSC recommends a couple of resources for economic data and forecasting for Washington State, including the Washington State Economic and Revenue Forecast Council (ERFC) and the King County Office of Economic and Financial Analysis (OEFA). Both agencies produce several reports which include national data, although their focus is local.

ERFC’s June 2022 report highlights the continued addition of jobs in the state, a drop in COVID cases, and strong state-based revenue collections. Although strong state-based revenue collection might appear like a positive sign, some of it is attributed to inflation and higher prices of goods, which means more revenue in taxes.

EFRC’s report highlights the Seattle consumer price index (CPI), which saw a seasonally adjusted increase of 9.1% for the year ending in May 2022. This is 0.9% higher than the U.S. city average for the same period, at 8.2%.

Also noted in the June 2022 report are negative factors, such as higher interest rates, inflation, and supply chain issues. Inflation is expected to decrease to 3.5% in 2023 and then below 2% after that. Consumer spending is expected to continue to rise through the rest of 2022 and then begin to ease, while unemployment will continue to fall.

Conclusion

As was mentioned earlier, depending on the composition of your revenue sources, how these projections might impact your revenues can vary. I always find it helpful to talk with colleagues from other local governments and get their thoughts on how they are determining revenue forecasts for their agencies. In most cases it assures me my thinking is in line with others, and in some cases, it gives me insights I had never considered.

Download 2023 Budget Suggestions