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The Economy is Better - So Why is My Budget So Hard To Balance?

By Mike Bailey, Finance Director, City of Redmond

You may have seen some of the headlines recently: "Boeing: Record 777X order placed in Dubai"; "Many small business owners are saying they're ready to hire"; "S&P 500 trades above all-time high"; "Construction spending up 45% over last year"; "Retail sales grow again". But if you've looked at your budget forecasts, they don't seem to reflect this same economy.

What gives? - Why is my budget so hard to balance?

There are a few reasons for this and we will take a quick look at those reasons. Secondly we will take a look at what you might consider doing about it.

The first reason why your budgets are so difficult to balance even in a good economy is that the system is designed to make it that way. While Initiative 747 gets the credit for the 1% limitation on property taxes, it is actually found in RCW 84.55.005 after the Legislature adopted the 1% limit in a special session (most assuredly under pressure from the populous who had just passed an initiative to the same effect - even though that initiative was found unconstitutional by the state supreme court). In looking at data from the State Auditor's Office Local Government Financial Reporting System (a great tool by the way) I see that in average city budgets property taxes are one-quarter of total revenues (and 40% of total county revenues!). That means that one of the largest revenue sources to most all city and county budgets is limited to a growth rate well below the growing costs of doing business. Compensation costs (and especially health care costs for our employees) make up the majority of our budgets and are certainly growing faster than 1% annually. In addition, state law further limits most other revenue sources available to cities and counties for their general government budgets.

So why would the legislature intentionally make our budget balancing impossible? The answer comes in two parts (in my opinion). The logic used in support of lowering the limit on property taxes is that this would periodically force a community wide conversation about adjusting that limit (through a vote of the people) and resuming the agreed upon level of service. This isn't convenient, but many communities have done just that (see more about this later when we discuss solutions). The second part to this answer (which I find myself often repeating in my own city hall) is that it is supposed to be hard. This is "other people's money" and the power to extract that money and use it for the benefit of the community is a privilege that we take seriously. It should be an organizational struggle to make certain that we use those scarce resources as effectively as we can.

Secondly, growth does not really pay for growth. In fact, growth often camouflages the effect it is having on your revenues and costs. The new revenue from growth related activities (such as property tax on new construction, sales taxes on construction or sales of related items, fees related to development and permitting) are often much appreciated in an era of growth. They are what make a thriving economy feel like we are finally able to manage our budgets and pay for the little extra burden those new roads, pipe systems and parks resulting from the growth impose. However, the only on-going new revenue is the property tax related to the additions to the tax base (new construction). Once that property tax gets added to the tax rolls, it gets limited as described in the first reason budgets don't balance. So the result of growth related revenues is the addition of new obligations to meet in our budgeting process and very short-term revenues to deal with these new costs. In fact, the only way out of this dilemma is for more growth to occur, bringing in more short-term revenue, to pay for the short-comings from the last growth - and on it goes. That is until the growth stops and we have to adjust to the real revenue growth rates that have occurred - often resulting in also adjusting our services to match.

Next we come to great ideas that didn't turn out so great. These take many forms and almost all of them have a lot of merit and are commendable (I'm not referring to any specifically that aren't commendable - but I'm sure there have been a few). I have a difficult time faulting those who took action to address a local need or spur economic development. Those are the most common types of initiatives that took or pledged resources, increased risk and eventually resulted in budget stress. Taking action to make things better is good. The problem often is that the estimates weren't sufficiently scrutinized, the risks weren't objectively evaluated or minimal protections weren't put into place to avoid the negative consequences of "bad bets". That is why the Government Finance Officers Association (GFOA) created its Committee on Economic Development and Capital Planning. The GFOA had seen too many examples where its members struggled to find "best practices" for guidance on how to assess these types of initiatives. In the past several years the committee has adopted twenty-eight best practices on such topics as: analyzing the benefits of economic development projects; balancing costs and benefits of economic development projects; and evaluating data and financial assumptions in development proposals. You can find these on the committee's best practices page.

So, if the problems with balancing our budgets are a result of good intentions going bad, a false sense of hope from a growth related Ponzi scheme and even structural, what should we do to make ends meet.

Along with the Economic Development and Capital Planning committee described above, the GFOA has developed deep resources on long-term financial planning. This emerging topic has risen on the radar screens of many as they seek answers to the challenges described above. The first key to a good long-term financial plan is to know what you are planning for. How do you describe success in your community? Is it realization of a vision?; status quo?; avoiding layoffs?; or keeping the tax burden low? Clarity about policy priorities is the first step, one that is often overlooked. Many times the financial plan starts with a spreadsheet comparing past year's experiences with what we think safe (read: conservative) future assumptions would suggest about the future. That's fine for context but at this point it isn't a plan. The long-term financial plan should really start with policy. The Growth Management Act really does a pretty good job of framing how this might work. The policy determines what service levels you are working to achieve and the financial plan illustrates how you might align resources to support that level of service.

This may sound like an overly simplistic way of thinking about the solution to the budget balancing dilemma however I would direct you to the GFOA's resources, additional resources on MRSC's many pages and the help available from other local associations. Failure results in draconian cuts (read sequestration), "shut-downs", kicking the can down the road, robbing Peter (or capital budgets) to pay Paul, and other gimmicks that are all too apparent in governments today.

This is an example of where the value is in the journey as you work together to determine how to achieve your policy goals, provide your agreed upon levels of service and finance the whole thing with community resources. No, it isn't easy - it's not supposed to be.

MRSC is a private nonprofit organization serving local governments in Washington State. Eligible government agencies in Washington State may use our free, one-on-one Ask MRSC service to get answers to legal, policy, or financial questions.

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About Mike Bailey

Mike served as a Finance Consultant for MRSC for several years before retiring in 2020.

Mike writes about local government financial management, local government budgeting, financial leadership, and strategic planning processes.