‘No obvious way out’: Seattle facing $117 million revenue shortfall in 2023

For most of the past decade, Seattle’s population, tax revenue and spending have all been expanding.

As growth has driven increased revenue, elected officials have used those funds to bolster services, keep up with rising inflation and maintain a competitive workforce in an increasingly expensive city.

But as revenues drop from plateauing growth and the effects of the pandemic, the city is facing a projected $117 million gap between revenues and expected expenditures in 2023, and, according to the city’s budget chief, there’s “no obvious way” to bridge the gap in 2023 or future years.

“This has been a slow build, many years in the making, where the city’s expenditures have begun to exceed revenues,” said Budget Director Julie Dingley, who took charge of the city’s budget office earlier this year.

How did we get here?

In 2019, though the city was in its fifth consecutive year of significant revenue growth — about 4.5%-5% — then-Budget Director Ben Noble began to caution against increasing spending, forecasting a $116 million shortfall in 2023, based on historical patterns.

“The reality wasn’t upon us at that point … we were worrying about a long-term problem and that didn’t necessarily catch everyone’s attention,” said Noble, who now runs the city’s new Economic and Revenue Forecasts Office.

While the city had a couple of years to brace for the 2023 shortfall, the pandemic hit just months later, moving a distant budget concern down the triage list.

“At first, it was by sort of modest amounts and the city has been able to close the gap over the years using one-time methods,” Dingley said. “But then you come to COVID, and COVID really blows it wide open.”

When the pandemic first hit, the city buckled down, implementing a hiring freeze and generally bracing for the unknown impacts of COVID-19. As time went on, the city had to increase spending to provide help to the community through programs like rent relief, hazard pay and noncongregate shelters.

With roughly $128 million in one-time federal relief and $231 million from the City Council’s newly enacted Jumpstart payroll tax, in 2021 and 2022 the city managed to bandage the gaps created by the declining growth revenue and other revenue shortfalls, like parking, which tanked during the pandemic.

But the one-time funds, Noble says, were a double-edged sword.

“As much as it helped in those years, the pandemic funds in some ways exacerbated this pattern of ‘Oh, we have some one-time money, we’re going to invest in an ongoing thing,'” Noble said, noting increased spending on housing and homelessness prioritized by the council and a $100 million investment into BIPOC communities, committed by former Mayor Jenny Durkan without a funding source.

Though the spending is going toward important causes, Noble says the city either has to come up with new sustained revenue or cut down its investments into these issues, echoing a memo he sent the council during the 2022 budget season that identified a “misalignment” between the city’s spending and revenue.

“A misalignment between city spending and available revenues had been building before the pandemic hit, but decreased revenues and increased needs have significantly exacerbated the problem, and it will need to be addressed with some urgency,” Noble wrote in November. “Unless additional revenues are authorized next year, the city’s general fund will be facing a deficit of more than $100 million in 2023.”

Noble clarified Friday that he does not blame the elected officials for the shortfall, but is no less concerned about the sustainability of current spending.

“I don’t want it to sound like they were being stupid or spendthrift. They were doing the right thing to respond to these problems,” Noble said Friday. “They had resources, there was a problem. But how much of these solutions can be sustained is now the question.”

“Austerity is not the way out”

To bridge the projected gap in 2023, the city either needs to make significant cuts, find new money to cover planned expenditures or a combination of the two.

Though the mayor’s office is in the early stages of forming its budget, which will be presented to City Council for approval in September, the administration is looking to find new revenue rather than slash existing spending.

“The short version is, absolutely nobody desires or is looking for an austerity budget. That has to be an absolute worst-case scenario,” Senior Deputy Mayor Monisha Harrell said. “Investment in the city means that we continue to grow and that we continue to grow with the best interests of all of our stakeholders in mind.”

City Councilmember and Budget Chair Teresa Mosqueda echoed Harrell’s perspective in a written statement Friday, saying “Austerity is not the way out of a financial pinch. As a city, we can’t cut our way to prosperity. It only weakens the economy in the long-term.”

The mayor’s office and the City Council are currently operating off the forecast office’s April baseline projection for 2023 — the $117 million shortfall — which will be updated in August with more current revenue projects.

While there’s a small chance the August forecast improves, Dingley notes that it’s more likely to stay the same or even worsen.

And while Harrell says the administration wants to avoid cuts, the mayor’s office has asked each city department to prepare proposals with 3% to 6% cuts.

“We’re keeping an eye on the forecast and we don’t believe 6% will be where we will end up,” said Harrell, who declined to identify which departments were asked to entertain higher cuts. “But, you know, it’s helpful to get people started around what they would be able to do if there were some really dramatic scenarios that emerged.”

Searching for answers and money

Since no new revenue source could be implemented and produce new funds by 2023 or likely even 2024, Harrell says the mayor’s office will look for short-term solutions to fund gaps in next year’s budgets, while the city looks for progressive revenue sources to help in future years.

Specifically, the new administration is seeking grants to patch holes in the 2023 budget.

“We think that there’s a really strong nexus for seeking and securing funding from the state. And we also think that the federal government likes a lot of the innovative work that we may want to do and so may have some avenues for us to pursue grants and funding from the federal government,” Harrell said.

But another large part of making 2023 work will likely be asking the council to free up money earmarked for specific causes — like the Jumpstart tax — to cover general expenditures.  Under the tax, businesses with at least $7 million in annual payroll are taxed on salaries paid to Seattle employees who make at least $150,000 per year. It generated $231 million in 2021.

Harrell declined to name any specific revenue sources the mayor’s office might try to tap in 2023, but said that to avoid layoffs or significant budget cuts, they may “have to look at general-fund-adjacent sources of revenue” for short-term use.

Even after 2023 is resolved, the budget office’s most recent projection still predicts shortfalls of about $107 million in 2024, $69 million in 2025 and $37 million in 2026, so the city must find a sustained new revenue source.

“Structural problems require structural solutions, like Jumpstart, and as budget chair, that’s what I’ll be exploring as we head into the budget season this fall,” Mosqueda said, committing to finding a “progressive” revenue source, or one that is graduated based on income.

“We are a long way from saying we have a new revenue source right now,” Harrell said. “We’re working with Councilmember Mosqueda to create a revenue task force to see if there are any options for additional revenue on the horizon.”

Noble says that the city’s limited taxing authority and the changing work/life climate driven by the pandemic leave few options for long-term funding solutions.

“So we’ve got to find a new, sustainable revenue source, but there’s no obvious way out,” he added.