The technical term is “alligator jaws.”
The term refers to a graph that displays the recent troubling circumstances associated with running a city, county or any public agency. The top jaw shows growing costs, which increase steadily by a few percent every year. And the bottom jaw shows the flat line of the steady stream of tax dollars that pay for everything. Thus, you get a chart resembling gaping alligator jaws.
National news of recent global financial chaos has revealed a frozen credit market, hundreds of thousands of homeowners on the verge of foreclosure, lowered consumer spending and even lower consumer confidence in the marketplace.
When the national economy starts to shrink, the American people get a frightening reminder of how connected everything is. If the housing market slows to a crawl and financing becomes more difficult to obtain, that means projects will be delayed and permits will not be sought. When the consumer hunkers down, retailers see fewer sales and businesses generate lower gross receipts.
All of those things have an effect locally on the steady stream of tax dollars that fund the city of Bellingham and Whatcom County. A portion of the excise tax from real estate transactions and the fees from building permits, plus sales, property and B&O taxes, all go directly into local governments. However, the market’s recent nosedive is showing alligator jaws to many of the state’s top municipal finance experts.
The effects have been felt locally. The city of Bellingham’s budget cuts 13 vacant positions and depends on zero revenue growth through 2009 and the county executive’s biennium budget proposal cuts 36 positions.
Feeling the bite across the state
Jim Justin, assistant director of legislative affairs for the Association of Washington Cities, said the story is similar across Western Washington.
“If sales tax is going down and property taxes are flat — you’ve got trouble,” Justin said.
Justin said his agency has been getting calls from municipalities across the state concerned about what the drop in tax revenue means for their budgets. The association recently held 14 meetings across the state to see how different jurisdictions are responding.
“What we are seeing is personnel and program cuts across the board,” Justin said. “Many are deferring capital projects, saying they can’t afford to build until next year.”
Justin said if the current trends continue, the resulting financial decisions make him worried.
“I am nervous about the infrastructure gap that could form if we get behind in projects, and that we will not be able to do those things that we need to do for our citizens,” Justin said.
Justin said unfortunately in tough times, “quality of life” items such as the arts and recreational programs are often the first to go. But most agree it is better to cut those programs than to cut a firefighter or a police officer. However, Justin fears there will start to be cuts to core services if this downward trend continues.
“The bulk of a city’s or county’s expenses is for personnel,” Justin said. “So there is not a lot you can do to cut costs without cutting someone’s job.”
Digging for money
David Webster, Bellingham’s chief administrative officer, said Bellingham’s general funds, which are only about one-third of the city’s total operating budget of approximately $213 million, are mirroring the national trends.
To understand the city’s fiscal situation, it has to be noted that previous administrations projected that general-fund tax revenue would consistently grow by 4.5 percent through 2013. Webster said that Mayor Dan Pike, in an effort to be conservative, started to base the 2009 budget on only 2 percent growth.
“In January, things were doing pretty well. We were actually well above the projected 4.5 percent increase, and then the slide began,” Webster said. “It got a little bit of a bump with April tax payments but since then into September — it’s been way down.”
According to the city’s September numbers, sales tax is 3.9 percent under projections, B&O tax is 1.5 percent below projections, utilities tax is 2.5 percent below projections and real estate excise tax is 26.9 percent below projections.
With this downward trend in mind, Pike presented the city’s preliminary 2009 budget at the Oct. 27 City Council meeting. Pike said the budget balances priorities and objectives while maintaining financial sustainability.
“It’s a manageable but challenging situation,” Pike said. “I was hoping to sign on for an expanding economy.”
In order to close the gap between costs and flat tax revenues, Pike said the city’s departments cut more than 3 percent from their budgets to come in as close to the 2008 numbers as possible, which requires the city to maintain a hiring freeze, absorb inflationary expenses and re-scope or delay certain capital projects such as road resurfacing and infrastructure improvements.
Pike said, at this point, it was better for the departments to rethink their budgets to make them more efficient than to cut out whole parts.
“It was a thousand small decisions affecting the discretionary aspects of their budgets,” Pike said.
While the city will cut 13 vacant positions from various departments, it will be adding four new police officers and 1.7 full-time equivalents (FTE) for the city’s public development authority for a net reduction of 5.8 FTEs from 2008 levels. The city also plans to reduce the amount of sales tax allocated to the city’s street fund from 50 percent to 42.5 percent, which Pike said is one of the larger cost offsets for the city.
All these measures are subject to the City Council’s approval of the budget, and Pike also stated in his budget message that it may have to be revised further — even before the Council has ruled on this version.
John Carter, Bellingham’s finance director, said the current shortfall is manageable, but if the downward slide continues to further separate revenues and projections, 2010 could be even worse.
“Right now the gap is around $800,000, but in 2010 it could be $5 million,” Carter said.
Webster agreed the city will most likely manage fine through 2009. To do so, Webster said the city asked all departments to look at their budgets for ways to cut costs in a way that would account for zero revenue growth. However, those departments were already absorbing cost increases in health care, cost of living and union benefits.
“This is a tall budget task,” Webster said. “To grow in those areas, they had to go pretty deep into other areas to find that money.”
To cut costs, the city plans to slow its street resurfacing and delay transportation-related capital projects scheduled for late 2009 to 2010. Webster said the cost reductions are being shared by all departments as much as possible, but larger departments have more wiggle room in their budgets than smaller ones, such as the city’s legal department.
“Our legal department has about five attorneys and you can cut some pencils and pens but you don’t have to go very deep before you have to start looking at cutting positions,” Webster said.
While Webster said the city would only eliminate vacant positions to close the budget gap, this may just be a Band-Aid if the market continues to worsen.
“It is starting to put some dirt back in the hole but the question is — is there a mine shaft beneath the hole?” Webster asked.
Looking through the windshield
Finance Director Carter said to stay on top of an unprecedented global financial crisis, the city has a multi-pronged approach to help predict future trends, as opposed to monitoring numbers that register after the activity like taxes.
Carter said he uses a combination of state and local data, information gathered from key members in the business community, a five-year rolling average of market changes and quarterly tax receipts. Together this information forms what Carter calls his “financial dashboard summary” because it helps him to look through the windshield at upcoming trends instead of through the rear-view mirror.
However, Carter said he has been in the finance world for 25 years and he has never seen markets in this condition before, so he worries about the relevance of his predictive data.
“We’ll see if it’s accurate enough because I don’t know if it was designed to work in this economic climate,” Carter said
Webster said the city is looking beyond 2009 with a new budget taskforce set to convene before the end of the year. This group will comprise city staff and one or two City Council members and will come together to examine the city’s budget with an eye to trim the fat.
“The task force is to institutionalize expenses and really break out the innovation here to see how we can restructure,” Webster said.
Whatcom County’s ‘efficient, service-oriented budget’
The county recently presented its 2009-2010 biennium budgets to the County Council, and it also has an eye for trimming excess costs in order to maintain essential services.
Steven Oliver, the Whatcom County treasurer, said the county is funded primarily through property and sales taxes. The county is also one of only eight in the state that manages a diversified pool of investments, which totals approximately $220 million, on behalf of all other public county districts, such as school districts, fire districts and the Whatcom Transit Authority.
Whatcom County Executive Pete Kremen said county staff has been working on the budgets since February, but in that time, just like Bellingham, economic trends are showing limited growth in sales tax, the county’s second largest revenue stream.
“Instead of a 4 or 5 percent increase, we will be lucky to see a 1 percent increase in sales tax revenue,” Kremen said. “On the other hand, our costs continue to rise by 4 or 5 percent a year.”
To address this issue, Kremen said the county went to its departments earlier this year and asked them to cut 3.6 percent from their budgets. The county also won’t fill 30 vacant county positions and six more will be phased out in 2009.
Some areas will be hit harder than others. The county’s planning department could see a 10 percent reduction due to diminished activity but the Sheriff’s department and the jail will see virtually no cuts.
“It was difficult to really convince all the department heads that we were in such a critical financial downturn but we had cooperation. It was sometimes reluctant, but we got it from almost everyone,” Kremen said. “We’ve put together a very efficient and service-oriented budget in spite of revenues being down.”
‘We have to do what we have to do’
Dewey Desler, Whatcom County’s deputy administrator, said counties have it a bit harder than cities because, in Washington state, cities get additional revenue streams in the form of utility taxes. Cities can also annex areas that contain businesses vital to the county’s sales tax base. Desler said Costco used to be in the county but was annexed into Bellingham, which now gets all its sales tax revenue.
However, Desler said the county is still responsible to offer key services that all city residents enjoy but only the county pays for such as the health department, courts and jails, elections and vital records.
“We collect and protect all of the major documents that serve as a foundation for the free enterprise system,” Desler said. “If no one did that there would be chaos on the streets.”
With a lot to pay for and incomes going down, Desler said the county needs to be flexible in this inclement market.
Recently, concerns were raised about the legality and appropriateness of the county’s taking interest accrued in accounts that are not used everyday, such as an emergency flood fund, and placing that money in the general fund for immediate county use.
“It’s something that is very common, though it is a choice,” Desler said. “We have to do what we have to do to keep up with our mandates.”
Desler said the interest is the county’s third-largest revenue stream and a tool to help provide essential services.
“We are maximizing the use of the tool to make sure we provide these essential services because they (the state Legislature) don’t always give us the tools we need,” Desler said. “We are a partnership of one.”
Desler said if the County Council decided it’s not appropriate for the county to spend that interest, then either the general fund would see further cuts or the council would have to find an additional revenue source.
But in the face of these troubling economic times, the county executive is not recommending a rise in property taxes.
“I don’t think it’s prudent to raise property taxes at this time,” Kremen said. “Right now, people are unable to come up with additional money.”
Despite budget cuts and job cuts through attrition, Kremen said Whatcom County is in an enviable position.
“We’re not issuing any pink slips at all and our budget constraints are not nearly as severe as other counties,” Kremen said.
However, Oliver said resources will be strapped for the next two years if the market doesn’t make a correction.
“I don’t expect that the county will be taking on any significant new initiatives that it is not absolutely required to do,” Oliver said. “It would be difficult to find the money."