The road to a $31 million budget gap in the City of Tacoma’s General Fund took years to create.

Steve Marcotte, former director of Tacoma’s Finance Department, retired in 2007 and left the city when it had some $47 million in cash to weather a downturn. Financial lingo refers to it as the Unreserved General Fund Balance, and it sits at the heart of the current budget troubles.

The city has since burned through much of that reserve – starting out at a rate of $1.5 million a month back in 2008 – instead of dealing with Tacoma’s long-standing problem of “structural deficits.” That means that many operating expenses and city services have long been paid through one-time revenues instead of through straightforward, money-in, money-out budgeting.

“That goes back a while,” he said.

Programs and personnel, for example, can find themselves paid for with fees and taxes associated with new construction one year and through some other funds the next since the construction of a building brings in much more in tax revenue than it does through property taxes once the work is completed. Best practices in city financing calls for a city to pay its expenses through ongoing revenues rather than one-time revenues that may or may not come.

What got the city into the current deficit, Marcotte said, came from two fronts: avoiding earlier cuts and layoffs at the onset of the “great recession” back in 2008 and 2009 by dipping into the unreserved General Fund balance and the continued practice of funding programs with one-time revenues only to have those dollars dry up as the recession dragged on longer than anyone expected.

“Tacoma was told that the city had a balanced budget, and that there wasn’t anything to worry about,” he said. “The city didn’t have a balanced budget. It was drawing down on a cash reserve. Do I blame the city council? No, I don’t. They had every reason to believe what they were being told at the time was true.”

Former City Manager Eric Anderson arrived to be Tacoma’s chief executive in 2006, at a time when the city had a $47 million reserve to weather a downturn. It was a fund that took five years by Anderson’s predecessors to build up mostly through construction related sales tax.

“The fact is that Tacoma was better prepared than other cities to weather a downturn,” Marcotte said.

Tacoma had built up the reserve to fund city functions in the wake of property tax caps and business tax changes that cut into the city’s revenue. That reserve came during the height of Tacoma’s building boom that included new museums, many high-profile condominium projects and rising home prices.

“Then the recession hit,” Marcotte said. “When budgeting in an economic downturn, the longer you wait the deeper you have to cut, and that is the heart of the problem for me.”

Rather than make early cuts, the city used its reserves and didn’t address the underlining losses in revenue. Using the reserves saved jobs then but compounded the deficit spending that not only led to the current budget gap, but also put the city in tougher financial shape for the years to come, he said. What should have happened was that Tacoma should have made small cuts in 2008 and 2009 at levels tied to the dropping tax incomes and revenues rather than continue to operate beyond its means.

“I have been saying that for three years,” he said.

Marcotte was not the only one to notice the looming budget problem. Tacoma Public Library's Trustees raised its concerns about the state of the city's finances in the summer of 2009. On Nov. 16, 2009, Anderson and then-Deputy City Manager Rey Arellano met with library heads to discuss the state of the city's budget and its impact on the library's budget. The library’s Board of Trustees expressed doubts about the assumptions on the economy guiding the city's budget strategy.

In another meeting the following fall, the trustees asked Anderson for a budget that he would regard as sustainable. At that time, the library's 2011-12 budget was calculated at $27.1 million dollars: Anderson proposed $24.5 million as sustainable. The library cut to meet that budget. 
During the last budget process, Library Director Susan Odencrantz noticed a shift in staffing in the General Fund government on a city handout. It showed that in 2008, the budgeted number of employees was 1,458 in the General Fund and another 988 budgeted in the other government accounts. The total budget was 2,446 city workers. That has since shifted to 1,220.8 workers under the General Fund and 1,221.1 full-time equivalent in other governmental funds. The difference was a loss of only four positions during the longest and deepest recessions since the 1930s.

Seven months later, the city announced a $31 million budget needed to be filled with service cuts and layoffs. The city’s Unreserved Fund Balance is $1.5 million, according to city reports from late October. That is about a month’s worth of overspending if the city operated as it did during the lowest point of the recession in 2008.

Attempts to reach Anderson for comment were not successful, and Mayor Marilyn Strickland did not return calls for this report.

General Fund 101

The General Fund is the catch all fund for city operations, although it only makes up a small percentage of overall city spending. The General Fund is about $400 million of the city’s overall budget of $2.7 billion. But the General Fund pays for much of what people consider city services, such as police and fire, Public Works, libraries, municipal courts and legal services.

The bulk of the budget falls into non-General Fund spending such as Tacoma Power, Tacoma Water, Tacoma Rail, Convention Center and Tacoma Dome spending and arts programs. Those efforts are paid for by those who use the service through fees and charges for the services, while General Fund spending is largely covered by property and sales taxes as well as business and utility taxes.

The city used its multimillion-dollar parking system reserve that was set aside to fund the parking system until it would be self-sustaining to build the Southside Park Plaza. The lack of a reserve now means the system will need General Fund dollars in the future.