Troubles will likely grow, at least continue

Everyone in the city knows at least a little something about Tacoma's struggles to fill a $32 million gap in the city's General Fund.

Lost in the uproar about the layoffs of some 167 people, including 100 police officers and firefighters that were announced and then largely put on hold last month pending further study, is the fact that similar budget shortfalls are likely to continue for years.

City forecasts show a budget gap of $36 million in 2013 and $38 million in 2014. An outside auditor put those gaps even higher, at $39 million and $43 million during those years. Those figures, however, do not take into account the ongoing savings any current round of cuts and layoffs will have on those years, so they will likely be smaller. But those savings have yet to be calculated, so the deeper budget gaps stand until those savings are tabulated. That work will not be done until the current budget gap is filled.

The announcement by police and fire unions to make wage concessions instead of facing layoffs in their ranks, for example, could mean fewer cuts in future rounds of budget reviews. Those concessions and layoffs elsewhere are projected to cover $22 million of the current deficit, leaving about $10 million in cuts still to come.

City Council members are now tasked with maximizing the impact of current cuts on future budgets to bring down those deficit projections, Tacoma's Communications Director Rob McNair-Huff said.

"The idea is to not go through this every year," he said.

While the current roster of cuts works its way through the process, for example, another round will likely be presented in February to lower future budget gaps. The details of those largely depend on how early the current cuts take shape and how fast the economy improves, since future budgets are based on estimated revenue projections.

That has been at the heart of Tacoma's budget problem dating back years. Costs have gone up and revenue has largely been flat, former Finance Director Steve Marcott said. He worked in the city's finance department until he retired in 2007, when the city had a budget surplus of $47 million at the dawn of the recession.

"Tacoma has a long history of having more fixed costs than ongoing revenue," he said, noting that those gaps were often filled with one-time revenues such as the sale of property. "To some degree that is normal."

Tacoma was then facing two budget problems that make that practice worse. Two state initiatives cut into revenues. One capped the growth of property tax to 1 percent per year, making property tax revenue growth fall below the rate of inflation. Another ended the ability for Tacoma and other cities to collect taxes on out-of-area sales by local businesses.

"Those two things changed the whole biennial budget game," Marcott said, since they added to the ongoing "structural deficit" within the budget by lowering revenues.

Financial minds call it the "alligator's mouth" since the gap between rising costs and flat or shrinking revenue can quickly widen and swallow large amounts of reserves if not closed properly.

"No one closed the alligator's mouth and then the recession hit and made the budget deficit widen," Marcott said, adding that the then City Manager Eric Anderson kept spending General Fund reserves, some $33 million, to fill the gaps during his tenure.

"This is not a new discovery," Marcott said.

Smaller cuts at the lowest point of the current recession, in 2008 and 2009, and a rationed use of reserves could have lowered or eliminated the need for deep cuts now and in future years. That did not happen. The city avoided cuts by cutting into savings and deferring payments that are now coming due at a time the city has little money to spend since the usual options have been exhausted.

"Tacoma's problems are solvable, and they will be solved," Marcott said. "The question is how much damage will be done in the process."

The City Council has thus far spent most of its time on the current budget troubles, Councilmember Jake Fey said. Once that work is done, the council will shift into longer-term projections and the looming budget troubles in 2013 and 2014.

Two big expenses the city will have to address in the coming years are the three years of deferred payments on bonds and money for the parking system. The council deferred bond payments since 2010 and pushing them out again would mean refinancing them at a higher interest rate caused by a likely lowering of the city's credit rating. Bond payments in the next budget will be about $10 million. The city's parking system will cost another $8 million.

"We really haven't had a great deal of conversation about this," he said, adding that he had expected the outside auditor to do projections on revenues as well as expenditures under the city contract but has so far only seen the revenue forecasts.

The outside auditor was largely called in because the police and fire unions wanted independent verification of the city budget projections.

"Quite frankly, I don't blame them," Fey said. "They were hidden from them and they were hidden from us. We were caught off guard. We are going through a whole lot of pain right now and we didn't have to do this if we had a city manager who was square with us."

The City Council sacked Anderson last year after six years on the job. Two reasons for opting to not renew his contract were outlined in his annual evaluation that stated he was "using a growing reliance on deferred expenditures that may present several difficulties for budgets in the future" and had "not always provided detailed information when making recommendations to the council."


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