Projected Olympia budget shortfall caused by COVID-19 exceeds $10 million
Olympia could face a budget deficit of more than $10 million in 2020 due to the economic collapse caused by the novel coronavirus pandemic, according to an initial set of projections presented Wednesday by city staff during a meeting of the city finance committee.
Interim City Manager Jay Burney and Director of Economic Development Mike Reid walked attendees of the virtual meeting through escalating levels of response the city may have to undertake to make up for the losses incurred largely through sharp downturns in projected tax revenues, which make up about two-thirds of the $85.5 million general fund in the 2020 budget.
The projected budget shortfall of $10.57 million is a preliminary one, staff cautioned during the meeting, one that may well deepen as more data is collected and the scope of the damage done by COVID-19 becomes more clear.
As it stands, the predicted impact would fall into the third tier of scenarios mapped out by Olympia officials, one that would necessitate more cuts than have already taken place, but largely spare cornerstone services such as water, fire, law enforcement and public parks.
“Our key premise is that we’re going to protect our essential services,” Burney said. “Public safety right now is really needed to help us get through this crisis. I feel really comfortable and confident with where we are if we do get to the $10.5 million number. At the end of the day, we have to be here for our community, and we’re going to do everything in our power to serve our community the best way we know how.”
Olympia received word this week that it will get about $1.6 million in stimulus funding from the state and $237,000 added to its Community Development Block Grant funding from the federal Department of Housing and Urban Development as part of the CARES Act. Neither pot of money had been factored into the projections shown Wednesday evening.
City staff are still working on specifics, but the general understanding is the state funds must be used to backfill COVID-19 related expenses incurred on items that were in the budget prior to March 27, while the CDBG money can be used for new programs or targeted stimuli going forward. Reid highlighted the potential for using the latter to boost local food banks and child care in Olympia, two areas which will be crucial as the region begins to reopen.
“Some of the work occurring at the regional task force level is identifying some of those areas we need to pay attention to,” Reid said. “With schools being canceled right now, even if all the industries were to open back up, you have a lot of working parents who would need child care in order to fully return to their jobs.”
Olympia department heads, besides volunteering to take an unpaid day each month, have taken proactive steps to identify cutbacks in an effort to avoid reductions across the board.
Burney said the city has already made $2.7 million in cuts to discretionary spending out of the general fund by implementing a hiring freeze and curtailing expenditures related to staff training, travel and professional development. There also have been reductions made to specific city maintenance and utility programs that staff have determined can run at a reduced capacity for the time being.
Olympia furloughed all of its seasonal employees through June 1 for a savings of $140,000. Voluntary furloughs by city employees saved another $170,000 and eight early retirements added another $200,000 back into the budget. The city can carry over $935,000 of unspent funds from the 2019 general fund and potentially redirect appropriations previously earmarked for the Olympia Metropolitan Park District. It also has instituted a freeze on lodging tax funds appropriated to local organizations that promote tourism, in anticipation of reallocating that money elsewhere in the 2020 budget.
The City Council made a declaration of exigent financial circumstances last month, defined as a scenario where an entity is facing an imminent financial crisis if it doesn’t take immediate and severe actions. Doing so is a requirement of the interlocal agreement between the city and the metropolitan parks district if the city chooses to withhold funding.
If the pandemic and financial downturn extend to the point of creating an eight-figure hole in the budget, Olympia has a pair of safety nets it can draw on to keep the city functioning. It recently created a Budget Stabilization Reserve to go along with the operating reserve fund required by state law. Each contains about $8 million, though the city wouldn’t exhaust one or both except under the most dire circumstances.
The stabilization fund would be tapped first — staff projections for a $10.5 million shortfall include using $3 million of it to fill in the gap — because the city has a legal requirement to maintain its emergency operating reserve at a certain percentage of the overall general fund budget. Not only would Olympia first have to exhaust every other avenue within reason to maintain funding for essential services, but drawing from the emergency fund would damage its bond rating.
“Our city is in a much better place than it was going into the 2008 recession,” said Councilman Jim Cooper, chair of the finance committee. “We learned our lesson from that and thankfully established the BSR for this exact situation, but we don’t want to just rely on that and drain the fund, in case of future emergencies.
“Generally, I feel OK about our ability to keep things stable, but the longer it goes, the less confident I get about that. I think everyone in the community has a different definition of what’s ‘essential,’ but we have to keep water flowing and police and fire on the streets. There will be cuts to services in our reductions to the general fund unless we get it all backfilled.”
Because reporting of some key indicators such as sales tax revenues carry a reporting lag of a few months, Reid and his staff have relied more heavily on unemployment data and other factors when creating their first run of projections.
Even without the numbers for March and April expected until the summer, Reid has his eye on a few economic sectors as bigger factors than others when it comes to how bad the budget situation will get. The Olympia Auto Mall, with its nine dealerships and high-priced inventory, has seen huge reductions in sales under the limits imposed by Gov. Jay Inslee’s Stay Home, Stay Healthy order.
Olympia has a high concentration of the retail and food service jobs in Thurston County, jobs which have been among the hardest hit by the pandemic. Even as those businesses are able to resume in-person sales in the coming months, they are unlikely to reach pre-COVID levels in the near future.
“We know we’ll be short, but if we can see some industries adapt to this in ways where they have meaningful sales and employment, that’s our biggest hope,” Reid said. “Sales tax before this was outperforming what we’d predicted in some instances. The auto industry has been really pushing the idea of touchless transactions, and that’s important, because the longer we see whole industries at the scale of the Olympia Auto Mall shut down, having that be limited creates a bigger burden on the city.”
The Olympia City Council is expected to discuss aspects of the budget shortfall during upcoming meetings on Tuesday and on May 12. The next meeting of the finance committee is scheduled for May 20.
Information for viewing those meetings and providing public comment can be found at olympia.legistar.com.