City Council - Special Meeting

Good evening, everyone. I will call the special meeting of the Federal Race City Council to order, and would you all please rise for the Pledge of Allegiance.

I pledge allegiance to the flag of the United States of America, and to the republic for which it stands, one nation, under God, indivisible, with liberty and justice for all.

All right. Well, welcome, everyone. We have a very special meeting today to talk about the budget presentation for the proposed budget that I submitted to the council. And to walk us through the first steps of this process is our finance director, Steve Grimm. Steve?

Thank you, Mayor. This budget stands on the shoulders of every employee, every department that we have, and everything that we deliver to the citizens is what this budget is about. But for me, you want to hear about numbers. So the budget book is posted online to the city website. and Amy provided you council members with a printed copy. And the purpose of this presentation, I don't want to preempt anything that the mayor is going to say at the main session, but I want to help you navigate the budget book, and I want to point out the high-level things that are worthy of council time. It's never our expectation to lob a 300-page book at somebody and say figure it out. So I have about 20 slides, and I plan for that to take about 25 minutes, which will leave plenty of time for discussion and question. The mayor's going to give his presentation at 6.30 at the main meeting, and then next week on Monday and Thursday we have department-specific presentations. So what I have to give you is a foundation of our revenue, debt, and economic assumptions so that for the study sessions you'll have what the budget is built on. So here's my little outline how to navigate the budget book many of you have done this before but for those watching Many haven't and if somebody goes to look online at a at a city budget book It can be a little daunting Council members. I want to make sure I point out that the biggest hurdles that you need to know about for revenue forecasting we all have the foundation of having looked at revenues and Every single Fed Rec meeting this year, everyone that we've ever had, we've always looked at our top revenues, and so there isn't a whole lot of surprises there. And I will end with two things. I'll point you specifically to the fund balances that we have projected over the next biennium. Wealth advisors say that it's not how much you make, it's how much you keep. And it's our fund balances that are where our fiscal health really is. And then lastly, I'll give you the menu of budget balancing tools that you as a council or anybody have at your disposal when we go through study sessions and when you hear from each department. So if you look at the budget book, whether it's online or in paper, I would first point you to the table of contents. And I've put an image of all three pages. And it's not meant to be able to read here. But what I want to point out to you is that it's three pages long, two and a half. The table of contents is where you get the complete overview of the budget before. You decide where you want to drill in. And the outline of the budget book starts with the mayor's budget message. There are citywide tables and charts. There's a long-range plan. There's budgets sliced by department or sliced by fund. There's a debt section, and there's a capital project section. The mayor's budget is the executive summary. And so here's a little sub-outline of the budget message itself. It outlines the goals that this budget accomplishes. In getting to balance, staff was forced to address several challenges. We've listed what the challenges are. Some of the challenges have been revenue issues. I don't think any are a surprise. We've been acknowledging revenue challenges for a while, but this budget is a fresh start for the next two years, and so now we want to build a budget based on what we know now. The executive summary also provides some debt and cash position summary info that's detailed. All of the summary info here... is detailed later in the book so if anybody was to read only one thing it would be the mayor's message that's the that's the budget in a nutshell and lastly there's some expense summary information which is detailed later in the book now throughout my slides i will have page numbers but it's not intended that you look at your book it's just a reference number so that if if if anybody wants to go back later and find anything that i spoke about uh... most of these have got page numbers this one doesn't this is This is a list of the biggest hurdles that we overcame in getting to a balanced budget. Our insurance premiums increased $2 million in 27 and $2.2 million in 28. The step increases, this is for existing staff that every year we have a salary schedule that they go step by step once a year. Now for people that have been here more than five or six years, there are no more steps. The only thing that is available to them is a cost of living increase. The mayor always pays attention to that and so we do have a built in 2% COLA, that comes with a price tag. Both of these are cumulative. You give a step increase or you give a cost of living one year, that sets an employee at a new rate, and so then the following year you've got the cumulative effect of two years. I list jail costs even though it went up in prior years, and I have a slide to show you that, and the same thing is true for debt. So these are big increases in expenses that we had to deal with compared to the previous biennium. Let me start with debt. I've got a busy slide here. The table on the left shows the current debt payments for each of our debt issues, for the community center, SCORE jail, the performing arts center. There's also a second smaller debt issue for the performing arts center. And then the operations and maintenance Now, the gray graph in the upper right, that shows you the story of our debt looking back in history. The graph in the upper right shows the total debt payments that have increased. They used to be under $3 million a year. In 2024, we issued new debt for the new maintenance facility. And so the 2025 payments bumped up around in the range of $5 million per year. Now, that's the total debt for all of the city. The blue graph on the lower right, that shows the story looking forward. There's light blue for interest and there's dark blue for principle. But you can see how it does stair-step down a little bit over the years as different debt issues are extinguished. There's a whole debt issue. There's a whole debt section in the budget book. I've got it noted. It's pages 203 if people wanted to go look at it. And that's where the details of every debt issue are in the budget book. Jail cost. I mentioned that it increased in past years. This is the history of what our jail cost has been for us since 2020. You remember 2020, that was a tough time. Our jail cost was well below $3 million, but I'm not sure if it was 20 or 21, but PD went through this season where they couldn't pursue. Vehicle thefts skyrocketed. Jail cost was not particularly high at that point, looking back in retrospect. Since then, they have since gotten some tools back. And one of the costs of delivering public safety is budgeting the cost of enforcing the law. So what we're seeing here is both an increase in usage and in cost because the jail rates have gone up. so much so that in twenty three twenty four i think we exceeded our budget now during those years we had healthy sales tax and so we could come back with a budget amendment and we could we could we could fund it more uh... we don't have that luxury anymore so what so when in into talking About the 27 and 28 budget, what we are budgeting to do is stay within $5 million, and that is managing both the volume, the usage, with the rates that they're giving us. So that's one of the assumptions that we have built into this budget. The single biggest cost increase for this biennium has been insurance. And you can just see by that blue bar, this is the historical total cost of our liability insurance. The insurance premiums went up $2 million for 27 and $2.2 million for 28. So that was a big increase to insurance. Absorb not only the premium increase, but the city's vehicles. They also raised the deductible which means that our vehicles mostly police when they have collisions crashes what have you Are now going to have to be funded almost entirely by the city and the rates that we are given, they're based on the city's loss history. Yes, they're pooled with other cities, and our city's losses seem to be dramatically higher. And again, most of this comes from our PD vehicles, and they generally have no choice in what they have to respond to or how they respond to it. So this is an increase that we have to build into our budget, and we have. I have got eight revenue... graphs to walk through. And this is really where we built the economic assumptions for how we are going to fund all of the increases that we have to absorb. And each of them has a page in the budget book starting on page 33, sales tax. The scale, I always point out of sales tax, that scale right now, it gets up in the neighborhood of almost $28 million in the second year. And the table above it shows how we track month by month. And we've seen this in our finance committee. Because we've got the actual month by month, and what we can do then is look to see how much each month increases over the same month in the prior year. We can also forecast using that same methodology going forward. The blue graphs, the blue bars on the graph are the actuals from the prior year. The dark green is the current year that we're in the middle of, how we're going to finish, and then the light green is our forecast years for the biennium. Sales tax is the largest revenue. It's almost also the... primary economic driver, primary economic indicator for the local economy. And you can see that 24 and 25 had a little bit of a setback. In the current year that we're in, I think I reported recently that through July, the first seven months of this year, are 6.5% over the same seven months last year. So what we've done is we've forecasted 5% to be kind of cautious and conservative going forward. But on top of that, we added the additional revenue from the point one percent sales tax now we're going to get six months this year i i i i have yet to see the first remittance it started it was effective july first twenty twenty six but we haven't gotten it yet for from the state however based on the amount that 0.1% should increase our sales tax, it should be $1.2 million this year and then $2.4 million in 27 and then go from there. That is how we, and I'm sorry, which results in a $2.5 million increase in revenue for 2027 and then 1.5 for 2028. Those are significant numbers. Unrestricted utility tax. I've got a table that shows the total utility tax month by month. However, when we forecasted it, we forecast individually electricity, water, gas, sewer, all that. The increase in total is $2.2 million in 27 and 2.7 in 2028. And we took the seven months of this year compared to the same seven months prior year. And each of them individually, electricity is about 50% of the total. The other pieces are about 10% each, water, gas, sewer, solid waste. So the electricity cost that we forecasted going forward is what we're currently seeing. We didn't really meddle too much with the future. We looked at the rate that it's currently actually increasing because we want to kind of try to stay grounded in reality in what we're actually seeing. So the increase that you see is the increase that we're actually currently experiencing right now. The property tax revenue, the scale here, the blue graph is our assessed value. And the table shows how assessed value has grown. And there are some pretty significant numbers of assessed value of the properties of the city have grown. However, as you know, tax levy is capped. It's capped at 1% on existing value. New construction gets to be added at the current tax rate. So the blue graph shows what assessed value has grown, but we always want to keep reminding our taxpayers that their tax bill does not grow. We do not increase our tax levy. Our tax levy is capped. It generally grows about 1.6%, 1% for the cap plus another 0.6% for the new construction, and that amounts to $200,000 per year. So really, we just increase our budget $200,000 per year. Speed enforcement revenue, now this one, the scale gets up to about almost 6 million. Again, we have been tracking this month by month. And just like jail costs, when I create a budget, whether we're talking revenues or expenses, I really want to be tied in to what really we expect and what we plan to do in the real world. The intent of the budget is to make sure that we're budgeting intelligently, being in touch with what's going on out in the real world. PD and I believe Public Works did a study recently, or sometime recently, and acting on the results of that study in the context of keeping the streets safe, There are several school zones that they plan on enforcing to a greater degree. And so our revenue forecast started with a 1% decrease year over year because that's what we were experiencing. And then we added to that the effect of the school zones being planned for enforcement. And so that is what gave us a 2.4 increase for 2027. And then from there, a slight further increase in 2028. permit fees uh... here the scale of the graph of the revenue down on the lower right is it's five million dollars currently we're seeing an increase year-over-year of five percent and to be prudent we were forecasting three percent but as you can see history shows it's a little bit of a roller coaster The takeaway here is that we're forecasting modest growth, a little bit lighter than the current growth that we're really seeing. There have been years in the past we've seen some significant permit activity much higher, but the prudent course of action when you're building a budget is to forecast a budget that we think is probably attainable. Real estate excise tax. This scale is in the neighborhood of $5 million. But it has dropped into the range of $3 million and stayed there. And this isn't news. We've been talking about this every month at our finance committee. The current rates that we're seeing coming in over the same months prior year, they're between 3% to 8%, but at that much lower level. So we forecasted a 5% increase for 27-28. That amounts to an increase of $160,000 per year. Now, it exceeded $5 million in 22, hasn't since. It's been coming up a touch. But the budget squeeze in this situation is that Reed is what funds our revenue. Now, we just added debt for the operation and maintenance shop. And so the little table in the bottom lower left there shows how much of the 2027 debt was already pledged to debt to be paid by REIT. That was 3.2 million and then the same, almost the same amount for 2028. That means that between what we forecast to come in and what we are already obligated to spend, it almost breaks even. Now in the past biennium, what we did is we've forecasted REIT optimistically. And we said, OK, if REIT doesn't come in, we'll just have to press pause on projects. So we're almost doing the same thing here. But what we're doing is we're forecasting less optimistically shall I say realistically and we are pressing pause on all of the REIT projects and then if REIT comes in favorable you know the real estate market we always think of as cyclical when we built the operation and maintenance shop we didn't imagine it would stay down this long and the underlying values as I showed you in a couple charts back the underlying values are quite stable So it's just a matter of when we think the real estate market would come. But that means that, again, projects are what suffers. There is just a little bit of room to manage to fund the parks repair and maintenance that we generally budget out of REIT. And that's their only tool, I believe, to do repair and maintenance on the equipment that's associated with parks. Investment interest. This one has really served us well in the past. It got up to $4 million in 23 and 24. However, it's our level of investable cash that has suffered, and that has been because the sales tax has been nothing new. We already know this. Sales tax has been under budget. REIT has been down significantly. we pay our insurance and purchase our vehicles at the beginning of the year we did not have a sale of the property at town center three and also in 27 and 28 wild waves is going to be closing half a million dollars of admissions tax per year it's not a lot but we have to make sure that we build it into our our forecast Investment rates have been stable for the last three years. We expect them to continue in the neighborhood of 3.5%, 3.7%. And all of our investments have been five-year investments locking in the rates that were available when we made each purchase. However, you can see the decline in our forecast here. Lastly, lodging tax revenue. Now, the scale here is only 300,000. It breaks 300 and starts going towards 400,000. But there's two reasons to mention lodging tax. One of them, it's an economic indicator. It shows the health of the tourism and hospitality sector. But also, it has a special spot in our budget because State statutes, the RCWs require communication between the LTAC committee and city council. And at the August 13th LTAC meeting, they reviewed the proposal. The little blue box in the lower left shows that we proposed, we forecasted revenue with only a 1% increase. And we proposed using 50% of that to support the Performing Arts Center, as we've done in the past. 25% for tourism enhancement grants and 25% for tourism marketing. And at their August 13th meeting, they gave that a review and responded and they approved that. And the graph in the lower right, it shows a little bit of a dip in the current year. But remember, this is one of the very few funds that we have that has a really strong fund balance. It's got a $1.8 million fund balance. So if we're wrong, that backstops it. Okay, so enough of revenue. If you look on page, if anybody looks at page 23 and 24, that is the place where you see the page on the left is the entire city, every single fund for 2027. For every fund on every row, it shows the beginning balance, the forecasted revenue, the budgeted expenses, and then the ending balance. And then the same thing for 28. So now don't squint and try and look at the graphic here. On my next slide, I am going to zoom in because there are two lines that we really want to focus on. The total at the bottom of the page is for the entire city. And as in every other budget year, you might notice the fund balancers are decreasing over a year, but every fund in the top half of the page is pretty level. the general fund, most of the restricted funds. And it's when you get to the bottom half of the page that you look at the capital funds, the internal service funds. And this is true for every biennial budget we've ever adopted. It's normal for capital and internal service funds to kind of build up fund balance because it takes them a couple of years in many cases to spend out the projects. Also, the second thing is we're in the middle of 2026 until we get to the end of this year I don't know what our ending balance is going to be for 2026 to roll forward and it's generally in those capital funds that we have large roll forwards So the two most important things to look at on this page would be the top line Which is the general fund and the bottom line, which is the city citywide total and we have tables that do exactly that on other pages and The table at the top shows the citywide total, and the table at the bottom shows the general fund. Now, what does that tell us? Each of these has got a column for 2024 and 2025. Those are audited. Those are actuals. Then in 26, we've got a column for the adopted budget, and then we have adjusted. That's the ones where we've brought budget amendments, and you have approved them. And then we have the current projection that we think is where we're going to end the year, and essentially that's just staying within the current budget to the end of the year. And then the last two columns are for 27 and 28. Now those red arrows, if you were to look at each of those numbers, you'd say, my goodness, the total city started at 146 million, and it's gotten down to half of that. I want you to remember back in 2024, we had just issued a bond for the maintenance shop. We also had some unspent ARPA revenue. So of course, you see the sequence that plays out. Now, on the bottom graph, general fund and street fund, we had some unspent ARPA back in 2024. But really, that one almost always stays pretty level. You see 10 million, 9.5, 9.5. That's normal. But this is the bottom line. This is the net result of a balanced budget. These two tables show you that we've balanced the general street fund. It's not really obvious how we budgeted because the hardest part of this budget was overcoming the insurance increase, the debt payments, the jail costs, and the salaries and benefits built into steps and COLA. So, from this point, we do have a balanced budget, and if we were to make changes, we would want to make equal and offsetting changes. So, let me show you the menu. Any budget, any city, anywhere in the world, the only way to balance a budget is this list of eight things. If you can think of a way to increase revenue, we could increase revenue. We can reduce expenses. That involves kind of differentiating between necessities and luxuries or importance or urgency. You can defer spending. You can eliminate discretionary spending. You can also build in savings. You can add to your contingency. And then number six, you could use savings and fund balances. Number seven, I have been talking about this for five years ever since I got here, manage the wait list. You can look at any city's budget and you can tell what's in the budget, but what you can't tell us what's not in the budget. And we maintain a list from every department. My pledge and promise to you or any of the departments is anything that isn't in the budget, we want to collect it. We won't lose it. We want to put it on a list that can then be prioritized so that the first dollar available can be applied to the most important things. And then number eight, course correct going forward. You know, I could also add another option, and that's there's a little bit of a balance that we have to do between current year operations and taking care of our infrastructure. So there's, to some degree, that's another lever that can be pushed, making shifts between taking care of capital projects or current year operations. But number seven, managing the wait list. Right now, REIT is down. Real estate excise tax has been disappointing us for three years. I think it's critically important to make sure that we have a wait list for that. But then that's true for the whole city because we also expect sales tax to be cyclical. So the budget as proposed is in balance. And as you consider any changes or proposals, these eight things are the actions I would kind of always come back to. the next week on monday we have department presentations on monday and on thursday fedrack is also on tuesday so it's going to be a full week of finance you can look forward to it i don't expect many many many surprises to come out of fedrack we will give you another month's another incremental update on every revenue and you'll look at our spending so we may have you know some slightly new information but but really Absolutely nothing has come along since we, and this budget, we've been working on it for months, and we did incorporate the most recent information that we had. The study sessions, we've got today finances largely on revenue and an overview of the budget, and then the mayor will speak to us, give us the executive summary later. Monday, we will be hearing from municipal court, police, and public works. Thursday, we'll be hearing from parks and our city administrator. And then there are two further study sessions at 5 o'clock on October 6th and October 20th, should you need them. That's everything I've got. Thank you. Enjoy reading the book.

All right. Council, any questions at this stage? Okay. All right. Thank you very much, Steve. And I know there's many questions, but we're going to get into the details as we go forward. All right. Next, we've got executive session. This is under item 4B. Pursuant to collective bargaining, pursuant to RCW 4230-1404B, the duration will be approximately 15 minutes. We'll be in recess for that purpose.