News

'Hard times' have city holding its breath

By ERICA JAHN

Staff writer

It’s not that city officials are terribly worried about finances this year. The city budget has already been approved and there’s grant money and a decent contingency fund set aside in case things get worse than they already are.

It’s just that the economic recession isn’t showing signs of turning around any time soon — soon being within the next couple of years — and it appears consumers are hunkering down and locking their wallets to wait out uncertain times.

Steadfast Properties’ purchase of SeaTac Mall for $37 million in February was a good boost for the city, thanks to the real estate excise tax. But other tax revenue collected by the city –– especially sales tax, which provides about 30 percent of the city’s operating budget –– hasn’t met 2003-04 estimates.

Finance director Iwen Wang said city officials are waiting to see what the economy does.

“We’re watching closely every month,” she said. “There’s not a lot of positive economic news in the area that we could expect. I’m not that concerned, but I’m starting to be.

“We don’t anticipate problems in 2003 because of the contingency fund, but the question is how long the economy will continue and the impacts of the war. It’s still real early in the year.”

Cities plan for hard times similarly to how households prepare — with sound investments and savings. Wang said when the city prepares a budget, officials look at two-year short-term services the city needs to provide, as well as long-term, four to six-year projections.

“We consider the chance of economic downturn and build in contingency funds to give us flexibility and to give us time to prepare for adjustments,” she said. “The most important thing is the contingency funding. In the 2003-04 budget, we anticipated a long recession. We increased our contingency fund for this cycle.”

Experts predict things eventually will get better across the region; it’s just a “matter of weathering the short-term,” Wang said.

The good news is the city has a substantial contingency fund of about $2 million, or 6 percent of the general fund, set aside.

“That will give us time to adjust,” Wang said. “It helps you fill in the need during those down times. It’s kind of like a savings plan an individual might have.”

Assistant city manager Derek Matheson said some have wondered why the city would pursue a big, expensive capital project, such as a new city hall, during a tough economy. But he added funding for construction projects comes from different revenue sources than funding for daily city operations.

State law governs how cities can use the funding collected from some taxes, such as the real estate excise tax, and ordinances restrict how other taxes or revenue sources can be used. Even if the city canceled funded capital projects, the money allocated toward them couldn’t just be transferred into the operating budget.

Capital funding comes from a variety of sources, including unspent general fund money, real estate excise tax revenue, utility taxes and county, state and federal grants.

For operating revenue, the city relies partially on consumer spending, which provides the sales tax revenue the city needs. Property and gambling taxes are the other “big two” operating budget sources, though the city has a variety of “other smaller sources,” Matheson said.

But as households cut expenses and, ultimately, people spend less, the city is left shorter than expected on operating revenue. If the shortfall continues, city officials eventually will have to decide which city services to cut.

“Our concern is how to suspend daily operations,” Wang said. “In a recession, government services are usually needed more. That will be the harder part –– determining where to trim.

“It’s difficult. I don’t know when it’s going to change. It’s hard times.”

Federal Way is “very vulnerable to consumers deciding that even though they still have their jobs, they’re not going to spend,” said Dick Conway, co-publisher of The Puget Sound Economic Forecaster.

He said it’s difficult to predict what will happen with the regional economy because it was rising on already shaky legs when the war in Iraq ushered in a whole new set of uncertainties.

“What we think and what happens are often different things,” Conway said. “The economy really, fundamentally, isn’t that strong, and war added uncertainty to everything. It tends to cause consumers to hold a little tighter to his or her wallet. People think twice about spending.”

That tendency to save rather than spend equates to tough times for jurisdictions that use sales tax revenue for operations.

Unfortunately, there’s no clear picture when people will feel comfortable spending again.

Conway said depressions in consumer sentiment have been reflected in the performance of the stock market. If not declining, Conway said, investment is definitely slowing down.

“We’ve seen consumer (spending) largely holding up the economy. If it wasn’t for consumers, the recession two years ago would have been a lot worse,” he said. “It could be now consumers are running out of steam or it could be uncertainty because of the war.”

Past wars have had mixed effects on the national economy. World War II buoyed it when people went to work to fill jobs left behind by troops. When soldiers returned, the national economy experienced a flood of families wanting homes, cars and consumer convenience goods. The economy grew, Conway said.

On the other hand, he said, the Vietnam War employed a lot of people, particularly in Washington, but war production mixed with an oil embargo led to stagflation. People and businesses, including Weyerhaeuser, struggled through the singular experience of a sluggish economy and high prices.

Conway said the latter is a potential outcome of the war in Iraq, particularly if the Fed spends out of its means and interest rates, which have hit historic lows, would rise “just at a time when the economy was trying to recover.”

Still, the economy wants to turn around and it was beginning to at the end of last year, Conway said.

“War aside –– and it remains to be seen what war will do to us –– it appears the economy was going to bottom out at the end of last year,” he said.

Bottoming out would have been followed by a slowly executed turn-around during the first quarter of this year and a gradual acceleration through the middle and end of 2003. War might slow this down, Conway said, but he still tentatively expects the economy to begin its gradual ascent this year.

Nancy Hohenstein, spokeswoman for the Multi-Service Center in Federal Way, said the number of new people seeking assistance has been declining since late last year. Then, the number of people seeking assistance at the food bank (“Our best barometer”) was climbing between 10 and 17 percent each quarter. Now, the number is down to about 3 percent each quarter.

Iit remains to be seen how the war and ensuing uncertainty will affect Federal Way, “which is in the middle of a very weak economy, anyway,” Conway said. “War makes the forecast cloudy.”

Staff writer Erica Jahn: 925-5565, ejahn@fedwaymirror.com

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