Trends in the economy are affecting tax revenues in Federal Way.

A close eye on the budget and a push for economic development could help the city avoid a dire situation.

“We are doing what people are doing in their personal lives, which is tightening our belt,” City Manager Neal Beets said.

In the past, Federal Way’s taxes have generally produced more than what was budgeted. The city predicted 2008’s sales tax revenue would show a loss. The city did not anticipate a 3.2 percent drop, finance director Tho Kraus said. Sales tax was short $400,000 more than expected, she said.

“This is the unforeseen,” Kraus said.

Real estate excise tax (REET) — a tax on the sale of real estate — and utility tax income are other areas of concern. The degree of decline could not have been predicted, Kraus said.

“It’s not unique to just the city of Federal Way,” she said.

The city, knowing the economy was rough, watched its spending this past year. Compared to what was allotted, a little more than $1 million was saved on expenditures, Beets said.

“There’s some good news there,” he said. “Even though revenues were down, expenditures were down by even more.”

That does not mean the city is completely safe.

Cuts may occur until revenue bounces back, Beets said. These cuts would need city council approval.

“We are re-evaluating all our programs and our projects,” he said.

Meanwhile, the push for economic development is also likely to increase. The more people choose to come to Federal Way to spend their money, the better off the city’s financial status will be.

“One of our goals has always been to help to build business and things that attract businesses,” Beets said.

A source of pride

The city introduced a balanced budget and boosted its rainy day fund during the 2009-2010 bienniel budget process. It added $2.1 million to the rainy day reserve. The stash is for emergency uses and thus far has not been needed. The city plans to keep it that way.

Volatile income stream

Federal Way, like other cities, relies heavily on a variety of taxes.

Property, sales, utility and real estate excise taxes help fuel the operating and capital budgets. The biennial budget banks on an incoming $60 million from ongoing taxes and fees in 2009, according to October 2008 biennial budget overview materials.

Twenty-four percent of this is estimated to come from utility taxes. Sales tax is expected to generate 21 percent of ongoing revenue, according to the documents. Property tax is hoped to generate 15 percent, according to the same materials.

But as the economy continues its downturn and last year’s numbers are finalized, the staff realizes these estimates need to be examined again.

Staying ahead

In an effort to remain ahead of the curve, the city council was briefed on the revenue sources.

An in-depth look at how to manage the dwindling funding is planned, finance director Tho Kraus said. The Finance, Economic Development and Regional Affairs committee is also monitoring city projects and the budget. Status reports on revenues and expenditures will be more frequent as a way to avoid future pitfalls. A March public study session on the budget is also planned.

“We gave the council this information, but we need to work on a plan with the council,” Kraus said. “The bottom line is we are looking at it.”

In comparison

In 2007, the city generated $116,553 more than expected in sales tax revenue, according to a December 2008 financial report. A total of $141,825 more than budgeted was brought in from 2007 property taxes, according to the same document. Nearly $1.4 million more than budgeted was generated through utility taxes, according to the documents.