-Today is Thursday, April 10th, 2025,
and this meeting of the Economic and Revenue Forecast Council
will come to order.
I'm Councilmember Dan Strauss,
the Chair of the Economic and Revenue Forecast Council.
I'm joined today with colleagues,
Council President Sara Nelson,
Seattle Mayor Bruce Harrell's Chief of Staff
and General Counsel Jeremy Racca,
and City Finance Director Jamie Carnell.
I'm also joined today from the Office of Economic and Revenue
Forecasts, as well as representatives
from the City Budget Office,
as well as City Council Central staff.
A couple of substantive items today
will be to act on the selection of a Chair and Vice-Chair
for the Forecast Council for 2025.
The Council President is now independent.
Presentation and review of the Economic and Revenue Forecasts.
And I will move to have the formal approval
of the 2025 work program for the Office of Economic and Revenue
Forecasts to our next meeting.
Before moving on to items,
I will formally adopt the agenda for today's meeting.
Is there any objection to the amended agenda
moving the approval of the 2025 work plan to the next meeting?
Seeing no objections, I move to adopt the amended agenda.
Is there a second?
-Second. -Thank you.
It has been moved and seconded to adopt the agenda,
today's agenda.
It is before the Forecast Council,
and this is an opportunity -- I guess we already amended it.
If there are no objections to today's agenda,
it will be adopted as amended.
Hearing no objections today, it is adopted as amended.
We'll move on to our next order.
This is to select a Chair and Vice-Chair
for the Forecast Council for 2025.
I served as Chair last year,
and Chief of Staff Racca served as Vice-Chair.
Per the ordinance that created the Forecast Council,
it allows us to elect
or re-elect someone from both of these positions.
At this point, I would entertain nominations from the floor.
We'll start with the Chair.
Are there any nominations for the Chair from the floor?
-Chair Strauss, I'd like to nominate you
to continue to be our Chair.
-Thank you. Do we have a second?
-Second.
-Thank you. It has been moved and seconded.
Are there any comments before I call the vote?
Seeing none,
I'll now call the vote on the role
of accommodating Council Member Strauss, myself,
to serve as the Chair.
I will ask who is calling the vote.
Myself? I guess so.
We'll start with Council President Nelson.
-Aye.
-Chief of Staff Racca. Chair Carnell?
-Aye.
-Council Member Strauss votes yes.
So we have now elected the Chair.
With that, I will move on to electing the Vice-Chair.
With that, are there any nominations from the floor?
I will nominate Jeremy Racca for the role
of Vice-Chair of the Forecast Council.
Is there a second?
-Second. -Thank you.
It has been moved and seconded to elect Jeremy Racca
as the Vice-Chair of the Forecast Council.
Any comments before we take the vote?
I will go in the opposite order as last time,
so calling on myself, Council Member Strauss votes yes.
We'll go with Council President Sara Nelson.
-Aye.
-Director Carnell.
-Aye.
-Jeremy Racca. -Aye.
-At the unanimous vote, congratulations, Jeremy.
You are elected as our Vice-Chair.
We'll now move on to the second item,
which is actually the approval of the meeting minutes
from October 22nd, 2024.
A copy of the minutes from that meeting on the Forecast Council
has been circulated to the members on the website
of the Forecast Council.
I would move and seek a second for approval.
So I move for the approval of the minutes from October 22nd.
Is there a second?
-Second. -Thank you.
It has been moved and seconded to approve the minutes
from October 22nd, 2024.
If there are no objections, the minutes will be approved.
Hearing no objections, the minutes are approved.
I'll move on to the agenda presentation of the April 2025
Economic and Revenue Forecasts recommendation
from the Office of Economic and Revenue
Forecasts regarding the 2025 and 2026 forecasts.
This is a presentation of the Economic and Revenue
Forecasts led by the staff of the Forecast Office,
the April forecast.
This is the first of three revenue forecasts
that we will be reviewing this year.
We return to the August and October
forecasts received as revised forecasts.
The April forecast provides an opportunity
to check in regarding revenue assumptions
that underlie the 2025 and 2026 biannual budget
that was adopted and endorsed by the City Council last year.
An updated revenue forecast takes into account
the 2024 year-end actual revenues,
current economic conditions,
and the changes in the economic outlook since this last year.
The August revenue forecast will provide the basis
for any changes that the mayor will propose during the 2025
and 2026 biannual budget.
The October forecast will be the final update.
It will form the foundation for Council's final actions,
potentially amending the 2025 budget
and adopting the 2026 budget.
Today's presentation will be led by the staff from the City's
Independent Office of Economic and Revenue Forecasts.
Just as a reminder,
the Office was established in 2021
in a model based on similar independent forecasting offices
in King County, Washington State.
The main purpose is to increase transparency and accountability
around the city's revenue forecasting process
and to ensure that there is no political influence
on the forecasts themselves,
to ensure that the Forecast Council is fully informed
and able to have a full range of functions addressed.
Staff from the City Council's
Central Staff and City Budget IC Director Peter Kieran-Kent,
will also participate in the briefing.
Staff from the City Budget Office
is also here to present briefings regarding revenues
still in the purview of the Budget Office as well.
The Forecast Office will present three economic
and revenue scenarios -- fine, pessimistic and optimistic.
The Office will then provide recommendation of which
of these scenarios should become the formal forecast.
We will have the opportunity to discuss the recommendation,
whether to confirm the recommendation
or consider a different forecast scenario.
And before I turn this over to the Office,
I want to share that what we all
know is that the geopolitical economic situation has been
in flux quite a bit in the last 7 to 14 days.
Just understanding that it is different.
For those of us who celebrate Passover,
why is today different than all other days?
Today is different
because of the economic fluctuations
of the past 14 days.
I will also share that because the team presenting here today
will be in the Finance Committee next Wednesday,
I will ask for us to keep the conversation short
so that we can dive into a deeper conversation
with more of our colleagues for the next week.
With that, I'm going to turn it over to Jan.
Jan? -Thank you very much.
Good morning to our guest council members.
This is the outline for the presentation today.
I will spend some time summarizing the recent
economic developments for the U.S.
economy as a whole.
Then we will move on to talk about the national forecast,
which is one of the main inputs
that we are developing in the regional economic forecast.
If you look at that,
it will summarize the performance
of the Seattle economy in 2024.
Again, that is a starting point for
where we might be heading this year and the next one.
Then in the second part, we will move on to the revenue forecast.
Before that,
we will again look quickly at the 2024 revenue actuals,
summarize where we ended up,
and then talk about the forecast itself.
There is quite a lot of information here.
Because we are incorporating those year-end actual revenues,
we have presentations on ones there,
usually ones where there is much more --
-My apologies, Jan.
I'm going to have to interrupt you.
If you could bring the microphone closer to you,
I'm having reports that it's hard to hear you.
I'm hearing you fine.
-All right. Is this any better?
-Right. Yeah.
-I can move a little bit closer and speak up.
Let's look at the recent economic development.
There is a lot of talk about tariffs.
Essentially, everything is driven
by what's happening with tariffs.
The chart here summarizes the tariff announcements.
The chart here
summarizes what the economists call the effective tariff rate,
which is a single measure
to gauge how large those tariffs are.
They are essentially taking all the tariffs
that are raised and dividing them by the value of imports.
It gives a measure of how big of a tax
is imposed on these imports.
There has been a lot of development.
It happened quite fast over a couple of weeks
and a couple of days, eventually.
The green line summarizes what
the effective tariff rate would be
if the tariffs were in place the way
they were announced on April 2nd
and there were no further changes beyond that.
The tariff rate spiked before this year.
The tariff rate was somewhere around 3%.
That spike goes all the way to 23%.
That's a substantial increase in the amount of tariffs imposed.
We would have to go back 100 years to see what's there.
What's more important for the forecast itself,
these announcements were made
after the March forecast for the U.S.
economy was finalized by S&P Global.
That's the forecast
that we are using as a starting point to develop
our original economic forecast
and to develop a revenue forecast.
And so that gap between what the economists believed
the tariffs would look like back in March
and what the actual announcement was is shown
when we are comparing the purple line,
that's the March baseline,
essentially the assumptions about the tariffs,
that it will go somewhere at 10%,
stay there for a little bit.
But as you can see,
the purple line is coming down
as the negotiations were expected to take place
and the imposed tariffs would be scaled back.
The gap between the purple line and the green line,
that's 10% plus,
a substantial change between what were the beliefs in March
and what the April announcements were.
There have been some developments since then.
Some of those tariffs are now imposed,
but the tariffs on China
were increased beyond those April 2nd announcements.
It's really a huge increase.
It has been summarized by Oxford Economics
as dialing it up to 11.
Oxford Economics is the source of this chart.
We are supplementing our S&P Global forecast
with additional data from other sources
when they provide additional information.
This is one particular example
where this chart really nicely summarizes
the recent developments and how much they matter.
They do matter a lot.
There is really a lot of uncertainty
regarding the trade policy.
The top panel in the chart
labeled Economic Policy Uncertainty Index is
a single measure that tries to summarize
how much uncertainty there is regarding economic policy.
You can see it spiked quite significantly
over a recent couple of weeks,
and similar sort of spike that we have seen in early 2020
and the onset of pandemic
where there was a lot of uncertainty
regarding what the fiscal policy restrictions might look like.
These are really very uncertain times.
The uncertainty leads to all sorts of important impacts
on the global economy.
The impact on output prices and employment
will not be negligible.
The problem is that it is really hard to assess just
how much the tariffs will cost the economy,
how much prices might go up. The announcements change a lot.
It is hard to figure out where we are
and where we might be going
and what the timing might be about those changes.
The financial markets have been quite volatile
at the bottom part.
It is an index that summarizes
how much volatility there is in financial markets.
The main takeaway here is that there is again a spike
that is maybe not as big as the early 2020s
or as big as the spike during the Great Recession.
It is a significant increase in volatility.
The fast forward is rather unclear.
A lot is happening.
The financial markets are just trying to get a sense
of what the long-term implications might be.
Yesterday, the markets recovered some of the losses.
The trend point is showing what the closing position
of the S&P 500 index was yesterday.
It is above the bottom of the dip shown by the black line.
But today, the losses continue.
The S&P 500 is down around 4% or 5% again.
The sell-off continues.
Uncertainty and volatility is expected to linger.
There is a potential to pause.
It is hard to tell where things might be heading.
There are direct implications for the barrel
expense tax revenue as we will see when we get to the forecast.
But there are really considerable wealth effects.
They are not negligible
because a larger population is considering the impact
of their pensions,
their savings, and their ability to spend.
And so they are going to be hesitant
to make any big purchases.
It will be all delayed until there is more clarity on
where we might be heading.
The same sort of thing with businesses.
Making any sort of investment or hiring
decision is really hard
because it is really hard to tell what
the economy would look like,
what the start would look like, and any of these.
With that, I want to move now to the forecast.
Again, the point here is that what we are going to show
is what the forecast looked like based
on the assumption back in March.
There is going to be a baseline scenario
and a pessimistic scenario.
Both had some underlying assumptions
about what the tariffs are
and what the fast forward might look like.
These charts here show the October 2024 baseline.
That was the forecast
that is underlying the adopted 2025 budget.
The economy was in very solid conditions.
It was expected to slow down.
As you can see in the panel on the right side,
the employment growth was expected to come down gradually.
It is showing a percentage change
in the employment year over year.
While it was around 2%,
slightly below 2% at the beginning of 2024,
it was expected to be gradually coming down
as those high interest rates were still in place.
But the GDP growth was expected
to be quite remarkable given the extensive
and ongoing monetary restrictionary policy.
Moving on to March and looking at the March baseline scenario,
very similar, slight small changes, but same sort of story.
Solid growth expected for this year and the next one.
A little bit of a slowdown
compared to the growth in previous years.
A little bit more of a slowdown in employment,
but nothing really dramatic.
That scenario again assumes some amount
of tariffs imposed on the trading partners.
The pessimistic scenario
that the S&P Global developed in March
was a slightly weaker outlook.
You can see that the employment actually declined year over year
slightly, about 0.5% decline in U.S.
employment year over year in 2026 and 2027.
Nothing really dramatic and really nothing
that would be called a recession.
The panel on the left, the black line,
shows that the real GDP,
even in a pessimistic March scenario developed
by S&P Global, was expected to be somewhere around 1%.
No recession in a traditional sense of output declining
for two consecutive quarters.
It's something that the economists refer to
as growth recession,
when the growth of GDP slows down,
but real GDP does not decline.
What distinguishes these two scenarios
is that the pessimistic scenario assumes higher tariffs
and assumes a bigger response by the affected countries.
That would lead to higher inflation and slow growth.
Here's the chart that summarizes the impact on the prices.
A lot of uncertainty
regarding what the Fed might do given the tariffs.
They are putting the Fed in a very difficult position because,
on the one hand,
they would want to lower the interest rate
to help the economy and avoid larger job losses.
On the other hand, tariffs might cause the inflation to go up.
If the inflation expectations become anchored
and long-term inflation expectations start to rise,
that would make it hard
for the Fed to bring the inflation back down.
The assumption back in March was that,
given the tariffs are now part of the policy
of this administration,
the Fed will have to keep the interest rate higher
for a longer period of time.
In the panel on the right,
those two lines show the anticipated paths
for the federal funds interest rate in October
and then the paths of the interest rate
under the assumption of some tariffs imposed.
Again, kind of like what that purple line was showing
in the chart of the effective tariff rate.
Again, the Fed is expected to keep the interest rate higher
to prevent the inflation expectations
from becoming anchored.
The inflation would spike, but not that dramatically.
Eventually, it would go back to the 2% target.
In a pessimistic scenario, again, higher tariffs,
bigger response of trading partners.
All that implies
that the interest rate would have to stay higher
for a longer period of time
to prevent inflation from becoming unanchored.
The inflation still rises, peaks somewhere around 4%,
but the interest rate eventually helps to bring it back down
as the long-term inflation expectations are not met.
It's kind of a one-time event.
If tariffs were imposed immediately as a single event,
that would work perfectly fine. Not to worry about it too much,
but given the amount of uncertainty,
given that the timeline is very uncertain,
and potentially adding additional tariffs
over a longer time,
the Fed is more likely to be in this wait-and-see position.
Get a sense of how big of an impact
these tariffs have on prices,
how much of an impact there is going to be on employment
when it will be time to start cutting the interest rate.
The main takeaway here is that given
that the two scenarios were developed back in
the middle of March,
and given the underlying assumptions about tariffs,
even though this baseline scenario was supposed
to be the more likely one,
the current policies in place
and the likely response are more in line
with the pessimistic scenario outcome.
So higher tariffs,
higher inflation as a result of the Fed waiting
and keeping interest rates higher for a longer period
of time, potentially happening more aggressively
than the pessimistic scenario forecasts show,
so potentially there might be some larger cuts
at the end of the year,
but definitely interest rates higher
for a longer period of time.
So what does that mean for the Seattle area economy
and the regional forecast?
We're going to look at that in a second.
To get a better understanding of where we are,
here is a quick summary of what 2024 year looked like overall,
and how it compared to our expectations.
Looking at the third set of bars,
the ones labeled Employment,
they show that the employment grew about 0.8% year-over-year
in the last year, slightly above our expectations from October,
0.1 percentage point above what our forecast was back
in October,
and 0.2 percentage points above our expectations
back when the 2024 adoptive budget was developed.
So roughly in line with our expectations,
notably weaker as in the national economy,
as I will talk about more in the next slide.
When it comes to regional inflation,
it was above national level.
It cooled down faster than the national inflation did.
In general, again, quite close to what we were expecting,
3.7% actual inflation compared to 3.6% forecast
from October last year, 3.8% forecast from October 2023.
Now, one thing
where our forecast was further away from the actual figures
is the taxable sales.
In 2024, taxable sales did not really grow.
They remained pretty much flat, 0.1%, so rather flat.
The spending in the city was weaker than
in the national economy, so the increase in retail sales
that we saw in the national economy
did not really translate to similar sort of increases
in the city of Seattle.
An additional and really big part of what happened
is the decline in the construction sector.
We have already talked about it a couple of times.
Construction sector is in downturn.
It declined 7.1% year over year in 2024,
so that's weighing down considerably
on sales tax collection.
Construction sector is around 22%.
That's slightly down from 25%,
so roughly a quarter, a couple of years ago.
Right now, about 22% of overall taxable sales.
A considerable part of sales tax
is dependent on the construction sector.
Then the last two, very last two bars on the personal income,
the actual is missing there.
It's not a mistake.
We are only going to get personal income for 2024
in November this year,
so there is significant lag between when we're seeing it
and working on these forecasts.
What we do know is that the personal income
in Washington state grew about 5.6%,
so very similar to what our forecast is for Seattle area.
In the past, Seattle area, let's say 10 years before pandemic,
did tend to grow higher than the Washington state.
Recently, we have seen a bit of a lag.
Seattle area was lagging in terms of employment growth,
for example,
but we are expecting to see personal incomes pretty close
to what our forecast is
when we eventually see those numbers in November.
A little bit more on job growth.
Since we don't have income data,
we are relying on the employment data
to get a better understanding of where the regional economy is
and where it might be heading.
As I mentioned when I was talking about those actuals
versus forecasts for employment growth on the previous slide,
Seattle area employment grew at a lower rate
than the national economy.
0.8% growth in Seattle area
compared to 1.3% growth at the national level.
That's the red bar versus the blue bar for total employment.
Here is how the different industries contributed
or weighed down on the overall growth.
Construction sector, again, is in downturn.
It declined considerably. In addition to that,
the information sector is still recovering from those layoffs.
Those two combined took a good chunk out of the growth
that we have seen in education, health services,
and government sectors.
Overall, the starting position is weaker
for the regional employment forecast.
Very modest growth in 2024.
It was expected to continue in 2025 and in 2026.
That line labeled October 2024 Baseline Scenario is,
again, what's underlying the adopted 2025 forecast.
Very similar to what the baseline scenario
currently suggests for the employment growth.
Slightly weaker growth still for 2026.
It's a little bit harder to see given the scale.
If you focus on the part that starts from 2026 Q1,
the March 2025 baseline scenario is below the October 2024
baseline scenario,
essentially showing the impact of those tariffs
and how they weigh down on the employment growth.
Similar sort of story as for the national economy.
Some of them, slow economic growth.
No recession in the baseline scenario,
but lower employment growth.
The recession scenario, the scenario of a recession,
was the one that the S&P Global considered back in October.
The brown line labeled October 2024
Pessimistic shows what that sort of recession assumption
back from October would imply
for the employment declines here in the Seattle area.
It wouldn't be a deep recession like a great recession
or a pandemic recession,
but the number of jobs would decline by about 4.3%
between the peak and summer of 2026.
Again, that was the assumption back in October.
In October,
we made the recommendation to adopt the baseline scenario
because given everything that was going on,
we did not really expect a recession to be on the books
for the next year, this year or the next one.
The economies in general entering 2024
were putting roughly 15-20% probability
on a recession happening,
which is very low in historical standards.
The economy was in a very solid position.
There were some concerns about tariffs,
but they were really not on anybody's radar at that time.
Moving forward to the current pessimistic scenario,
the last brown line shows what the S&P Global's
pessimistic scenario would imply for the regional employment.
Again, what we are doing,
we are taking the scenarios developed by the S&P Global,
using them as an input in our forecasting models
to develop those regional economic forecasts
for employment,
taking into account all the other things
that we have that inform the forecast,
let's say, permits issued by SBCI
that inform where the construction sector
in the local economy might be heading.
So the March pessimistic scenario,
again, implies some job losses,
about 1% year-over-year decline at the beginning of 2027.
So that's something that, in some sense,
would resemble a mild recession, again,
not a particularly deep one,
but it would not be a recession in a traditional sense,
in the sense of national economies, output,
real GDP declining.
Again, because that's not the pessimistic scenario.
The March pessimistic scenario assumption is
just a post-recession,
not a traditional recession or GDP decline.
Nevertheless, it would mean about 1.5% total decline
from peak to slope between the second half of 2025
and the summer of 2027.
So those are the economic forecasts.
Now, moving to the revenues.
Again, looking first at the revenue actuals
to get a sense of
where we are starting at the beginning of this year.
A little bit of information of
how the revenue is coming in throughout the year.
We are in April.
Typically, in April, we don't really know anything other
than some information on REIT.
We don't have any sense of
where the current year actual revenues are heading.
For REIT, we have three months of tax collection.
So last year,
it was roughly 20% of the overall revenue for the year.
For other taxes,
the only thing that we do have is a sales tax for one month.
So less than one-twelfth of the overall collection
that we are going to see throughout the year.
And then, usually, there is a little bit of property tax.
In general, for business and occupation
tax or payroll expense tax,
there isn't anything that companies would pay
at this point for the current year obligations
because the due dates are a little bit later this year.
So what the revenue forecast is informed by
is last year actuals and the economic outlook
that we went over.
This table summarizes.
It's a lot of information in one place.
It's the same sort of information
that we sent out as part of the 2024 year end revenue report.
It summarizes our forecast from October and the actual revenues.
It compares those two and shows
where the actuals came short of the forecast
and where they outperformed.
Overall, if you focus on the very bottom line,
it's labeled Total General Fund Without Grants and Transfers.
Taking out the grants and fund balance transfers,
the general fund came in 7.3 million above the expectation,
so around half a percent above the forecast.
The small variance, part of it,
2.3 million of that is higher
than expected sales tax revenues.
So there were some non-current payments that were higher
that pushed sales tax revenues above the forecast.
Overall, the variance is about 0.7% for sales tax.
For business and occupation tax, there was less revenue,
about 700,000 less than forecasted, which is 0.2%.
Those two combined came in about 1.5 million above the forecast,
which is around a quarter of a percent variance
from the forecast.
In general, in line with our expectations from October.
One particularly large number that jumps out here
are the grants, and David and Alex
can provide some information on that.
-Sure. So for grants,
the forecast in October
was inflated by what we call grant carry-forward.
Essentially, each grant was appropriated fully
at the beginning when the grant was accepted.
So this is just indicating that a lot of grants
are usually spent over multiple years
and have not yet been spent,
and so the revenue has also not been received.
This just means
that that amount is also going to continue
to be carried forward into the next year.
-Yeah, so that's the reason
why those two bottom lines are
where there is a big difference between them.
Taking into account the 45 million less in grants
means that the total general fund,
if we include the grants, would be again 38.8 million,
or 0.2% below the forecast. So carry forward,
and you will see how that affects the 2025 revenue
at the forecast in a second. Before moving to that,
let's look a little bit more closely
at those main economically driven revenues.
Again, what happened last year informs the forecast
and gives us a sense of where different industries,
different parts of the economy are.
So for business and occupation tax,
the base is really diversified.
Professional and business services are a larger share,
notably a larger share than the others,
but it's definitely more diversified
than the sales tax revenue, for example.
What we have seen in this year
is a decline in those professional and business
services, trade and information sectors.
So those where a large share of revenue is coming in,
they actually declined year over year.
There was an additional 11% decline
in the construction sector.
So overall, the performance was weaker than,
say, a year before that,
and definitely weaker than a long-run average
that we have seen in the last decade,
picking out the 2020 forecast,
which was affected by the pandemic.
So for trade, information sector,
and professional and business services sector,
they declined combined overall.
The tax obligation in these three sectors
declined by a combined 2.7% after growing 9.1% in 2023
and after growing on average
about 8% in the period 2010 through 2023.
That's somewhat concerning for the outlook as well.
For the sales tax,
the 2024 actuals, again, came in slightly above the expectations
because of some non-current payments.
What that implies for 2025 is --
it doesn't really imply that we are going to see,
that we should see a higher --
that did not compel us to revise the forecast much higher
than our expectations, which are, to a large extent,
formed by the outlook for the construction sector.
Again, it's about 25, 22% of revenues right now.
So roughly, trade accounts for a third of revenues.
Again, as you can see, it declined last year.
People are, again,
possibly quite hesitant to make large purchases.
Car sales are significantly down.
Tariffs might be, again,
something that might compel some of them
to make a purchase before those tariffs are in place.
But for the overall 2025 year, it's certainly not something
that would suggest a larger growth in this sector.
Overall, just like for business and occupation tax,
there is a large amount of taxpayers,
20,000 for business and occupation tax,
roughly 70,000 taxpayers for sales and use tax.
Relatively diversified revenue sources
and not particularly concentrated revenue sources.
Top 10 taxpayers,
they account for 20% of the business and occupation
overall revenues
and they account for about 11% of the sales tax revenues.
So that's quite different from the payroll expense tax.
One more thing, I guess,
that might provide some idea
of what the sales tax revenue are heading,
where they are heading, before we get to payroll expense tax.
This chart here shows the overall year-over-year
growth in sales tax revenues.
That's the black line.
Sales tax revenues have dropped considerably since 2022.
There were a lot of spending on goods.
The economy was recovering,
so we had hospitality revenues were up.
Construction sector,
there were still some projects in the pipeline
that were finishing up.
As they were getting to the completion,
you can see that the sales tax revenue started to decline
as the construction started to really weigh down
on the overall sales tax growth.
Starting from the second half of 2023,
sales tax revenue has been mostly declining year-over-year,
with some exceptions that happened in early 2024.
This November spike here,
I think it's partially due to some non-current payments,
partially due to eventual impact on the bearing zones
and the funneling of purchases.
For the single months that we had in 2025,
so the very last point on the black line,
sales tax obligations declined 5% year-over-year,
so 5% down in January 2025 relative to January 2024.
Again, a large part of that is the construction sector.
Those individual bars, they stack up to the total,
and they show which sectors are weighing down,
which are contributing to the growth.
The yellow bar is the construction sector as shown.
-Jan, I'm getting feedback again
that your audio is difficult to hear.
I can make out what you're saying,
but I think that's because you
and I had this discussion beforehand.
I'm going to ask you again
if you could bring the microphone closer to you.
I'll make an editorial comment here for the group.
I think that we need to, in working with the Vice-Chair,
to understand a better forum for these meetings.
I know that we moved the forum to the mayor's conference room
as an improvement over 370,
but I might recommend that we use council chambers,
which is already set up for Seattle Channel
and has individual microphones.
For the listening public right now,
also be aware
that we will be having this presentation again next week
in council chambers,
so if there's something that you're not hearing today,
you have another opportunity to receive this information.
And Jan, I will also request for the future meetings
that rather than having your bullet points show
up one by one,
that they just all appear at once or not at all.
I'll turn it back to you, and let's continue through.
Thank you. -Thank you.
The final of the three main tax is the payroll expense tax.
Here's what 2024 actuals look like, broken down by industry.
It's a quite different revenue source compared to the other two
that I talked about.
It's only paid by less than 500 companies,
and it's really highly concentrated.
The concentration has gone up in the last couple of years.
Right now, the top 100 companies, top 100 businesses,
account for 93% of the revenues.
About 75, so about three quarters, is just 10 companies.
Nine of those are in the tech sector.
One note here is that tech sector does not mean
the information industries.
The classification in this chart is based on the NAICS codes
and what people consider tech companies to be.
Our companies that would show up in trade,
for example, Amazon.com services,
they would show up in professional and business
services, that would be AWS.
So not necessarily companies in the information sector.
They are in those three sectors that we often talk about
and focus in this presentation.
The trade, the information,
and the professional and business sectors.
It's a highly concentrated score that's very hard to forecast.
This is where our forecast was quite off for last year.
Our baseline scenario forecast was 406 million.
The pessimistic scenario forecast
in October was 361 million.
The actual revenue for the year was 360 million.
That means about 46.7 million below
the baseline scenario forecast.
It's a 11.5% gap and about 1.2 million
or 0.3% less than the pessimistic scenario forecast.
The table at the bottom shows
how those forecast errors compare to the accuracy
of our forecast in the previous years.
In relative terms,
it's about the same magnitude of a forecast error.
We have seen 46 million more in the previous year
for 2023 actuals.
That was about 17.3% above the forecast.
The year before that,
the actual collection was 26 million below the forecast.
That's about a 9.5% gap.
The very first year was particularly imprecise.
We did not have a good source of information
to import the forecast.
Eventually, the collection was close to 300 million.
The forecast error was 100 million,
almost 100 million, so 47.7%.
In terms of the relative size of the error,
it's definitely much larger than the one for the sales tax,
for the business and occupation tax.
A little bit more information here
on what we believe the reason is
why the actuals underperformed the forecast.
We have talked in the past
about why we believe the stock prices are an important factor
and why payroll expense tax revenues are quite dependent
on the stock prices.
That was one of the main inputs in the forecast.
The chart here summarizes the expected stock price performance
for a couple of large tech companies.
The gray dots show the expected year-over-year
growth back from October.
The expectations for the year-over-year growth
as we were getting close to the end of the year.
The blue dots are the actual year-over-year growth in 2024.
In general,
stock prices grew in line with expectations outperformed
in most of the cases. That's, again,
something that is hard to put together
with our assumption about the role of the stock prices
for the payroll expense tax revenues.
In addition,
one has to take into account the fact
that the 360 million in payments
are not all payments for 2024 obligations.
There were some payments for the previous years
and only about 347 million are payments for 2024 obligations.
That means that the growth was actually even smaller
than the 14.2% of the total.
It was around 11.3%.
About 6.5% of that is essentially
because of higher tax rates that were in place starting in 2024.
Adjusting for those non-current obligations,
adjusting for the increase in the tax rate,
the growth of the obligation,
the growth of the tax base is only around 4.5%.
Again, very hard to square with the performance
of the stock market
and the performance of the stock prices for those main taxpayers.
In addition to that,
the 2024 stock price growth was even stronger
than the year before.
Looking at those same companies as in the previous chart,
but rather than looking at their growth of their stock prices
in 2024 and comparing it to the expected growth,
this chart now shows how the stock prices of those companies
evolved over time.
2024 was a particularly strong year for the stock market.
Meta, still Facebook in this chart,
the stock price for Meta grew close to 100%,
so almost doubled year over year.
For Amazon, the growth was 50%.
Again, given what we believe the role of restricted stock units
is, what the role of stock prices
is for the payroll expense tax revenues,
that is somewhat of a challenge with the actual revenues.
What we did, we looked at the new data
that we now have available.
We have entered into a sharing agreement
with the Employment Security Department,
which provides us with access to total payrolls and payrolls
by employee for companies in King County.
One thing we can do is we can look at companies
that are main taxpayers for payroll expense tax
and compare the growth
or the change in the payroll expense tax revenues paid
by the companies
with the wage growth of those companies in King County.
With some additional effort, in some cases,
we can look more closely at the change in the payrolls,
the total wages paid in the city of Seattle specifically.
This chart tries to do that sort of comparison.
Given that we have seen a strong growth in the stock prices,
and given our assumption about
how stock prices matter for wages,
we were trying to understand
whether the total wages in King County
grew with what those stock price movements would suggest.
That's what the blue line shows.
The blue line here shows the year-over-year change
in the total wages in King County,
only for the top 15 payroll expense tax payers.
We are trying to do adjustments here for different tax rates
in different years because highly compensated employees,
their compensations are subject to higher tax rates.
We are taking that into account and calculating again.
Year-over-year change in the wages in King County in 2024,
which came for those top 15 tax payers,
based on these estimates, somewhere close to 35%.
Again, also taking into account the 6.5% increase in the rates,
so let's say 30%, slightly below 30%.
That's significantly more than the growth of the tax base,
the growth of the PET, payroll expense tax revenue,
which again, looking only at the current 2024 obligation,
was 11%.
Adjusting for the fact that we received some payments for 2023,
some payments for 2022, that growth is only around 11%.
Wages did grow, again,
in line with that expectation that stock prices,
when they are growing fast,
the wages of the tax payers of those companies
are growing fast.
The thing that we are now trying to work on
is figuring out
why the Seattle tax base has been growing much weaker,
much, much slower than the companies' local wages.
So finally moving to the revenue for --
-If we could go back to that last slide just
before we move on,
I just want to confirm my understanding
that when you're running these numbers,
the 2024 actual versus forecast,
this was up until December 31st, 2024, is that correct?
-So what we have right now, and that's a good question,
what we have right now are
the data from the Employment Security Department
goes through the third quarter,
so we have the first three quarters of 2024.
What we did, we looked at how big of a share
the first three quarters historically are
in the overall annual compensations
and estimated the total of 2024 annuals,
so total compensation for the whole year.
We have a reasonable apples-to-apples comparison.
We are estimating the overall wages that were paid in 2024.
We'll only know that in a couple of weeks from now
when the fourth quarter data,
when we receive the fourth quarter data
from the Employment Security Department.
-Okay, thank you.
Just to clarify,
and maybe a yes-no answer is what I'm looking for here,
is that this information is not representing any data
from January 1st, 2025 through today, is that correct?
-No, this is really just information for 2024.
We will have the first quarter data on wages and employment
in summer,
before we work on the August forecast for the first quarter,
to have some sense of where the 2025 year is heading.
-Okay, thank you.
I just wanted to clarify that
because I know that even some of us here at the city
and the private employers changed their work
from office requirements in the first few weeks of January 2025,
and just confirming that this representation does not include
that data or information, is that correct?
-That's correct, yeah.
So in addition to the Employment Security data on total wages,
we are incorporating the estimates of some measures
of the return to the office.
We have data from Glacier AI,
which is a location analytics company
that provides aggregated anonymized data
on the workforce presence,
so we can keep track of what fraction of workers
are returning to the office and what trends there are.
And we have seen in the past upticks
when major employers changed their policy,
moved to three days in the office,
and we are starting to see that effect.
You mentioned the additional employees coming to the office
starting from January 2025
are showing up in that measure of workplace presence.
That's another input in addition to the stock prices
and in addition to the new PSD data.
So that's what will be incorporated
in the forecast in August.
-Thank you. Let's keep moving on.
I just wanted the record to reflect
that this does not include 2025 and beyond.
I will ask you again to get that microphone closer to you.
Thank you.
-So we are now finally moving to the April revenue forecast
for 2025 and 2026.
The table here summarizes the general fund revenues.
The first column are 2024 actuals that I went over.
The next two columns are showing the current forecast,
the April forecast.
So as you can see, again,
focusing on the very bottom line,
focusing on the total general fund revenues
excluding grants and transfers,
we are forecasting growth in total general fund revenues
of about 2% and growth of about 2.7% in 2025
and 2026 respectively.
So the baseline scenario assumes a modest amount of growth.
What's more important for budgeting purposes,
however, is that the forecast has been revised
down relative to the adopted budget forecast.
So those three additional columns in the table
that just showed up,
they show the difference for the two years,
the dollar amount difference,
and the total two-year difference
for individual revenue streams.
Overall reduction is about 9.5% without grants and transfers
for the two years,
and it's essentially coming up in the second year.
So the first year revenues are slightly higher,
3.8 million above the adopted budget forecast,
but the second year, 2026,
is about 3.3 million below the previous forecast.
It's a growth-based reduction essentially driven
by the slower economic growth
that is part of the original economic forecast.
So that's the reason why sales tax,
why business and occupation tax,
are down about 5 million,
4.5 million combined over the two years.
I want to note here
that the Forecast Office is responsible
for a relatively small number of revenues in this table,
those highlighted in blue.
The rest of the revenues,
the forecast for those
are overseen by the City Budget Office,
so Dave and Alex
can provide some additional information on the reasons
for the property tax, parking meters, and court fines.
-Great, thank you.
So for property tax,
about two-thirds of that is attributable
to lower AV assumption than prior for the adopted budget.
And a reminder that in 2026, well actually fall of 2025 here,
we'll be voting on the renewal of the medical and EMS levy,
and that will be coming in at proposed at a $0.25 rate,
and with AV dropping $0.25 times less AV gives you less revenue.
About a third of that though is the general expense levy,
and that is due to declining new construction assumptions.
Moving down, excuse me, not much to see in utilities.
Maybe a comment about parking, Joe?
-Sure, yeah, I can go that way.
Parking meters you can see are down with this forecast,
and that is mostly related to moderating of the rate increases
that happen quarterly around the city.
In fact,
the rate increases have been sort of neutralizing over time,
and this most recent one that took effect around March 10th
of this year actually saw an overall rate decrease
in the city of about 3.5%.
We had twice as many areas of the city saw decreases
as saw increases this time,
which suggests we may have plateaued in our demand
for parking in some of these areas.
And the outlook for future rate increases reflects this now.
Moving the microphones here. -Great.
A comment quickly about the licenses
permits interest income line.
That decrease in 2026 is entirely due to reduction
in our cash balances
in the cash pool attributable to the general fund,
and so we're maintaining relatively high
for us interest earnings at about 3.6%.
But our cash balances that contribute to the general fund
have decreased at the end of 2024 primarily.
And then we have service charges and reimbursements,
which we have a comment about. -Yeah,
so there was a notable reduction in the internal service rates
for SDHR last year.
That was not captured in last year's forecast,
so now it's reflected here.
-And this category, service charges and reimbursements,
is a lot about internal flows of money between departments,
between funds within the city
for allocated costs and so forth.
So that's what we have.
-And grants, this ties back to the 2024
what we saw shortfall in grant revenue.
So again, that's just appropriation
that has not been used for a lot of these grants
carrying forward again,
and we're still in a one-to-one relationship
between appropriation and revenue.
So the grants have not been cut down yet
when we look at revenue.
-So that was the baseline scenario.
Moving to the second one, the pessimistic scenario forecast.
Again, the first two columns summarize the 2024 actuals
and the April forecast.
Again, what we have here is not a decline
in revenues year-over-year in 2025 or 2026.
There is a modest growth in revenues
forecasted in the April forecast update.
Again, where the reductions are
and where we are seeing less revenue is
when we are comparing the April forecast
with the adopted budget forecast.
Now, those reductions,
those downward revisions are much larger than
in the baseline scenario.
Again, this is a scenario
where the S&P Global forecast is not a recession forecast.
It's just a slower economic growth,
higher impact of tariffs,
tariffs which have a larger impact on prices
that push the employment growth down.
And because of that,
because of timing when these changes will take place,
there is a significant reduction, especially in 2026.
So it's about 40 million overall reduction
in forecasted revenues driven to a large extent
by a downward revision in sales tax and business and occupation
tax, again, when it comes to revenues.
-Yeah, essentially the same story.
With gloomier outlooks and more uncertainty,
all boats are falling.
Nothing in particular in any given line item here
to explain it other than a more negative forecast
from the region and so forth.
-So that summarizes the pessimistic scenario
for general fund.
Moving on to the non-general fund revenue,
looking at the baseline scenario first.
Again, the payroll expense tax revenues came in
below the forecast at 360 million.
Between 2025 and 2026,
the current April baseline scenario forecast is
373 million and 391 million.
So that's a downward reduction of 67 million for the first year
and 75 million for the second year.
That's essentially basically taking into account
the lower base that we are starting from.
The ESD data that we are now incorporating into the forecast
is one part of the story.
The second part,
the second reason is the weaker outlook for the stock market.
S&P Global was expecting the S&P 500
index to grow about 5.5% back in October.
That has been revised down
in the March baseline scenario to 2.2%.
This baseline scenario is trying to take into account
the recent developments.
We were looking at the individual stock prices
of those main tax payers, what happened over the last week,
how it might affect the overall changes throughout the year,
what the outlook might be. That's another reason
why this particular revenue stream has been revised
down so significantly.
For admission tax revenues,
there was a little bit less revenue in 2024.
That's part of the story.
The other part is less tourism,
fewer people likely to visit Seattle.
Wealth affects people being less likely to spend on travel
because of concerns about where the economy might be heading.
For rate, the downward revision in 2026
is the result of higher interest rates
that will be in place for a longer period of time.
That limits the amount of sales
and decreases the amount of rate revenues collected.
Are there other revenues? What are you forecasting?
-Sure.
Sweetened beverage tax just generally reflects
2024 revenues came in below forecast.
Essentially, it reflects a downward revision,
but there are signs of wage effects,
inflationary effects which may have some impact
on consumption of sweetened beverages.
There's even an article in the New York Times
about people are bringing their lunch to work more
than buying out now.
So who knows?
But that's that.
Short-term rental tax is pretty small.
The vehicle licensing fee, again, a small change.
It's just an assumption about new car purchasing,
new registrations being added to existing.
Just a slight downward revision.
And then the commercial parking tax.
-Some of this reduction is due to a base effect.
There was less productivity in 2024 than expected.
And so that's cascading into 2025 and 2026.
The other piece is that growth rates across these two years
have declined just a little bit due to weakening tourism.
-Now finally, moving to non-general fund revenues
and pessimistic scenario outlook.
Similar story, similar reason,
just larger reductions because those effects of tariffs,
these economic slowdowns,
it's weighing down on those revenue streams even more.
For payroll expense tax in particular,
the assumption about where those stock prices might be heading,
the outlook is more conservative in the pessimistic scenario,
but again, informed and what we believe realistic,
even what we have seen in the last seven days,
and how much the uncertainty,
the future uncertainty might be still weighing
down on the stock market in general.
So to summarize the forecast
and move to the scenario recommendation,
the S&P Global's forecast
that served as the main input assigned 50% probability
to the baseline scenario
and only 25% probability to the pessimistic scenario forecast.
That was back in March,
back before all the announcements regarding tariffs
on April 2nd,
before the recent changes over the last couple of days,
where the outlook has really deteriorated quite fast
and quite dramatically.
There are certainly a lot of risks to the forecast,
regardless of which scenario is going to be approved.
The amount of uncertainty is really remarkable,
whether we are looking at the policies implemented
on the federal level,
state proposals regarding tax policies,
whether we are looking at the local changes.
We have a new tax that's in place starting this year.
All those are going to have impact
on the job growth in Seattle.
That's hard to quantify,
that's hard to assess,
and they are certainly not things
that would compel us to revise the forecast
or consider there to be a lot of upside risks.
Washington State and Seattle,
in addition, are quite dependent on trade and tourism.
The trade policies, the impact of all that's going on,
on the amount of travel from Canada,
the wealth effect for U.S. citizens,
how much they might be spending on travel
has to be taken into account.
High interest rates are going to be in place
for a longer period of time, and they will weigh
down on construction sector even further.
All those things essentially mean, taking them as a total,
what we see here are recent developments
that pose considerable risks to the forecast.
The current outlook
that's more in line with the pessimistic scenario
than the baseline scenario outlook.
And because of that,
the Forecast Office is recommending
to use the pessimistic scenario revenue forecast
for the April 2024 official forecast.
-Thank you, Director Duras.
Is there anything further in your presentation?
-I'm happy to take any questions
and provide additional insight.
-Okay, thank you.
We are going to open the floor for colleagues
that have any questions.
I will start with the Forecast Council members,
Director Carnell, Deputy Racca, Council President Nelson.
I see Council President Nelson's hand up.
We'll also remind colleagues
that we will have this presentation back
in the Finance Committee next week.
Council President, the floor is yours.
-Thank you very much for this very thorough presentation,
although it's disheartening.
I appreciate the work that went into it.
So just to repeat what I heard, based on your presentation,
I'm focusing on the payroll expense tax
because that's a big change in the forecast.
So PET, I'll say. Based on the presentation,
the main determinants of PET revenues
are stock prices for companies that are subject to the tax,
or the large payers at least,
the wages paid to impacted employees,
and the number of jobs in Seattle
that are subject to that tax.
And then the presentation also showed that in 2024,
wages and stock paid to employees,
those two factors, wages and stock prices, were up,
so that leads me to conclude, or is it reasonable to conclude
that it's the number of jobs in Seattle subject to the tax
that is driving the change in forecast?
And so, I ask that because even if, granted,
this forecast does not take into account return to work
from January on,
what matters is that they're returning to work in Seattle,
and we do have some leasing information
and other indications
that those jobs are going to other municipalities.
I'm thinking about, I was reading an Esquire article
about, you know, Meta's leasing activities in Seattle
versus the east side, et cetera.
So is that a general conclusion that is reasonable?
-So for 2024,
we do believe that the big part of
why we missed the forecast
is that we did not factor in completely the change
in the number of jobs located in Seattle.
You mentioned Meta.
Meta has not renewed some leases in South Lake Union
that moved thousands of employees
out of those buildings, and they are expanding the department.
-Yes.
-That's in addition to the 10,000 jobs
that have already been reported as lost in Seattle
in Amazon over the last couple of years
and the expansion of Amazon in Bellevue.
So that's a part of why the 2024 actuals are below our forecast.
That's our belief based on the overall data
and our sense of the data.
For 2025 and 2026, we are now starting with a lower base,
and that's a part of the story.
In addition to that, the output for stock prices is bigger.
So the reductions in the forecast
are not just taking into account the new source of data
that we have on employment,
what we have learned over the last year about the employment,
but also taking into account the downturn in stock prices,
and that's a significant part of the story.
-I'll ask a question if I may.
So do you track the number of jobs
in other municipalities in King County?
And this could maybe be an offline
or a next meeting question,
but at some point I'd be interested in knowing
between stock prices and number of jobs,
which is more determinative. -We do.
We have done some work with Sean
recently trying to get some publicly available data
in addition to Employment Security data.
So we are tracking the changes in the employment,
how Bellevue, Redmond,
and Seattle have come to our main taxpayers
over the last couple of years. So yeah.
-Okay, thank you. -Thank you, Council President.
Any further questions? Director Carnell?
Chief of Staff Racca?
Seeing none from the Forecast Council, I will also note,
and can you confirm with me, Jan,
I believe that the jumpstart tax has only been in effect
for four years, collected for three, is that correct?
-Yeah, it's been in place,
the first collection came in in 2022.
So for 2021 tax year, so we have four years of collection.
-Four years of collection,
and am I correct
that the most prudent analysis is a five-year
smoothing analysis to understand trends in taxation?
-That would be a reasonable approach
that would smooth out some of the changes
under normal circumstances.
Yes, you have to take into account
how standard those five years have been,
whether there have been any changes in the policies,
for example,
that would cause changes in the behavior.
It's really hard in the relatively short history
to use averages.
-Thank you.
I bring that up just to note that,
because this is still a new tax policy on the books,
that we won't have enough data
to even engage in a five-year smoothing analysis
to understand long-term trends.
With that, colleagues, I will move us on.
So within the ordinance here,
we do not need to vote on adopting the recommendation
from the Forecast Office. Yeah, thank you.
If somebody does have a proposal to not adopt the recommendation,
which is a pessimistic scenario, we will take a vote.
Generally and overall, I will say that this is not news,
but it could be much worse.
I think it is prudent for us to adopt this pessimistic scenario
because we do still have another new revenue forecast
before the final budget is created.
We have a revenue forecast
before the Mayor's Office creates their proposal
and then another revenue forecast
before the council finishes their work.
And so I think it is prudent
and in the best interest for the City of Seattle
and our residents
if we adopt the recommended pessimistic scenario.
Are there any comments, questions or concerns on that?
I'm seeing none,
so I will move to adopt the 2025 Forecast Office's work.
Sorry, I will move to adopt the pessimistic scenario
as recommended by the Forecast Office.
I was in the wrong place in my script.
I already moved on.
In terms of the forecast,
if we concur with the recommendation
of the forecast scenario and a formal vote is required,
although the original legislation was
to remove any risk of political influence,
the Forecast Office
and receiving recommendations from staff and experts
is the best way to achieve that aim.
With that,
are there any objections to receiving
and approving the recommended pessimistic scenario?
Not having heard any objections,
I'm going to direct the Forecast Office
to record our concurrence with the recommended forecast
in the meeting minutes.
With that, I believe that brings us to the end
of our amended agenda for today.
Colleagues, and for the general public,
understand we'll try to make improvements
on the meeting format here by moving the conference rooms.
And Vice Chair, I would like to work with you
before the next meeting
to work out the technological issues here.
-Absolutely.
I already looked at our wonderful folks
at the Department of IT
and see what would make a better use of their experience.
-Fantastic.
With that, colleagues, are there any questions,
comments, concerns for the general viewer?
Seeing and hearing none, we are adjourned.
We have reached the end of our formal agenda.
Before adjourning,
I want to remind everyone
that we will have two additional meetings this year,
one in August, one in October, to receive updated forecasts.
The next meeting will take place on Monday,
August 4th at 9:30 a.m.
If there are no further questions, we will be adjourned.
If there are no further questions, we are adjourned.
Thank you.