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HomeMy WebLinkAboutCOW 2024-02-12 Item 4A - Update - Financial Sustainability CommitteeCOUNCIL AGENDA SYNOPSIS Initials Meeting Date Prepared by Mayor's review Council review 2/12/24 LH ITEM INFORMATION ITEM NO. 4.A. STAFF SPONSOR: VICKY CARLSEN ORIGINAL AGENDA DATE: 2/12/24 AGENDA ITEM TITLE Update on activities of the Financial Sustainability Committee CATEGORY ® Discussion Mtg Date 2/12/24 ❑ Motion Mtg Date ❑ Resolution Mtg Date ❑ Ordinance Mtg Date ❑ Bid Award Mtg Date ❑ Public Hearing Mtg Date ❑ Other Mtg Date SPONSOR ® Council ❑ Mayor ❑ Admin Svcs ❑ DCD Finance ❑ Fire ❑ P&R ❑ Police ❑ PW SPONSOR'S SUMMARY The City's consultant on the project will give an update on the activities and progress of the Committee. REVIEWED BY ❑ Trans&Infrastructure Svcs ❑ Community Svcs/Safety ❑ Finance & Governance ❑ Planning & Community Dev. ❑ LTAC DATE: ❑ Arts Comm. ❑ Parks Comm. ❑ Planning Comm. COMMITTEE CHAIR: RECOMMENDATIONS: SPONSOR/ADMIN. COMMITTEE COST IMPACT / FUND SOURCE EXPENDITURE REQUIRED AMOUNT BUDGETED APPROPRIATION REQUIRED Fund Source: Comments: MTG. DATE RECORD OF COUNCIL ACTION MTG. DATE ATTACHMENTS 2/12/24 Informational Memo PowerPoint 1 2 IILBERK MEMORANDUM DATE: February 6, 2024 TO: Tukwila City Council FROM: Brian Murphy and Katherine Goetz RE: Update on Financial Sustainability Planning Process Phone: (206) 324-8760 2200 Sixth Avenue, Suite 1000 Seattle, WA 98121 www.berkconsulting.com We will be providing an update on the Financial Sustainability Plan development process at the City Council meeting on February 1 2th. This memo provides a brief overview of the effort and an update on the work to date. Background The City of Tukwila is facing a challenge like many other cities in Washington: how to provide the level of programs, services, and infrastructure improvements desired by the community over the long-term in the face of budget constraints and the need to contain impacts to taxpayers and ratepayers. The City has recently taken steps to enhance its long-term financial sustainability. The Business & Occupation Tax, implemented in January 2024, broadens the taxpayer base, and provides additional funding to support police services. The annexation into the regional fire authority, to be implemented in January 2025, provides flexibility for future budgets. The development of a Financial Sustainability Plan continues this work and draws on input from the community. The graphic below includes these recently adopted strategies, as well as additional context and planning efforts that will influence the City's long-term financial sustainability. Community context COVID-19 Pandemic: declining 'Bridge Budget": use of Economic recovery and additional Community growth and revenues and reduced service levels one-time funds property tax capacity 2020-2022 City strategies Additional planning efforts 2023-2024 BUDGET 2025-2026 BUDGET service level adjustments FUTURE FORECAST Adoption of Business Annexation into Puget Sound Strategies for future financial & Occupation Tax Regional Fire Authority sustainability Economic Golf Course and Capital Improvement Comprehensive Plan Development Community Center Plan and Facility Periodic Update strategy business planning Condition Assessment 110 1 3 The key questions to be answered in this study include: • How can the City best use its limited financial resources to meet the priorities of the community? Is the City using the right tools to achieve long-term financial sustainability? • How should the City's programs and services be calibrated with the community members' desires and willingness to pay? • How can impacts to residents and businesses be most equitably balanced, including consideration of the range of household wealth and business size present in Tukwila? Financial Sustainability Committee The Financial Sustainability Committee, comprised of Tukwila residents and business representatives, is advising on the development of the Plan. The Committee has reviewed information about the makeup of the Tukwila community, the City's programs and services, and the City's primary revenue sources and expenditure categories. At this point, we are having discussions together to learn what programs and services the Committee members would prioritize, as well as what strategies they would suggest to maintain financial sustainabilty. The Financial Sustainability Committee has met three times, with a fourth meeting scheduled for February 7'". The content covered in each meeting is available online and described below: • Meeting 1: Project overview and Tukwila Community Profile (demographics, profile of businesses) • Meeting 2: Community vision and priorities, financial overview (revenue sources, expenditure categories, budget trends) • Meeting 3: Fiscal impacts of land use, City programs and services overview • Meeting 4: Financial plan overview, emerging themes from Committee input Committee Members • Arta Baharmast, General Manager, Westfield Southcenter • Phillip Combs, COO, Segale Properties • Jacob Halverson, Resident • Kathy Hougardy, Resident • Peggy McCarthy, Resident • Annie McGrath, CEO, Seattle Southside Chamber • Krysteena Mann, Resident • Karin Masters, Resident • Amber Meza, Resident • Abdiwali Mohamed, Owner, Abdiwali Mohamed CPA • Diane Myers, Resident • David Puki, Resident • Verna Seal, Resident • Greg Sherlock, Resident In meetings 5 and 6, scheduled for March and April, the discussion will focus on evaluating options and developing Committee recommendations. Options and recommendations will be evaluated against the following criteria, as directed by the City Council on October 2, 2023: • Equity • Cost • Magnitude and Growth • Stability • Sustainability 4 ..iII City of Tukwila I Financial Sustainabilty Planning: Council Briefing February 12, 2024 2 • Alignment with City Priorities • Feasibility • Impact to Other Services Analysis To inform the options that will be discussed with the Committee, BERK developed a Community Profile that highlights the demographic and economic makeup of Tukwila. We also presented summaries of historical revenue and expenditure data, historical data that indicates demand for programs and services, and the City's six -year financial plan. We collected information on several peer cities, to learn how the City's services and funding strategies compare to neighboring cities or cities of similar size. We interviewed the leadership of each City department to learn about departmental priorities, challenges, and opportunities. The highlights shared below were shared and discussed with the Committee. Community Profile Takeaways • Tukwila is a growing community, with more diversity and younger residents than King County. Tukwila School District has students that represent many cultures and speak more than 80 world languages. • Tukwila has a higher share of low-income households than King County, particularly among renters. • Tukwila residents identify as less healthy than residents in King County and Washington State. • Tukwila has a very high jobs to population ratio, with a strong commercial sector that includes retail sales and manufacturing. Employment growth in Tukwila has been slower than peer cities, but jobs are projected to grow over the next two decades. • Most businesses in Tukwila have 100 or fewer employees and most jobs are in the services, retail, and manufacturing sectors. Most workers in Tukwila commute from outside the City. The influx of workers and daytime visitors drives up the demand for public services. Financial Overview Highlights • The City collects different types of revenues from different groups. The City's largest revenue sources are taxes and fees. More than half of Tukwila's General Fund revenues are from property and sales taxes. With the Southcenter mall, a majority of Tukwila's taxable retail sales are attributed to consumer shopping. • Tukwila's total property tax rate is similar to peer cities in King County. Compared to peer cities, Tukwila has a lower business and occupation tax rate. • 67% of total property tax revenue comes from commercial property. One quarter of property tax revenue comes from residential property and eight percent comes from apartments and mobile homes. • As a service provider, the City spends the largest percentage of General Fund expenditures on salaries and benefits. Labor costs are driven by the regional employment market and City policies. • Total City staffing has decreased slightly since 2016, during which time the City's population has continued to grow. • Tukwila's largest General Fund expenditure is for Police services, which is similar to peer cities. • ill City of Tukwila I Financial Sustainabilty Planning: Council Briefing February 12, 2024 3 5 ■ Increased service needs and the growing cost of providing existing services will impact the City's financial forecast. Programs and Services Overview Highlights ■ The City provides many services. Some services are required by federal, state, or local statute, and some are discretionary. ■ Service levels were reduced during the pandemic and not all services have been restored to pre - pandemic levels. ■ The demographic makeup of the Tukwila community necessitates a high level of service. ■ Population and employment growth drive staff workload and will increase demands on the City's infrastructure. ■ The cost of providing existing services is increasing due to factors such as inflation, minimum wage requirements, and technology and training needs. Next Steps Using the input from the Committee, we will develop a financial forecast that incorporates their priorities and present potential options to ensure revenues and expenditures will be aligned in the future. Options will include both revenue and expenditure strategies. The Committee will discuss these ideas in meetings 5 and 6. We anticipate presenting a final report to the City Council in April. The report will summarize the materials the Committee has received and present the Committee's recommendations for future City budgeting and financial management. 6 ' 111 City of Tukwila I Financial Sustainabilty Planning: Council Briefing February 12, 2024 4 CITY OF TUKWILA FINANCIAL SUSTAINABILITY PLAN COUNCIL BRIEFING FEBRUARY 12, 2024 00 INTRODUCTIONS Brian Murphy Project Manager Katherine Goetz Financial Sustainability Plan Lead with FCS GROUP lead for Utility Rate Study. MEETING AGENDA • Project Overview ■ Project Purpose • Financial Sustainabilty Committee Charge ■ Guidance from Council • Status Update • Content Shared with the Committee ■ Input from the Committee • Next Steps • Discussion CD PROJECT OVERVIEW PROJECT PURPOSE Key questions to be answered include: • How can the City best use its limited financial resources to meet the priorities of the community? Is the City using the right tools to achieve long-term financial sustainability? ■ How should the City's programs and services be calibrated with the community members' desires and willingness to pay? ■ How can impacts to residents and businesses be most equitably balanced, including consideration of the range of household wealth and business size present in Tukwila? The City is implementing two interrelated planning processes to answer these questions and establish the City's long-range financial strategy: a Financial Sustainability Plan and a Utility Rate Study. 5 PROJECT PURPOSE Community context COVID-19 Pandemic: declining "Bridge Budget": use of revenues and reduced service levels one-time funds Economic recovery and additional Community growth and property tax capacity service level adjustments I 2020-2022 2023-2024 BUDGET 2025-2026 BUDGET FUTURE FORECAST City strategies Additional planning efforts 11[ Adoption of Business Annexation into Puget Sound Strategies for future financial & Occupation Tax Regional Fire Authority sustainability Economic Golf Course and Capital Improvement Development Community Center Plan and Facility strategy business planning Condition Assessment Comprehensive Plan Periodic Update FINANCIAL SUSTAINABILITY COMMITTEE CHARGE • Representatives of Tukwila's residential and business communities. • Input of the Committee is intended to advise the consulting team and City Council. Members of the Financial Sustainability Committee will: • Review information about the City's financial condition and factors that will impact future revenues and expenditures. • Review options for enhancing the City's financial sustainability. • Prepare recommendations for the Mayor and City Council. Financial Sustainability Committee Members • Arta Baharmast, General Manager, Westfield Southcenter • Phillip Combs, COO, Segale Properties • Jacob Halverson, Resident • Kathy Hougardy, Resident • Peggy McCarthy, Resident • Annie McGrath, CEO, Seattle Southside Chamber • Krysteena Mann, Resident • Karin Masters, Resident • Amber Meza, Resident • Abdiwali Mohamed, Owner, Abdiwali Mohamed CPA • Diane Myers, Resident • David Puki, Resident • Verna Seal, Resident • Greg Sherlock, Resident DIRECTION FROM CITY COUNCIL Process Guidance Evaluative Criteria The process for developing the Financial Ensure that final recommendations balance the Sustainability Plan must be: City's financial sustainability, the provision of City services that meet community expectations, and • Inclusive. equity in costs and services. • Open, Accessible, and Fair. Options and strategies should be evaluated against at • Tukwila -specific. least the following criteria: • Analytically -based. ■ Equity. • Sustainability. • Transparent. • Cost. • Alignment with ▪ Magnitude Priorities. and Growth. • Feasibility. ■ Stability. • Impact to Other :111 Services. 8 STATUS UPDATE COMMITTEE MEETING SCHEDULE ■ Meeting 1: Project overview and Tukwila community profile (November) ■ Meeting 2: Community vision and priorities, financial overview (December) Meeting 3: Fiscal impacts of land use, City programs and services overview (January) Meeting 4: Financial plan overview, emerging themes from Committee input (February) 4 Update to City Council (February) Meeting 5: Options discussion (March) Meeting 6: Recommendations discussion (April) 4 Final delivery of recommendations to City Council (April) 10 PROJECT ARC Meeting 1 Meeting 2 Meeting 3 Meeting 4 Meeting 5 Meeting 6 Community Context Who lives here? What kind of businesses? What is the composition of the Tukwila economy? Community Values and Priorities Revenue Mix General Spending 1 What does the community desire? What are the City's biggest costs? How do City revenue tools compare to others? City Programs and Services Gather Potential Principles and Recommendations in meetings 1-4 Identify themes and preferred strategies What are the City's greatest needs? How might efficiencies be gained? What programs and services best align with community priorities? Financial forecast Full Set of Recommendations How can we best balance the City's financial sustainability, the provision of City services that meet community expectations, and equity in costs and services? CITY FINANCES AND SERVICES Revenues Expenses City revenues are (mostly) paid for by residents and businesses through taxes, fees, and rates. Considerations • Revenue tools in use. • Rate compared to neighbors and peers. • Distribution of burden between residents and businesses. • Nexus between payment and benefit. City expenses are directly or indirectly incurred in delivering services to residents and businesses. Some services help residents and businesses do well, supporting their ability to contribute to City revenues. Considerations • Service mix and levels of service. • Inflation (labor and capital). • Capital needs. Financial Sustainability A city can't run a deficit. One-time funds and levels of service adjustments are used to match revenues. There is almost always a gap in actual and desired services. This gap is not visible in the City's forecast. Considerations • Unmet operating needs and capital investments. • Impacts of population growth and inflation. A city's fiscal sustainability depends on its land uses. The mix of commercial and residential property has an impact on both City revenues and City costs. It drives the revenue the City collects and demand for City services. Revenue and service mix that is sustainable and equitable. 12 INFORMATION SHARED WITH THE COMMITTEE ■ Community Profile - demographics, profile of businesses ■ Community vision and priorities, financial overview (revenue sources, expenditure categories, budget trends) • Fiscal impacts of land use, City programs and services, departmental priorities and challenges ■ Financial plan overview, general cost and revenue options that can impact the forecast 13 EMERGENT THEMES FROM COMMITTEE DISCUSSIONS Not Draft Recommendations • Explore cost-efficient options for gathering statistically valid community input Evaluate investments for community return on investment Consider creative staffing and service delivery approaches • Manage costs to achieve the greatest value and live within our means • Encourage business growth and a range • of housing as investments with future returns Add capacity to pursue grants in high value areas Use performance audits and continuous improvement to achieve efficiency and effectiveness Prioritize public safety (which needs to be defined) and maintaining City infrastructure • Maintain quality staff while • calibrating personnel costs Invest in financial management Improve the City's approach to asset management Keep context in mind: the unique needs of the Tukwila community • 14 REPORT OUTLINE • Introduction and Background ❑ Project purpose and current context in Tukwila that is impacting long-term financial sustainability • About the Financial Sustainability Committee ❑ Committee charge and formation; summary of meeting schedule, materials, and discussion topics • The City's Financial Condition ❑ General fund financial forecast and major drivers; programs and services; capital needs; short- and long-term financial challenges, with benchmarking • Options ❑ Summary of options and evaluation • Recommendations and Next Steps ❑ Short- and long-term strategies for Council consideration, including both revenue- and cost -side strategies; description of how the Plan will be used in the future • Appendices: Community Profile, Peer Benchmarking, and others TBD 15 NEXT STEPS ■ Committee Meeting 5: Options Discussion (March) • Update on the Utility Rate Study from consultants from FCS GROUP • Impact of Committee input on six -year financial forecast • Evaluation of options: how cost savings and revenue generating options compare to Evaluative Criteria and advance financial sustainability • Committee Meeting 6: Recommendations Discussion (April) • Preparation of final report and presentation to City Council (April/May) • Launch of City's budget development process DISCUSSION ■ What questions do you have? ■ What specific choices or tradeoffs would you like the Committee to consider in their recommendations? 17 THANK YOU! ADDITIONAL INFORMATION :I1 COMMUNITY PROFILE TAKEAWAYS • Tukwila is a growing community, with more diversity and younger residents than King County. Tukwila School District has students that represent many cultures and speak more than 80 world languages. • Tukwila has a higher share of low-income households than King County, particularly among renters. • Tukwila residents identify as less healthy than residents in King County and Washington State. • Tukwila has a very high jobs to population ratio, with a strong commercial sector that includes retail sales and manufacturing. Employment growth in Tukwila has been slower than peer cities, but jobs are projected to grow over the next two decades. • Most businesses in Tukwila have 100 or fewer employees and most jobs are in the services, retail, and manufacturing sectors. Most workers in Tukwila commute from outside the City. The influx of workers and daytime visitors drives up the demand for public services. • More than half of Tukwila's General Fund revenues are from property and sales taxes. With the Southcenter mall, a majority of Tukwila's taxable retail sales are attributed to consumer shopping. • Tukwila's largest General Fund expenditure is toward Police services, which is similar to peer cities. 20 FINANCIAL OVERVIEW HIGHLIGHTS ■ The City collects different types of revenues from different groups. The City's largest revenue sources are taxes and fees. ■ Tukwila's total property tax rate is similar to peer cities in King County. Compared to peer cities, Tukwila has a lower business and occupation tax rate. ■ 67% of total property tax revenue comes from commercial property. One quarter of property tax revenue comes from residential property and eight percent comes from apartments and mobile homes ■ General Fund revenues decreased significantly at the onset of the pandemic and increased as the economy began to recover. The City has aligned service levels to match expenditures with available revenues. ■ As a service provider, the City spends the largest percentage of General Fund expenditures on salaries and benefits. Labor costs are driven by the regional employment market and City policies. ■ Total City staffing has decreased slightly since 2016, during which time the City's population has continued to grow. ■ Increased service needs and the growing cost of providing existing services will impact the City's financial forecast. 21 PROGRAMS AND SERVICES OVERVIEW HIGHLIGHTS ■ The City provides many services. Some services are required by federal, state, or local statute, and some are discretionary. ■ Service levels were reduced during the pandemic and not all services have been restored to pre - pandemic levels. ■ Costs and demand for City services ■ The demographic makeup of the Tukwila community necessitates a high level of service. ■ Population and employment growth (see slide 16) drive staff workload and will increase demands on the City's infrastructure. ■ The cost of providing existing services is increasing due to factors such as inflation, minimum wage requirements, and technology and training needs. 22 COST AND REVENUE OPTIONS These are the cost levers we can adjust. Limit growth in baseline costs Change levels of service Deliver services differently Other? • Find efficiencies, such as streamlining processes • Add programs or eliminate programs • Increase or decrease levels of service • Partner with other entities to provide services • Identify opportunities for the private/non-profit sectors to deliver services 23 COST AND REVENUE OPTIONS These are the revenue levers we can adjust. Il Property tax revenue Dedicated funding for infrastructure User fee revenue Sales tax revenue Business taxes/fees Grant revenue Other? • Adjust the levy rate • Use banked levy capacity • Encourage new development to expand the tax base • Establish a dedicated funding stream for transportation or parks • Establish cost recovery principles • Adjust the tax rate • Encourage commercial growth to expand the tax base • Adjust the business tax rate or business license fee • Encourage business growth • Seek to increase grant revenues 24 CURRENT GENERAL FUND FINANCIAL PLAN ■ The City's six -year plan restores services to pre-COVID levels and funds positions that had been frozen or funded by one-time revenues. ■ The plan adds a B&O tax and uses some property tax capacity created by fire annexation. ■ Overall, the City's property tax rate decreases. 4 Revenue growth is sufficient to fund planned expenditures and leave a margin of 1-3% of annual revenues $80,000,000 $75,000,000 $70,000,000 $65,000,000 $60,000,000 $55,000,000 $50,000,000 $45,000,000 $40,000,000 Impact of fire annexation 2023 2024 2025 2026 2027 2028 2029 2030 —Total Revenues —Total Expenditures 25 PROPERTY TAX IN WASH I NGTON ■ In Washington, a jurisdiction's property tax revenues can only increase by 1% annually, unless the public votes for a greater increase (a levy lid lift). This is the result of Legislative action following the passage of Initiative 747 in 2001. ■ Expenditures typically grow significantly more than 1% annually due to inflation, which creates a structural gap between property tax revenues and expenses. Illustrative Example Funding gaps r■ l i Year 1 Year 2 Year 3 Year 4 Year 5 ■ Property Tax (1% annual growth) ■ Expenditures (3% annual growth) 26