HomeMy WebLinkAboutSpecial 2012-08-08 Draft Fiscal Baseline AssessmentCITY OF TUKWILA STRATEGIC PLAN
Fiscal Baseline Assessment
Review Draft June 22, 2012: Not for Circulation
City of
Tukwila
STRATEGIC ACTION PLAN
Connecting to the future
INTRODUCTION
This purpose of this fiscal analysis is to provide high level fiscal context for the City's strategic planning effort.
This analysis describes how the City's fiscal future might look based on the current state of the City, recent
historical trends, and likely future growth and development if no significant changes are made to the City's tax
base and service delivery policies. In that sense is it is a no -action scenario indicating what would happen if the
City took no measures to more actively manage its financial position.
Given Washington State's tax structure, cities across the state face a structural challenge in which their costs are
increasing at a faster pace than their revenues. Therefore, the forecast for any city in the State would likely
indicate that at some point in the future the city's expenses will exceed its revenues. The important questions are
not whether this will happen, but when, with more fiscally healthy cities not facing this challenge for some period
of time, and what measures a city will take to balance its revenues and expenditures.
This analysis includes two separate forecasts to account for the uncertainty around the future development of the
Tukwila South Project, which will significantly impact the City once it develops.
1. Baseline Forecast. This look -ahead presents the baseline outlook for the City, estimating how its core
operating costs and revenues will likely evolve from its existing base. This baseline forecast does not include
development of the Tukwila South Project, but does include other known changes coming up for Tukwila:
a. Two upcoming annexations, including one small area through an interlocal agreement and the larger
North Highline area. While these annexations are not certain, they will have minimal impacts on the
City's future fiscal situation whether or not they occur.
b. Development of Tukwila Village. The Tukwila Village Project is on schedule to be developed within the
next few years, with the first phase open by the end of 2014 and the second phase open by the end of
2015. The baseline forecast includes the projected cost and revenue impacts of this project.
Impacts of the Tukwila South Project. This look -ahead estimates how the planned buildout of the Tukwila
South Project would change the City's core operating costs and revenues over time. Given the uncertainty
surrounding the timing of this development, this analysis presents a few different development scenarios.
This analysis is based on the 2008 study conducted for Segale Properties, and has been updated to current
dollars and to reflect changes in the City's tax policies.
Additional notes:
The fiscal analysis is based on 2012 budgeted expenditures, revenues, and tax and fee structures, as
provided by the City's Finance Department.
This paper isolates Tukwila's core operating costs and revenues — the components of the City's budget that
are funded through general tax and fee revenues through the General Fund. This analysis does not include
utility enterprise funds or funds used primarily for capital.
:iii BERK
1
9
City of Tukwila Strategic Planning
Fiscal Baseline Assessment
FISCAL BALANCE FRAMEWORK
A city's long-term fiscal sustainability challenge is to balance land use, fiscal policies, and effective delivery of
municipal services. The graphic in Exhibit 1 represents our approach to land-based fiscal analysis. Factors in the
land base such as population, employment, and commercial activity drive both the demand for services and the
tax base in the model.
Exhibit 1 — Description of our Land -Based Fiscal Analysis Approach
LAND BASE
(City)
Identify vacant and redevelopable land based on parcel -level
review of zoning, land use and current values.
Scenarios based on % of maximum buildout, pace of growth,
and redevelopment intensity
COMMERCIAL
Square Footage, Type, Scale,
Timing, Tenant Mix
Employment
New Retail Activity
RESIDENTIAL
Housing Mix, Type
and Density
Housing Units
Population
TAX BASE
Assessed Value
Taxable Retail Sales
Business Income
Utility Usage
Population -based
Employment -based
Development -related
Other
Set Tax and Fee Policies
REVENUES
Estimate service demand based
on population growth (police, fire,
parks, public works, etc.)
Estimate required FTEs and
personnel costs
Estimate non -personnel costs
Set Level -of -Service Policy
SERVICE COSTS
NET FISCAL IMPACT
J
BASELINE FORECASTS
Note: The forecasts in this section include likely upcoming annexations and development of Tukwila Village. They
do not include impacts from possible development of the Tukwila South Project, which are addressed beginning
on page 8.
Below, we describe the following key assumptions that drive the model:
1. Baseline Population and Employment Growth
2. Baseline Development Assumptions
3. Baseline Budget Assumptions
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City of Tukwila Strategic Planning
Fiscal Baseline Assessment
1. Baseline Population and Employment Growth
The population growth rate serves as a primary driver for revenue and cost estimates for the City going forward.
The employment growth rate, in combination with the population growth rate, drives revenues related to business
licenses and utility taxes, among other drivers. Population and employment growth rates in the model are based
on development assumptions and are similar to Puget Sound Regional Council's (PSRC) estimated population
growth for the City from 2010-30.
30,000
25,000
20,000
0
g 15,000
0
0.
10,000
5,000
0
Exhibit 2 — Historical and Projected Baseline Population
—6—Historical Population
Estimated Future Population
00 90 00 00 ^O ,�h ,10 r1' .y0
,t0 ,10 r10 ,10 ,10 ,10 ,11'
Source: Washington State Office of Financial Management, 2012; and BERK, 2012.
Since 1990, the City of Tukwila's annual average population growth (without annexations) was about 0.9%.
Development and growth assumptions yield an estimated average annual growth rate of about 1.1% for the
20 -year period from 2012-31.
Estimated employment growth over the next 20 years is also estimated to average about 1.0% per year.
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
Exhibit 3 — Projected Baseline Population and Employment
• Permanent Population ❑Employment
111
Source: BERK, 2012.
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3 11
City of Tukwila Strategic Planning
Fiscal Baseline Assessment
2. Baseline Development Assumptions
Buildout assumptions have been chosen to calibrate with PSRC's population and employment forecasts as well as
historic development trends and permit activity in the City of Tukwila. The model allows the flexibility to test the
fiscal impact of alternative development assumptions, including more or less total development, type of
development, and timing of development if the City would like to understand how different scenarios would
impact its future fiscal situation.
Development capacity assumptions are based on the King County Buildable Lands Report, last updated in
2007:
o Residential unit capacity is estimated directly in the report.
o Commercial capacity is estimated as land area, which is converted to building capacity using Floor to
Area ratios (FAR) of 0.33 for commercial and 0.57 for industrial. These FAR are based on realized FAR
from 1996-2005.
Exhibit 4 and Exhibit 5 summarize the development projections being used for the baseline fiscal analysis.
By 2033, the analysis assumes that about 95% of single-family (SF) housing capacity and 50% of multi-
family (MF) housing capacity will be developed. This results in an average of slightly over 50 units per year of
each type.
By 2033, this analysis assumes that about 70% of available commercial capacity and 80% of available
industrial capacity will be developed, resulting in 66,000 new square feet of commercial space per year and
about 225,000 new square feet of industrial space annually.
Exhibit 4 — Baseline Housing Unit Capacity and Assumed Pace of Development
(Excluding potential development of Tukwila South)
Total HU %Buildout HU Added Avg Units per
Capacity at 2033 through 2033 Year*
Baseline Forecasts
SF Housing Units 1,200 95% 1,100 50
MF Housing Units 1,600 50% 800 55
* MF Housing Units per Year includes development of Tukwila Village apartments.
Source: King County Buildable Lands Report, 2007; and BERK analysis, 2012.
Exhibit 5 — Baseline Commercial and Industrial Building Capacity and Assumed Pace of Development
(Excluding potential development of Tukwila South)
Total % Buildout SF Added Avg SF % Distribution
Capacity (SF) at 2033 through 2033 per Year (commercial)
Baseline Commercial
Retail 1,414,000 70% 990,000 45,000 70%
Office 505,000 70% 353,000 17,000 25%
Other Commercial 101,000 70% 71,000 3,000 5%
Total Commercial 2,020,000 70% 1,414,000 66,000 100%
Baseline Industrial
Industrial
6,173,000 80% 4,939,000 224,000 N/A
Source: King County Buildable Lands Report, 2007; and BERK analysis, 2012.
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City of Tukwila Strategic Planning
Fiscal Baseline Assessment
3. 2012 Budget Sources and Uses
Exhibit 6 summarizes the City's budgeted 2012 General Fund revenues and expenditures. The Baseline
Projections on the following page are based on these 2012 budget numbers and projected forward using
estimated future population, employment, and commercial activity and the City's current tax structure.
Exhibit 6 - Summary of 2012 Budgeted General Fund Revenues and Expenditures
(millions of dollars)
Revenues Expenditures
Revenue Source
2012 Budget Expenditures by Department 2012 Budget
Amount Amount
Property Tax
Retail Sales and Use Tax
State Sales Tax Mitigation
Natural Gas Use Tax
Criminal Justice Sales Tax
Utility Taxes
Admissions Tax
Other Taxes (excise, penalties, etc.)
13.87
14.41
1.20
0.28
0.36
6.36
0.65
2.64
Total Taxes 39.78
Business Licenses and Permits
Building Permits and Fees
Total Licenses & Permits
General Government
Security
Engineering Services
Transportation
Plan Check and Review Fees
Culture and Rec Fees
2.78
1.10
3.88
0.06
0.51
0.06
0.16
0.86
0.61
Total Charges for Service
Fines and Penalties
Intergovernmental
Miscellaneous
Transfers -In
2.26
0.21
2.86
1.90
1.87
TOTAL REVENUES AND TRANSFERS 52.77
Source: City of Tukwila 2011-2012 Adopted Budget; BERK, 2012.
Review Draft 6/22/12 - Not for Circulation
City Council
Mayor's Office
Human Resources
Finance
Legal
Parks & Recreation
Community Development
Court
Police
Fire
Information Technology
Public Works
Parks Maintenance
PW Street Maintenance
Non -Departmental
0.27
2.52
0.57
1.60
0.54
2.53
2.68
0.99
14.06
10.23
1.15
3.61
0.94
2.68
8.00
TOTAL EXPENDITURES
52.39
5 13
City of Tukwila Strategic Planning
Fiscal Baseline Assessment
Baseline Projections of Revenues and Expenditures
Exhibit 7
City Core Revenues Over
Time
(in 2012 dollars)
Exhibit 8
City Core Expenses Over
Time
(in 2012 dollars)
$70 M
2007-2011 Actual and
2012 Budgeted
160 M
$50 M
$40 M
$30 M
020 M
$10 M
$e M
$70 M
$60 M
$50 M
$40
$30 M
$20 M
$10 M
$0 M
•Core Expenditures
Core Resources
Other Revenues
Utility Taxes
01 OB 00 O 0 ti A ti0 b y 6 .1.°4‘
ry0 �O M1O
Building Permit, Planning
and Engineering Fees
Property Tax
'le titi0 ry0 M1O ry0 ry0 ry0 ti0
n'S tiOryo- ryo,10 ryO.a 4,1 ry0.,0 ry0.,0 ryO,y
2007-2011 Actual and
2012 Budgeted
r. - .Core Expenditures
—Core Resources
0 FTEs
ti0
,•�• • Other Operating Costs
•
Personnel Costs
(Salaries 8 Benefits)
350
300
250
200
From 2007-11, General Fund revenues grew by just less than 2.0% annually when adjusted for inflation.
o Sales tax revenue declined from 2007-10, but increased in 2011 and is expected to grow going forward.
o Sales tax revenue has been impacted over the last few years by destination -based sales tax policies (sales
tax streamlining), the economic recession, and changes in exemptions at the state level. Sales tax
mitigation from the move to destination -based sales tax began at the end of 2008.
o The City helped make up for losses in sales tax and other revenues affected by the recession by raising
existing utility taxes and instituting interfund utility taxes. Without these increases in utility taxes,
revenue growth would have only been about 1.4%
o Going forward, property taxes will continue to be limited by Initiative 747, which restricts growth to 1%
plus the addition of new construction.
There will likely be a one-time bump in sales tax from new construction for Tukwila Village in 2014-15.
The City's personnel costs going forward are estimated to grow slightly faster than the rate of inflation. The
City is in a relatively good position compared to other cities; since it is self-insured it can help control the
cost of rapidly increasing healthcare that has seen benefit rates skyrocket in recent years in most cities.
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City of Tukwila Strategic Planning
Fiscal Baseline Assessment
Net Baseline Projections
Assuming no changes in fiscal policies, Tukwila is expected to face budget deficits in the coming years. This
finding is consistent with most other cities in Washington State, and is related to a structural imbalance between
the way that costs and revenues are able to grow. Much of the this imbalance is related to the limits of Initiative
747, which caps growth in property tax revenues at 1% per year, plus revenue from new construction.
With this major revenue source capped at 1% increase per year, and with costs that tend to escalate at levels at
least equivalent to inflation, cities across the state are facing the reality of costs that grow faster than their
revenues. To address this challenge, local governments must make tough choices involving either increases in
revenues, cuts in costs, or both to maintain fiscal balance. Exhibit 9 shows the future outlook for Tukwila.
$140M
$120M
$100M
$80M
$60M
$40M
$20M t I
Exhibit 9
Net Fiscal Baseline (in year of expenditure dollars)
=Total Operating Revenues
Total Operating Costs
—o—Annual Operating surplus/(deficit)
--1 -
$0M
-20M L
- tet Oji iiL. L�}IJ-i
NI' O^. ONt. N6 O<1/4 O^O ONO OHO O�� e e e Ory a O,f� OHO OHO OHO Off^
ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti
Note: revenues and costs do not include beginning or ending General Fund balance.
Core operating cost growth is estimated to outpace revenue growth over the long-term, resulting in a deficit
within the next five years if the City does not make changes to revenue policy or levels of service.
From 2007-11, core revenues increased at about 5.0% per year. Future projections estimate annual revenue
growth of about 3.75%.
From 2007-11, core expenditures increased by about 7.5% per year. Future projections estimate annual cost
growth of about 4.1%.
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7 15
City of Tukwila Strategic Planning
Fiscal Baseline Assessment
TUKWII..-A. SOUTH IMPACTS
The Tukwila South Project will encompass about 500 acres of land along the Green River at the south end of the
City. The project is likely to add about 10 million square feet of occupied space, including a mix of office space,
residential, retail, and hotel. The development timeline for Tukwila South is currently uncertain due to many
factors, including:
Length of time it will take to complete the cut and fill process and infrastructure improvements that will
make the site ready for build.
The state of the economy: how quickly the economy recovers will dictate when there will be new demand for
large-scale development.
Potential FEMA regulations that will reduce the total buildable area of the Tukwila South site as it relates to
the Green River flood plain.
A project of this magnitude will significantly alter the tax base and cost structure of the City, and increase
population and employment projections.
Fiscal Impact of Development
A full analysis of the impacts of Tukwila South was not within the purview of the strategic planning process.
Instead, this analysis provides an update of a thorough cost and revenue analysis completed by BERK for Segale
Properties in 2005, with updates in 2008.
Key assumptions include:
The project will include about 10.3 million square feet (sf) of development, including 8.6 million sf of
commercial space and 1.7 million sf of residential.
o Commercial development will include research and office space, retail, restaurants, and hotels.
o Residential development will include condominiums and apartments.
At full buildout, the project would support about 3,200 additional residents and 23,000 additional jobs.
This analysis presents two scenarios: one where development begins five years from now (2017) and one
where it begins ten years from now (2022) to provide a range of impacts that this project could have on the
City.
o Phasing assumptions used in the original analysis assume a full development timeline of approximately
30 years once construction begins, with development spread fairly evenly over the first 20 years and then
slowing down for the final 10.
To support the strategic planning process, this analysis summarizes the potential revenue and cost findings from
the previous Tukwila South study, updated for 2012 dollars and for a more realistic timeline.
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City of Tukwila Strategic Planning
Fiscal Baseline Assessment
60,000
50,000
40,000
30,000
20,000
10,000
Exhibit 10 — Estimated Future Population and Employment
(assuming Tukwila South begins construction in 2017)
❑ Employment - TSP 2017
• Employment - TSP 2022
• Employment - Baseline
❑ Population - TSP 2017
• Population - TSP 2022
• Population - Baseline
1
1
1
1
1
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
If Tukwila South construction began in 2017, it would add approximately 2,000 new residents and 9,500
new jobs by 2031.
If Tukwila South construction began in 2022, it would add approximately 1,700 new residents and 4,500
new jobs by 2031.
$140 M
$120 M
$100 M
$80 M
$60 M
$40 M
$20 M
$0 M
-$20 M
Exhibit 11 — Estimated Net Fiscal Impact including Tukwila South
=Revenues TSP 2017 =Revenues TSP 2022 Revenues- Baseline
=Costs - TSP 2017 Costs - TSP 2022 Costs - Baseline
—a—Net- TSP 2017 —0—Net TSP 2022 —0—Net - Baseline
1
4
0 0 c
0
Source: City of Tukwila, 2008; BERK, 2012.
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9 17
City of Tukwila Strategic Planning
Fiscal Baseline Assessment
In the long-term, the revenues from Tukwila South will outweigh the operating costs to the City and provide a
net operating surplus.
o While there will be larger start-up costs at the beginning of the project that will not be fully covered by
increased taxes, the Developer Agreement will require the developer to pay the City to mitigate any
deficits, thus rendering the short-term impact neutral.
o The project will begin to have a net benefit to the City's operating costs and revenues about 5 years after
construction starts.
The project may also generate capital costs to the City. These costs could be covered by the additional Real
Estate Excise Tax generated from property sales within the development, as well as bonding against future
revenue increases.
FISCAL POLICY OPTION'
This baseline estimates the City's future fiscal health under a "no action" scenario. In reality, the City has many
choices and policy levers at its disposal to balance expenditures and revenues. A focus of the strategic planning
effort will be to explore tradeoffs, priorities, and policy choices that fall in the following broad categories:
Revenue -focused strategies
o Economic development.
o Taxes, fees, and other revenue -generating tools.
Cost -focused strategies
o Increased efficiency of operations (cost containment).
o Strategies to keep personnel cost growth in line with inflation over time.
o Decreases in level of service.
In addition to these options, the City has many options to reprioritize spending by shifting General Fund
resources among the uses shown in Exhibit 6.
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