County grapples with decline in tax revenue

— by Minor Lile, Orcas Issues reporter —

For the last seven weeks the County Council has allotted time at each of their meetings to discuss the condition of the County budget in the wake of the Coronavirus impact on the local economy and a corresponding decline in anticipated sales tax revenue. Key participants in these discussions have included the three Council members – Rick Hughes, Jamie Stephens, and Bill Watson – as well as County Auditor Milene Henley and County Manager Mike Thomas, supported from time to time by other Department heads and program managers.

The 2020 budget for the Current Expense Fund is approximately $21.9 million. According to the County Auditor, the anticipated shortfall in revenue for 2020 is expected to be $2.2 million, or approximately 10% of the budget. Of that shortfall, approximately $1.8 million is due to an anticipated decline in sales tax revenue. The remainder is made up of anticipated declines in various other revenue streams such as building permit revenues, interest income, and lodging taxes.

At their May 26 meeting, the Council, County Auditor and County Manager spent about an hour and a half considering ways to bring the budget back into balance. The primary focus of the discussion was the Current Expense Fund. In layperson terms, this fund is essentially utilized to conduct the general operations of the County, not including capital projects and areas of operation that have their own funding such as Parks and Public Works.

The following table summarizes the anticipated budget shortfall and the measures that have been discussed as ways of closing the gap between revenue and expenditures. The table is followed by a brief discussion of each of these, as well as a summary of other considerations that have been part of the discussion.

Additional Expenses
In addition to the anticipated revenue shortfall of $2.2 million, there are $460,000 in additional expenditures that have been identified. These include a $200,000 transfer to the Parks Fund and $260,000 related to the implementation of the County’s early retirement program. The Parks fund transfer is to make up for the loss of campground revenue and moving of the County fair from the fairgrounds to the virtual realm. It also incorporates savings gained by postponing the hiring of a new Parks director. While the early retirement program increases expenditures in 2020, it is expected to reduce future expenditures.

Beginning Balance Adjustments
To begin with, the shortfall can be reduced by $339,000 based on an adjustment to beginning balance of cash on hand at the beginning of the year. This adjustment to the current expense fund is typical at this time of year as it often takes a few months after the end of the previous year for each of the various departments to finalize their year end account balances.

Staff Furlough Days
At Tuesday’s meeting, the Council unanimously passed a motion authorizing seven staff furlough days (one day per month) for all County staff with the exception of the Sheriff’s Department. Total savings from the furloughs will be approximately $200,000. The Council also affirmed that they will participate in the furlough program and encourage other elected officials to do so as well.

Budget Stabilization Fund
According to the County Auditor, the current balance in the County’s Budget Stabilization Fund (also referred to as the Rainy Day Fund) is $2.07 million. At previous meetings, the Council had informally agreed that the $300,000 that was to have been added to the fund this year would be redirected towards meeting the budget shortfall.

Up to this point, there has appeared to be agreement that drawing from the Budget Stabilization Fund should only be considered as a last resort. The maximum amount that can be withdrawn from the fund in any given year is up to 50% of the fund balance. According to County ordinances, allowable uses of the fund can be triggered by either an unanticipated decline in sales tax revenue or by an emergency proclamation.

Information Services
Another $200,000 can be saved by adjustments to the Information Services Department budget. Department Manager Tony Harrell was attending the meeting remotely and confirmed that amount, but there was little, if any, detail provided publicly as to how these savings would be realized.

CARES Grant
In early May, San Juan County received a CARES Fund grant of $943,250 that was routed through the Washington State Department of Commerce. These funds are from the Federal CARES Act and may be used for a wide array of purposes and are available through the end of the year. The grant for San Juan County was calculated on a per capita basis of $55 per person based on a population base of 17,150. Friday Harbor received an additional CARES grant of $72,600.

There was a curious moment at Tuesday’s meeting when Milene Henley advised the Council that approximately $147,000 of the CARES Grant has already been allocated or spent. When Council member Bill Watson asked who had authorized those allocations, Ms. Henley replied, ‘things happen quickly when you’re running an EOC” (the EOC is the Emergency Operations Center that is coordinating the County’s overall response to the Coronavirus epidemic). Councilmember Hughes added, “we can figure that out later” and the discussion moved on.

After some discussion, the Council came to a tentative agreement that of the $807,000 remaining CARES Grant funds, $650,000 would tentatively be allocated to reduce the budget imbalance, with the remaining $157,000 available for community support. A leading candidate for receiving a significant portion of this $157,000 is the San Juan County Economic Development Council.

During the public comment period at Tuesday’s meeting, there was testimony from Hilary Canty, the Executive Director of the Orcas Island Community Foundation, and ex-State Senator and former County Council member Kevin Ranker, both of whom advocated allocating some portion of the CARES funds to support local social service organizations as they continue in the months ahead to respond to the needs of the communities they serve.

FEMA Funds
The County has also received a grant of up to $100,000 from the Federal Emergency Management Agency (FEMA) for coronavirus related expenditures. According to County Grants Manager Tara Anderson, these funds require a 25% local match and the allowable uses are more narrowly defined than the CARES funding. During Tuesday’s discussion, Mr. Hughes proposed including the entire $100,000 in the budget balancing exercise.

Road Fund Diversion
Mr. Hughes also raised the possibility of diverting $100,000 from the Public Works Road Fund as an additional source of funding to help cover the budgetary imbalance. This suggestion met with some concern from County Manager Mike Thomas. Thomas pointed out that the road fund also is confronting reduced revenues as a result of lower gasoline tax income and the passage of changes to the Motor Vehicle Excise Tax (MVET) that reduced automobile license tab fees last November.

Summary
If all of these potential cost savings were applied to the $2.66 million dollar shortfall, there would continue to be a remaining deficit of $771,000 to be addressed. This is equivalent to approximately 3.4% of anticipated expenditures. At the end of the discussion, the Council agreed to continue consideration of the budget at their June 2 meeting.

Additional Considerations
During the discussion, there was some consideration of the relative merits of an across the board approach to resolving the issue versus a program by program approach.

Ms. Henley expressed her strong support for an across the board cut of 7.5% that would impact all departments equally. In her view, this is preferable to identifying savings on a department by department basis because it would rely on each of the Department directors to determine the most effective way of making those cuts in their individual departments based on their expertise and insight. Councilmember Stephens noted in response that while this may be true in principle, his experience has been that imposing across the board cuts in expenditures rarely results in any actual change to the way the County does its business.

Ms. Henley also noted that another concern she has with a program by program approach is that in the past this has resulted in the burden of cuts falling on services such as health care that are considered discretionary rather than mandatory.

The possibility of restructuring County government to achieve greater efficiencies and cost savings is a topic that has come up many times. Councilmember Hughes has been particularly interested in applying the lessons of the past few months around telecommuting and working from home to this question. There have also been changes to the building and land use permitting process that may be applicable.

At Tuesday’s Council meeting, Mr. Thomas alluded to the possibility that reconsideration of how and where County staff work might reduce the need for more facilities if fewer employees were officed in Friday Harbor. These capital budget expenditures have not been the subject of close attention at recent Council meetings, but there was agreement that they merit further consideration.

An additional complicating factor in the overall budget discussion is related to the passage of a County ordinance last November that revised the County Charter. This ordinance provides for adoption of a biannual budget. So, for the first time in County history, the budget that was adopted last December was for two years, 2020 and 2021. Both Mr. Thomas and Ms. Henley have been consistent in advising the Council that there are significant shortfalls in the 2021 budget that will need to be addressed. One issue is that the 2021 budget is based on a 3% estimated increase in sales tax revenue. At Tuesday’s meeting, Ms. Henley shared her view that the economy is unlikely to have recovered sufficiently by then to reach that level. Her current estimate is that sales tax revenue will be ‘flat’ and not increase at all next year.

The Council will take up the budget again at their next meeting this coming Tuesday, June 2, at 9 a.m. Other items on the agenda include a first quarter 2020 Financial Report from County Auditor Milene Henley and a presentation from EDC Director Victoria Compton on the Business Resilience and Recovery Grant Fund that she is asking the County to support financially. The agenda also includes discussion of the status of the Long Range Planning project with Planning Manager Linda Kuller. In addition, a public hearing has been scheduled for Tuesday June 9 to consider various ordinances amending the 2020-2021 budget.