King County’s budget shortfall
The structural gap explained
King County’s General Fund budget crisis is a structural problem. The word “structural” is used to indicate that the crisis is a long-term problem caused by the structure of general fund revenues and expenditures. It is not a short-term problem caused by the downturn in the economy, although the size of the budget cuts required is exacerbated by that and other factors.
The structural gap is very simply that general fund revenues grow at a slower rate than expenditures. In years without a recession, general fund revenues grow at about 1 to 2% annually, while expenditures grow at 4 to 5%. In years with a recession, the structural gap is magnified by a decrease in revenue.
The insidious result of the structural gap is that the County becomes unable to provide the same level of services as in the previous year, requiring continuous cuts in the level of essential services to residents.
Simply cutting the level of expenditures or finding new revenues does not solve the structural problem, unless these actions increase the long-term growth of revenues and reduce growth in expenditures. The graph below illustrates the problem.
(This graph shows projected expenditures growing at 4-5% and projected revenues growing at 1-2%.)
(1) Budget is at balance in Year 1 with expenditures equal to revenues.
(2) With expenditures growing at 4-5%, the cost of offering the same programs in Year 2 grows to here.
(3) Meanwhile, revenues grow at only 1-2%, to here in Year 2.
(4) The difference between expenditure and revenue growth leads to a gap, requiring a cut in expenditures to balance the budget.
(5) If the budget cut affects only the level, but not the growth of expenditures, remaining expenditures will continue to grow at 4-5%. The level of expenditures needed to provide the same level of services as in the previous year grows to here.
(6) This structural difference in revenue and expenditure growth creates the need for another budget cut in the following year (Year 4). The problem continues until structural changes can be made that equalize the growth rates of expenditures with revenues.
The structural gap is not confined to King County. Counties across Washington State face this continuing challenge between expenditures that increase at a much higher percentage than the revenues the county can collect.
Other factors affecting the budget shortfall
There are several factors that have led to or exacerbated this structural problem. Factors on the revenue side include:
- Heavy reliance on property tax: Counties must rely almost solely on property and sales taxes, while cities, for example, can collect business and utility taxes. Less diversification in the tax base means that counties are affected more severely when property tax or sales tax collections slow or drop. Property taxes make up nearly one-half of the County’s general fund revenues.
- Property-tax limiting regulation: Initiatives such as I-747 capped increases in the property tax to one percent and was subsequently passed into law by the State Legislature. This has limited the growth of the property tax and other revenues to under the rate of inflation.
- A shrinking tax base due to annexations and incorporations: Often, businesses and densely populated residential areas are annexed into cities. Consequently, their tax revenues go to cities, leaving the County with a lower level of revenue and a slower-growing base of sales tax.
- Economic downturn: Both property tax and sales tax collections are particularly hard hit in times of slow economic growth. Property tax revenues are depressed by the slowdown in new construction, and sales tax revenues decline dramatically as consumers cut back on spending.
Factors on the expenditure side include:
- Unfunded mandates: Although Washington State has increased the County’s mandated service responsibilities, these increases have rarely come with an increase in state or other funding to assist the County in meeting the additional expenses of the service requirements.
- Urban unincorporated area services: Although state law requires the County to be a provider of regional and rural services, the County must also provide services to several unincorporated yet heavily populated urban communities. The latter is more costly to provide because of the greater population.
- Cost pressures: The County faces many of the same kinds of cost pressures on its expenditures that businesses do, but has far less flexibility than many businesses to meet these challenges. For example, inflation increases the costs of providing County services, both through purchases the County makes and through rising health care costs.
The Council and the County Executive have adopted or advanced several measures to resolve the budget crisis in the county’s general fund. But these measures do not eliminate the structural gap and the magnitude of its effect. The problems created by the structural gap can be resolved only through collaboration of the State Legislature, County, cities, and voters.