The Mill Creek City Council took steps to address a potential $1.7 million deficit in the City’s 2013-2014 budget during an all-day Legislative Retreat on Saturday, May 12th. The councilmembers directed City staff to plan for a mix of spending cuts, tax increases and use of general fund reserves to reduce the budget deficit. The City's, Finance Director, Landy Manuel, and City staff will continue to work on the 2013-2014 budget during the rest of the year. Although budget discussions will continue, the Mill Creek City Council won’t formally vote on the final budget until late in the year.
Acting City Manager, Tom Gathmann, set the stage for the Legislative Retreat by saying, “We all know there is a structural deficit issue with the budget. If we keep on the same plan we have right now, the ship runs aground in the future, because our expenses are exceeding our revenue… We want to deal with that structural deficit. We really need guidance, just as much, on putting together the 2013-2014 biennial budget. There are going to be some tough decisions to make.”
Gathmann encouraged councilmembers to keep the discussion at a high-level, “We don’t want you to tell us what line items to cut, what staff people to cut. Keep it high please… You have hired us to be professionals. I know how to be a good Public Works Director. Bob (Crannell) knows how to be a good Police Chief. Landy (Manuel) knows how to be a good Finance Manager. Pam (Olson) knows how to run a great recreation program. Give us direction of what you want us to do. Please don’t dive down into our business.”
Michelle Castanedo, a professional negotiator with thirty years of experience, facilitated the meeting. Castanedo had never before visited Mill Creek, but spent the week before the meeting studying Mill Creek’s recently adopted Strategic Plan and by talking with Mill Creek City councilmembers and key staff. She developed an understanding for the positions of the key players, “I interviewed ten people, and spent about three or four hours on the phone. It’s clear that you are divided and that you need to address some tough issues, and put together a reasonable plan moving forward. The next step is to give the City Manager and Finance Director clear guidance. I hear from everyone that that is your job today… What I heard on a real positive note is that you trust your Finance Director and rely on him to give you good data to review and work with… The other thing that I heard the majority of you say if the decisions are made to make service and personnel cuts, that you don’t get down into the weeds on that and also have an understanding and talk about what the impact on services will be if you are doing less with less in terms of services.”
Landy Manuel, the City of Mill Creek’s Finance Director, led the majority of the day’s discussion. Manuel said that by the end of 2012 there should be about $8 million on hand in various reserves. He stressed that the structural deficit is the main challenge to deal with, “We have plenty on hand to find ourselves a way out of the woods to solve our structural problem, but we have to take steps to solve the structural problem. Our business model is broken. We’re not going to survive unless we take steps to solve the structural problems. Using reserves out of any source isn’t solving the structural problems. It’s just buying time basically and hoping it’s getting better.”
Councilmember Terry Ryan, who has been on the Mill Creek City Council for almost two decades, said that the structural deficit has been threatening for a long time, “We had the same discussion sixteen years ago. We’ve always seen this kind of forecast.”
Manuel’s preliminary 2013-2014 budget forecasts a $1.7 million deficit. Mayor Mike Todd pointed out that the forecasted increases in fire services contracts are a big part of the looming deficit. Manuel forecasts the expense category housing fire services will rise from about $5.76 million in the 2011-2012 budget to $7.04 million in the 2013-2014 budget. This $1.28 million increase accounts for a substantial amount of the increasing deficit.
Manuel said that the building boom from 2000 through 2008 masked the structural budget problems and Mill Creek’s neighboring cities are dealing with the same problems, but have fared worse than Mill Creek. Unlike Mill Creek, surrounding cities increased taxes more significantly and laid off staff rather than defer hiring to cover shortfalls in their budgets.
Manuel suggested that one of the first steps in addressing Mill Creek’s current financial situation should be to create written guidelines for cash flow management and reserve fund levels. After much discussion, the Mill Creek City Council agreed that Manuel should update the existing budget guidelines to reflect his current thinking regarding the appropriate reserve levels. This unanimous decision was based on the council’s trust in Manuel’s judgment.
Manuel presented a number of suggestions for dealing with the forecasted budget deficit. In the end, a majority of the Mill Creek City Council directed City staff to work on a 2013-2014 budget which reduces the deficit with some structural changes and some temporary fixes as follows:
- Cut expenses in the general fund by $500,000. This structural budget change will likely include staffing reductions, a longer time between vehicle and equipment replacements, and other operational cuts. The acting City Manager, Tom Gathmann, explained that staff cuts would likely result in service cuts.
- Increase revenues by $300,000 by a combination of property tax increases and/or by drawing down general fund reserves. A 3% property tax increase is a structural change that would result in the full $300,000 deficit decrease. Any reduction in general fund reserves is only a temporary fix.
- Increase revenues by $300,000 by setting up a new 0.1% sales tax, which would have to be approved by a majority of voters in the upcoming election. County Executive Aaron Reardon has proposed this sales tax countywide, but since the Snohomish County Council may oppose this move; it may be necessary for the City to place the measure on the ballot. City staff will report back to the City Council in June as to the feasibility of this option. If voters approve this option, it would be a structural budget change.
- Use $600,000 from REET (Real Estate Excise Tax) to fund the Park Maintenance Budget. Recent legislation permits use of REET for this purpose through December 31, 2016. This is not a structural change, because the revenue was budgeted to fund capital projects and can only temporarily be used for operations.