With the City of Edmonds projecting an ending fund balance of $6.64 million this year and dipping into its reserves, city councilmembers and staff gathered at city hall Thursday afternoon to examine options for addressing the issue. Council President Neil Tibbott promised those viewing the meeting both in person and online that the city budget would continue to be a hot topic —  starting with “an exciting council meeting Tuesday night (Oct. 24).” From now until the end of the year, “it’s must-watch TV in Edmonds,” he said.

Related to Thursday’s discussion, the council will be conducting two public hearings Tuesday, Oct. 24. One — on 2024 property taxes — will give members of the public a chance to provide input. The city council has the option each year to consider the amount of property tax revenue required to fund the budget. The other — on city revenues — will provide community members an opportunity to comment on all other revenue sources. (The meeting begins at 7 p.m. and you can see the complete agenda here.)

Mayor Mike Nelson’s 2024 proposed budget includes a range of ideas aimed at increasing revenues, including raising utility rates, using the city’s allocation of federal American Rescue Plan Act (ARPA) funds and installing red-light cameras, along with several other sources. Thursday’s three-hour workshop also focused on many of these topics.

Council President Tibbott invited Administrative Services Director Dave Turley to provide an update on 2023 budget, which Turley confirmed is currently below 50% of the city’s reserves. By the end of the year, the city projects that budget “will come back up some” with the infusion of $5 million to $6 million in Snohomish County property taxes, he said.

The city, Turley explained, has two reserve funds: a general fund reserve that is required to be 16% of the general fund budget and a contingency reserve — which kicks in if the general fund reserve is exhausted — of 4%. As of August, the city is below 50% of its general reserve fund and predicts that fund will be $2.2 million in the red by the end of the year.

To shore up the city budget, the administration is proposing to transfer to the general fund budget $6.5 million in ARPA funds and $2 million from the building maintenance fund. The mayor has also proposed installing red-light cameras at six of the city’s most traffic crash-prone intersections, which he said will address traffic safety but is also projected to generate millions of dollars in revenue from violators.

Councilmember Dave Teitzel said he has been receiving “a lot of questions from residents” related to how both the council and the mayor have been talking about record sales tax revenues and stable property tax revenues. “With that in mind, how can it be that we are running a negative run rate when you compare revenues to expenses?” Teitzel asked. “The revenues forecast for end of year 2023 are at $51.6 million, expenses at $56.8 million. The only conclusion our citizens can draw is that we are overspending our run rate revenue and that’s what needs to be fixed. That’s how it gotten out of balance and why we are overspending our reserves. How would you respond to that. Have we not been responsible in our spending, in your opinion?”

“Honestly, we’ve been more than responsible in our spending,” Turley responded. “People don’t realize this but we run very lean in Edmonds.” A major driver of those expenses, he added, is inflation.

“We are not immune to inflation,” Turley continued. “When our costs went up, outside of adding a little bit of staff to our fire contract, everything we did was a direct result of inflation. It’s not bad management by council and approving bad budgets and it’s not bad administration. When the city added several positions a few years ago, “that was just catching up from running too lean for several years,” Turley said. “The reason our revenues haven’t gone up is beause we haven’t taken action to increase our revenues.”

The city also absorbed a $4 million increase in Edmonds’ contract with South County Fire for emergency medical and fire services during the past two years. The council in September approved a resolution telling the South Snohomish County Fire and Rescue Regional Authority (RFA) that the city officially intends to investigate the advantages and disadvantages of annexation into the RFA.

Councilmembers on Thursday also asked questions related to what constitutes a “fiscal emergency” — a phrase that is included in the city’s Fund Balance Reserve Policy approved by the city council in 2019. City Attorney Jeff Taraday noted the policy states that “a separate balance sheet account should be set up by the finance director for the general fund operating reserve,” and that is should be “used in instances of fiscal emergencies that include economic uncertainties, unforeseen emergencies and unanticipated operating expenses or revenue shortfalls.”

“The word emergency is some folks’ eyes can be a loaded term but the way the policy uses that term is a fairly inclusive definition,” Taraday added.

The policy also states that the mayor can declare a fiscal emergency, but that “unanticipated operating expenses are not included in the mayor’s declaration,” Taraday said.

At Tibbott’s request, the council did not get into details of what declaring a fiscal emergency would entail. That is on the agenda for the council’s Oct. 24 meeting, although no resolution was attached to the meeting agenda issued Friday. However, shortly before the Thursday workshop, Mayor Nelson issued an email to the media lambasting the council for considering such an idea.

“This scare tactic and political stunt will jeopardize our city’s AAA credit rating,” Nelson said. “A downgrade of our credit will result in a higher interest rate for the city and cost us more money. For example, a 1% interest increase for an upcoming $8 million utility bond (over 20 years) will cost the city an additional $1 million.

The council action,” Nelson said, “will create the opposite effect of fiscal prudence.” He added that councilmembers have been briefed on the city’s plan to address the current revenue shortfall, and that “the city has already taken necessary steps to ensure 2023 will finish financially strong. Additionally, my proposed balanced budget for 2024 was based on changes we have already adopted in 2023.”

Whether the declaration of a fiscal emergency would impact the city’s bond rating was discussed by councilmembers and staff briefly on Tuesday (Nelson wasn’t present for this discussion). Answering a question from Councilmember Susan Paine, Administrative Services Director Turley stated that bond rating agencies “look at a lot of things.” One area they place importance on, Turley said, is whether the council and administration “work well together. Is there a sense that there is discord between the two?

“I’m just going to be blunt,” Turley continued. “If council is to declare a resolution stating we are in dire financial straits and we are declaring an emergency, that kind of thing may play very poorly with the bond rating agency. A public resolution on the books could have a very negative impact.”

Councilmember Diane Buckshnis disagreed, stating that the city has an AAA rating for its general fund and an AA rating for its utility bonds. “The utility bonds are treated differently because utility rates pay for the bonds,” she said.

On Friday, some councilmembers expressed dismay about Nelson’s remarks to the media.

Councilmember Jenna Nand said said it was “very unfortunate” that she first learned about the possibility of a fiscal emergency resolution “by being cc’d on an email that Mayor Nelson sent to the local press, expressing his reservations and blaming council for potentially harming the City’s AAA credit rating, rather than the mayor attempting to have any sort of constructive dialogue with council members off of the dais.

“As was made clear to us at yesterday’s special budget meeting with the city attorney and the finance director, the inability of the mayor and the council to work together constructively to handle the business of the city and publicly airing discord like this can itself be considered a threat to the city’s credit rating,” Nand added.

“I’m very disappointed in the mayor’s comments — issued Thursday 30 minutes prior to the very important council workshop to identify ways we might work collaboratively with the mayor and his team to resolve the urgent fiscal challenges we are now facing,” Councilmember Teitzel said. “We simply can’t keep spending more than the revenue we are bringing in. That’s what has created this crisis. And it will take collaboration — not fighting — to solve the problem.”

Council President Tibbott said: “I think bond rating agencies would appreciate our efforts to support a healthy budget for years to come. Like many cities, if not all, Edmonds is responding to the challenge of an unprecedented year of inflationary pressures.”

Snohomish County Assessor Linda Hjelle introduced the second part of the meeting, which covered how property tax in Edmonds is calculated. Councilmember Vivian Olson originally invited Hjelle to the meeting after they discussed how challenging it is for many Edmonds homeowners to understand the process of calculating property tax.“I know our residents assume, like I did for a very long time, that if our property taxes go up, then proportionally our amount of tax that we pay goes up, based on the valuation going up,” Olson said. 

Hjelle described the responsibilities of a county assessor, which include appraising real and personal property at the true and fair market value—unless a law specifies otherwise. The assessors office also handles and oversees exemptions programs, such as those for nonprofits and senior citizens. 

By the end of the third quarter 2023, Snohomish County collected nearly $1.67 billion in property taxes, which is distributed to various public services. Local school districts receive the biggest cut (34.4%), followed by state schools (29.22%), fire districts (11.34%), cities and towns (8.53%) and the county (6.27%). 

Hjelle emphasized that it is the “taxing industry” that establishes how much property taxes homeowners and landlords pay. “It’s first voted in, and there’s some restrictions on how much that particular amount can increase each year,” she said. “Taxing districts come by my office with the levy budget amount that has to be presented to my office by the end of November. We take that information along with the assessment information that we’ve collected at our office, and we do the calculations.”

The assessor examines two major factors in these calculations: the highest lawful levy and the actual levy.

“Taxing districts do not necessarily have to collect the total amount that they are allowed to collect,” Hjelle explained. “Sometimes [they] choose not to do that. We still calculate what we could’ve taken [every year] if you pass the ordinances and resolutions. It’s called the highest lawful levy. Actual levy [is] what did you actually decided as a taxing district to take based on your budget.”

Taxing districts can increase their budget by 1% every year, but not every district does that. “When you don’t do that and you pass the ordinance, to bank that amount, you’re reserving your right to tax at a higher level in the future. It’s not dollars in the bank; it’s the ability to levy at a higher amount in the future,” Hjelle said.

“Does that mean you can stack the 1%?” Nand asked.

Hjelle replied that it kind of stacks. “We continue to calculate your highest lawful levy as if you’ve taken that 1% every year if you pass the ordinance to reserve that ability to do so,” she said. “There’s a statutory rate calculation cap. You could be limited by your rate in one year, but the next year if your assessed value goes up, and your rate goes down, you could have the capacity to maybe take it next year.”

One option for the council to increase revenue is to tap in to the city’s “banked capacity” from five years’ worth of property tax increases. 

Hjelle gave an example of how property tax is calculated. The current average assessed value of an Edmonds residence is about $896,700. If there is no increase in the actual levy rate, the estimated rate levied is about $0.6968. Multiply $896,700 by 0.6968 and divide the value by 1,000, and the property tax is $625.85. 

A 1% increase in the actual levy rate increases the amount levied to $0.70375, which increases the property tax to $631.06. A 5.9% increase raises the amount levied to $0.73789, which increases the property tax to $661.67.

Hjelle suggested that Edmonds residents should use the Property Tax Distribution tool on the Snohomish County website to see where their taxes were distributed in the past three years and how that has changed. “It really gives clarity to where those dollars go to,” she said. “One of my biggest goals is to give good information to people to make good decisions.”

— Story by Nick Ng and Teresa Wippel