Session started with strong economic forecast, but overshadowed by COVID-19 impacts

In January, at the beginning of the session, legislators were anticipating a strong economic forecast. This was buoyed by robust sales tax, an estate tax windfall, real estate sales, and a reduction in expenditures due to a reduced caseload forecast. The February revenue forecast delivered an additional $600 million in revenue. However, by the final week of session it was already clear that the coronavirus disease (COVID-19) was going to have an impact on the economy.

As a result of the strong forecast, the Legislature adopted of a fairly robust supplemental operating budget that included new spending on priorities like affordable housing and homelessness response. However, there are now concerns that the state can’t afford what was adopted and the Governor may use his veto pen on portions of the budget to reduce costs. Additionally, in the final days of session the Legislature passed HB 2965 to tap into the Rainy Day fund (Budget Stabilization Account) for $200 million to fund the state’s response to the COVID-19 emergency.

For a fuller picture of the what was in the adopted supplemental budgets, you can check out the budget matrix for city highlights.

While there were few significant policy bills that ended up passing this session, there are a few to note. Good news: The passage of HB 1948 provides ongoing mitigation funding to cities that act as manufacturing and job centers and are the most negatively impacted by Streamlined Sales Tax (SST) changes adopted in the last decade.

A proposal to allow King County to adopt a payroll tax to fund housing and homelessness needs cropped up late in the session. Ultimately, HB 2948 didn’t end up moving, but there was a great deal of effort by stakeholders to find a compromise proposal that would have created a regional funding mechanism. However, some issues like preemption of city authority and the rate of the tax ended up being sticking points.

Finally, cities may want to take a look at SB 6592 which increases the fee allowed for Tourism Promotion Areas (TPAs). The bill allows all cities to use the authority. Previously it was limited to those with populations over 40,000. It also allows for the fee to increase from $2 per room night to $5 if the lodging industry is supportive.

We anticipate that the economic fallout from the COVID-19 emergency will be far reaching and will significantly impact both state and city revenues and budgets. We expect that the 2021 session will be difficult as legislators wrestle with increased costs and revenue shortfalls as they write the next biennial budget.

It also wouldn’t be surprising if the Governor calls a special session of the Legislature to deal with immediate budget concerns and to help the state respond to this unprecedented emergency.

We know that city officials are overwhelmed right now with emergency response, but it is important for you to communicate what you are doing and your fiscal situation to your legislators. That way they can support your needs and preserve your funding if and when the Legislature has to make state budget adjustments and cuts.

Please keep reminding them of the importance of state support for city emergency response as well as the critical role state-shared revenue plays in balancing your budget and funding critical services.

City priorities – Outcomes

The Legislature:

PRO: Maintained funding in state-shared revenues for liquor profits, liquor taxes, cannabis taxes, Municipal Criminal Justice Assistance, Fire Insurance Premium Taxes, and City-County Assistance.

CON: Adopted a new unfunded cost-of-living increase for PERS 1 retirees that will increase city pension costs.

CON: Did not consider revising the 1% property tax cap for cities.