FY 2025 General Fund Forecast Updates:
Link to May 23, 2024 General Fund Forecast Briefing to the Board
Link to March 21, 2024 General Fund Forecast Briefing to the Board
Link to November 21, 2023 General Fund Forecast Briefing to the Board
Multnomah County facing budget shortfall in latest 5-year forecast
December 1, 2023
Inflation is improving, household income is increasing and the risk of a recession in the near future is falling. But stalling local development and recent declines in property values are dimming Multnomah County’s financial outlook in the latest five-year General Fund forecast.
Leaders with the County Budget Office delivered the news during a Tuesday, Nov. 21, briefing. The five-year forecast gives the Board of County Commissioners a snapshot of key variables affecting the County’s revenues and expenditures, and the economic drivers influencing the budget process.
In short, the Budget Office forecasts a $14 million deficit for Fiscal Year 2024-25. Without any interventions or larger economic improvements, providing the current level of programming would grow the deficit to $40.5 million by FY 2028-29.
“The biggest reason is our structural deficit,” said Jeff Renfro, the County’s Economist. “It’s the tendency for our personnel costs to grow faster than our property tax revenue over time under normal circumstances.”
Put another way, the County needs more than $30 million of new revenue every year just to cover ongoing programming. The County’s revenues typically do not grow by that much, which would result in ongoing shortfalls.
The County’s structural deficit is made worse by the effects of declining real market property values and a slowdown in local development, Renfro said, and that has implications for Multnomah County’s economic outlook.
But in the short-term, the office also revised its General Fund revenue forecast for the current fiscal year, 2023-24, with an additional $9.1 million, meaning there’s now an expected $54 million available in one-time-only funds for FY 2024-25. Per Board policy, half — or $27 million — must be allocated for facility and information technology projects with the other $27 million to be allocated for one-time-only programs and services.
The big picture: understanding America’s economy
One year ago, many well-known economists and experts were worried about the risk of an impending recession. Those concerns appear to have eased as the American economy has outperformed expectations while inflation continues to decline.
That’s good news, Renfro said, because higher inflation would eat further into the County’s budget.
“A high level of inflation over time is the one thing based on our property tax structure that we can’t accommodate,” he said. “Because inflation is moving in the right direction, we expect a little bit of relief on the growth side in the near future.”
Job growth at the national level is also cooling down, which means the Federal Reserve may feel less urgency to raise interest rates further. Since July, the federal funds rate has stood between 5.25% and 5.5%, the highest in 22 years. Elevated interest rates have generated concerns about an upcoming recession, but surprisingly high consumer spending has buoyed the economy.
Household income is also increasing. Between 2019 and 2022, household incomes rose at a much higher rate than in previous years. Household wealth also increased, but at even higher rates. This evidence shows that despite the disruption of the pandemic, the economy remained stronger than expected.
“As the Federal Reserve is raising interest rates, you would expect that to lead us toward recession, but people just continue to spend money and continue to support the economy,” Renfro said.
Decreasing property values and development undermines local outlook
At the current rate, Multnomah County’s personnel costs are outpacing growth in property tax revenue. Property tax revenue, which accounts for two-thirds of the County General Fund, is limited in how large it can grow year-over-year because of past ballot measures that amended Oregon’s Constitution.
Personnel cost increases drive the County’s overall expenditure increases. The County’s labor contracts tie annual cost of living increases (COLAs) to inflation. Even under normal circumstances, inflation pushes personnel cost growth above property tax revenue growth. But during the recent period of high inflation, this problem has become even worse. Poor returns on the Oregon Public Employees Retirement System’s (PERS)(link is external) investment portfolio are also anticipated to push up PERS rates, which further increases County personnel costs.
Declining real market values and low levels of development are creating headwinds for the County’s financial forecast. Real market value is what the assessor estimates a given property would sell for on the open market, as of the assessment date.
About 75% of property value in Multnomah County is related to housing. And while home values on the West Coast have decreased in recent months due mainly to increases in interest rates, prices have begun to stabilize. The resilience of residential property values is good for Multnomah County.
Interest rates are also affecting the County's recording fee revenue, which is based on property transactions. The Budget Office is assuming that recording fee revenue will not recover until the end of the 2024 calendar year, when it expects interest rates to decline. In the adopted FY 2023-24 budget, the County projected $3.7 million in recording fee revenue. That has since been reduced to just $2.5 million due to slow housing activity.
“Things look like they're going OK right now,” Renfro said of the residential market, “but it’s something we’re watching closely.“
Commercial property, emerging from the pandemic amid fundamental changes in how people work, shop and travel, is a different story. In the most recent tax roll, Renfro said, the real market value of downtown commercial property declined 30%. These property declines are expected to continue for multiple years.
The concern is that commercial buildings are worth significantly less than what they were listed on on the tax roll, and the full impact of this trend is yet to be seen. While commercial real estate isn’t the primary driver of the County’s property tax revenue, its struggles are a reflection of a broader problem.
The City of Portland’s Bureau of Development Services recently announced it was laying off staff as permit revenue drops. The outlook for permit revenue in the short term is negative because high interest rates and high construction costs are continuing to impact development.
Commissioner Sharon Meieran said that because the County’s financial outlook is linked to the economic health and vibrancy of Portland, it remains an important priority.
“You think of the city and businesses downtown — in reality it really impacts all of what we do at the County,” she said. “It directly impacts us with the property values, and so it’s on all of us.”
The Budget Office continues to monitor local trends, along with population growth. If population falls, it would further impact the County’s revenue. Fortunately, in the latest report from the Population Research Center at Portland State University, the County’s population grew .56% in 2023, gaining 4,600 residents.
Putting things together
In summary, the Budget Office is assuming low growth in assessed value property taxes over the foreseeable future. The County also expects labor costs to go up 5.7% in FY 2024-25 — less than the previous year, but still high based on historical data.
Even if inflation continues to improve, the Federal Reserve is reporting that interest rates are expected to remain higher for longer than anticipated. This has significant implications for growth and development, which affects the County’s financial outlook. Until inflation cools relative to historical levels and growth picks up again, the County will continue to face the challenges of its structural deficit.
Commissioner Jesse Beason asked whether there are lessons from other communities that the County can implement to address its structural deficit.
Renfro said the property tax system in Oregon has long been inequitable and flawed. And while a transition to a new property tax system would be difficult, he acknowledged it was ripe for improvement. “If this is an impetus to look at how our property tax works, great,” he said. “We could make a lot of changes that I think would improve it.”
Facing a budget shortfall, Commissioner Julia Brim-Edwards suggested that the County might need to make decisions focused on the “prioritization of the most important things” that are “core to our mission and we know we have to deliver.”
Chair Jessica Vega Pederson said that the latest economic forecast emphasized the need for the County to prioritize preserving its core services. In December, the Chair’s Office will provide guidance to departments on how to approach the priorities of the County as they experience budget constraints.
“This is the time where we have to be thinking about our fundamental services that we provide both in our safety net system and our public safety system, and our commitments we have as a County,” Chair Vega Pederson said.