How is Port Townsend doing financially? City Manager John Mauro tells us pretty much all is well.

Here he is in his City Manager’s preface to the city’s 2025 budget:

“If you take the time to review the previous years’ budgets – or even just the budget messages from me – you’ll see them evolve into something increasingly clear-eyed, strategic, and honest. This year we attempt to keep moving forward in a similar fashion, with a balanced, smart, and forward-thinking budget that reflects our community’s values and sets us up for enduring success.”

In an email exchange with the Leader, he deflected concern about the city’s budget actually being a deficit budget (keep reading). He insisted the city’s budget was instead “a structurally balanced budget.” That phrase does mean something. Indeed, a structurally balanced budget is a good thing. The Government Finance Officers Association provides this explanation:

Most state and local governments are subject to a requirement to pass a balanced budget. However, a budget that may fit the statutory definition of a “balanced budget” may not, in fact, be financially sustainable. For example, a budget that is balanced by such standards could include the use of non-recurring resources, such as asset sales or reserves, to fund ongoing expenditures, and thus not be in structural balance. A true structurally balanced budget is one that supports financial sustainability for multiple years into the future. A government needs to make sure that it is aware of the distinction between satisfying the statutory definition and achieving a true structurally balanced budget.

So is Port Townsend’s 2025 budget a structurally balanced budget? Should we not be concerned about the fact that the city’s budget is only balanced by spending reserves? Is the city being set up for success, as Mr. Mauro tells it, or something else?

The “Fiscal Cliff”

At the end of 2023, I wrote an article entitled, “Port Townsend is in Trouble.” It copied the graph featured at the top of this article directly from the report of the city’s Sustainability Task Force (on which I have also reported).

That graphic shows the city heading over a “fiscal cliff,” to use the words of the Sustainability Task Force, and certainly does not reflect a structurally balanced budget that delivers sustainability. To stave off that deep dive, the city has been doing some quite smart things, such as paying down debt and setting aside funds for future debt payments.

The 2025 budget shows just over $2 million being banked for paying debt coming due next year. Likewise, funding for streets is up significantly from taxing through the Transportation Benefit District, and the budget shows large expenditures on capital projects needing attention. Further, a rainy day fund had about $248,000 at the start of the year, not a huge amount, but at least something positive.

On the other hand, both the general capital and street capital funds show large deficits. Expenditures of almost $4 million on streets will leave less than $35,000 in that account by year end. Expenditures of almost $1.4 million from the general capital budget will pull that account into the red and leave under $200,000 by year’s end. That leaves very little for next year’s needs.

Despite some accounts doing well, there is a lot of red ink, spending in excess of income, throughout the city’s budget. The result is an overall deficit of $1,826,888.

Some kinds of municipal expenses can benefit from federal and state grants, and money from such sources is funding a good deal of Port Townsend’s infrastructure work. The general fund that pays for City Hall’s operations and staffing is another matter.

Burning General Fund Reserves

There is no more federal COVID money, aka American Rescue Plan Act funds, to supplement Port Townsend’s general fund. The city booked about $2.755 million in COVID funds in 2022. The city’s general fund peaked that year at almost $7 million (see the graph heading this article). The COVID money is now gone. These emergency funds were supposed to be spent on public health, infrastructure, supporting local businesses impacted by government-mandated shutdowns and supporting “essential” workers.

These federal funds bought two police vehicles ($356,000), contract legal services ($300,000), a roof repair for the pool ($91,500) and a Bobcat excavator and mini-excavator ($98,725). More questionable expenditures show in the city’s final reporting on how it used these one-time emergency funds: remodeling City Hall ($546,000), an “engagement survey” ($50,000), expanding payroll by adding a “Long Range Planner” ($240,000) and various outlays (about $500,000) in salaries and consultants for the failed golf-course revisioning as Central Park and the megabucks Taj Mahal aquatic center proposal.

With ARPA funds now showing a zero balance, 2025 will mark the third straight year of overspending out of the general fund. At the same time, the cost of City Hall salaries and operations has increased. Some line items have more than doubled.

By the end of this year, the general fund reserve will have been drawn down almost 43% from its 2022 level.  From almost $7 million in 2022, general fund reserves will be reduced to less than $4 million by year’s end. 

In 2025, the city is projected to pull about another $1 million from its general fund reserves to compensate for general fund deficit spending. There is no reason to believe that on the current trajectory this account won’t be pulled down further in coming years.

Spending on the Mayor and Council grew from $122,362 in 2022 to $291,434 last year, but has been cut back to $237,581 for 2025, still a 94% increase over 2022.  The City Attorney account grew from $483,504 in 2022 to $826,288 last year, a 71% increase. Some money has been shaved off the City Attorney budget for 2025, coming in at $762,723, still a huge increase since 2022.

Many other City Hall line items have also grown significantly since 2022:

• Communications, from $0 to $187,736
• Human Resources, from $340,690 to $495,865
• Planning & Development, from $1,108,492 to $2,140,316 ($2,510,257 in 2024)
• Finance, more than doubling, from $465,764 to $1,055,130
• Police Administration, more than doubling, from $552,993 to $1,219,402
• Police Operations, from $2,791,357 to $3,753,359

Even in the face of persistent deficits, the city continues to expand payroll.

It will be hiring three seasonal workers in 2025 for streets, parks, storm and waste water, and water distribution tasks. It is also adding four full-time positions: water maintenance worker, park maintenance worker, community services director and arts and culture coordinator.

Washington’s rising minimum wage will drive up labor costs for seasonal works and entry level library workers. It pushes higher all the wages above it by increasing the base wages on which the rest of the pay scale is built, called “wage compression.” Further, as the Leader has been reporting, raises will be coming to City Hall that are not in the 2025 budget, adding to the red ink already requiring spending reserves to create a “balanced” budget.

Worrying Signs

To avoid falling off the fast-approaching fiscal cliff, substantial real growth in the city’s economy is required. That was the message from City Engineer Steve King back in 2023. He was refreshingly frank about the approaching crisis. “Our tax structure absolutely requires growth,” he said. To avoid crisis, a “radical” change is needed to achieve a high rate of growth not seen in recent memory.

So how is the city’s real economy doing in providing the growth required by our tax structure?

The retail sales tax brought in an estimated $3,397,900 in 2024. This is up from not only pandemic years, but also higher than 2018, when the city netted $2,529,757. That may look like a much better year, except one must adjust for inflation. The 2018 revenue, adjusted for inflation, would be worth just under $3.2 million today. That means the city’s retail and other sectors that pay the retail sales tax have barely expanded in seven years. That is stagnation.

Property values, though, are not stagnating. Owners can expect to be paying more, with some of that increase heading towards the city’s accounts. The city can also increase the tax by the permitted 1% annual bump (count on it).

But the stagnation in the underlying economy can’t be ignored. Revenue from the Business and Occupation and Real Estate Excise Taxes are actually predicted to decline in 2025.

Port Townsend’s tourism economy is not experiencing any real growth. Lodging tax revenue is a fairly good barometer of how robust the tourist economy is. 2024 saw $528,096 in lodging tax revenue. That is below pre-pandemic 2018 when lodging tax revenue was $551,080. Adjusting that figure for inflation, in today’s dollars the 2018 lodging tax revenue would be $638,597. This means that in real terms the city’s tourism industry has shrunk considerably. Troubles at Fort Worden, a major driver of local tourism, does not mean good news for the city’s future lodging tax revenues.

And the costs of running a city continue to rise. Inflation is hanging around, not dropping as much as had been anticipated a couple years ago.

Structurally Balanced? Nope.

The question is not whether the city’s 2025 budget manages to balance out on paper. The question is whether the city’s budget, judged by the standards articulated by the Government Finance Officers Association in defining a “structurally balanced” budget, “supports financial sustainability for multiple years.”

A budget that uses reserves to cover ongoing expenditures, by definition, does not meet that criteria. The city’s 2025 budget, as in the preceding two years, uses reserves to cover ongoing expenditures. It is, therefore, not “structurally balanced” as Mr. Mauro claims. It continues on course over the financial cliff predicted by the city’s Financial Sustainability Task Force.

Mauro, as in his recent comments to the Leader about the city’s deficits, assures taxpayers not to worry about the red ink. “It’s not a coincidence.” he wrote in an email to the Leader, “that we won a national [International City/County Management] award for the work done by community members, staff, and Council – and something that should provide some assurance to our community that the City, through City Council action on budgets and related policy, is making sound financial decisions over multiple years.”

That award (self-nominated, by the way) was for work showing the city falling off a fiscal cliff three years from now. It was not an award for continued payroll expansion and deficit spending that will confirm that grim prediction.