Strong Local Economy Faltering, County Facing Large Deficit

If you think our “strong local economy” is going to protect the Seattle area from feeling a pinch in the housing market and elsewhere as recession looms on the horizon, think again. The pinch is here.

Photo by Flickr user sweet_chicago1With a cooling economy pinching tax revenue even as government costs rise, King County faces a $45 million budget deficit in 2009 unless services are cut below current levels, county officials said Tuesday.

That projection is gloomier than the $25 million general fund shortfall for 2009 forecast by County Executive Ron Sims in October. And the years beyond 2009 look worse still, county Budget Director Bob Cowan said.

The general fund relies primarily on sales and property taxes. The recent rapid growth in sales tax revenue is slowing with the economy. Property tax growth also is faltering: Although overall tax increases on existing property are capped at 1 percent in any event, new construction is exempt from that limit, and the housing slowdown has put a crimp in that revenue source, Cowan said.

So much for our special immunity. But as long as Microsoft and Boeing keep hiring, everything will work out, right?

How about instead of sticking our heads in the sand and pretending everything will just be okay, we get in gear and start looking for ways to work through the hard times that are almost certain to be just around the corner?

Along those lines, I received an email from a reader that wanted to discuss “where people should spend their tax rebate checks in a way that will truly benefit our economy.” Personally I think the problems with our economy are beyond the point where putting a few thousand dollars in everybody’s pocket is going to help things. I’d suggest using the money to pay off a little debt, do a little contrarian investing, or just plain save it… pretty much anything but spending it.

Anyway, how do you think individuals, families, and local governments can best prepare for a serious economic slowdown?

(Gregory Roberts, Seattle P-I, 03.11.2008)

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

51 comments:

  1. 1
    David McManus says:

    “Personally I think the problems with our economy are beyond the point where putting a few thousand dollars in everybody’s pocket is going to help things. I’d suggest using the money to pay off a little debt, do a little contrarian investing, or just plain save it… pretty much anything but spending it.”

    Amen, brother! Isn’t that how we got into the mess we’re in in the first place, by spending money like we were super-rich? Oh well, my great-grandchildren can pay it off. I’m going to stuff my check away somewhere instead of blowing it on crap I don’t need.

  2. 2
    Chris says:

    Are property tax increases on existing homes capped at 1%? My landlord just received a property tax increase of over 20% and is passing the increase on to me. He is an honest guy and I know he’s not trying to pull one on me, but a 20% increase in property taxes seems ludacrous.

    Is the 1% rule real?

    Thanks in advance for any help.

  3. 3
    The Tim says:

    Chris, the 1% rule applies to property tax revenues as a whole, not to individual properties. It’s complicated and hard to explain briefly. The Seattle Times describes it like this:

    The cap doesn’t apply to individual homes but rather limits increases in total property-tax collections by a taxing district to 1 percent a year.

    Hope that clears things up a bit.

  4. 4
    David McManus says:

    It’s kind of real. I believe that municipalities can bank future tax increases and then drop it on you in the future, so that they can get around the 1% rule. Also, I think that may only apply to the state portion of property taxes, not school levies, EMS, etc.

  5. 5
    John says:

    Saving for rainy days isn’t a platform that can get anyone elected.

  6. 6
    David McManus says:

    Well, our esteemed governor was trumpeting the fact that we had a huge surplus a few months ago and that she was going to save a lot of it. I wonder if she followed through?

  7. 7
    TheMightyQuinn says:

    State spending up 33% since Gregoire took office, no wonder they’re in the hole.

  8. 8
    The Tim says:

    Let’s be clear here. The post is referring to the King County budget. The state budget isn’t doing that much better, but they’re not quite as bad off as King County.

  9. 9
    AndyMiami says:

    I think I will use the money to throw a party. I plan to invite former NY governor Eliot Spitzer and some of his “girlfriends”. Not sure I can afford the girlfriends with the rebate check…maybe some other Seattle Bubble readers can help with your rebate checks…could be fun.

  10. 10
    David McManus says:

    I use King County parks often, Marymoor the most. I pay a ton of money in taxes for these parks. Everytime I go there, there are potholes in the parking lot that you could lose a small child in. There hasn’t been a parks levy that I’ve seen get voted down yet in my 10 years of living here. So what’s the excuse? It seems like with everything in this county it’s tax, tax, tax, tax, deliver something way less than what we promised, tax, tax, tax, tax. Why don’t we finally vote for CHANGE in King County government because it’s obvious whoever has been in control is messing things up?

  11. 11
    The Tim says:

    David, you must be in the minority, because you’re right—the way people vote around here makes it clear that they must be pretty happy with the way things are being run.

  12. 12
    Sniglet says:

    The first economic priority for everyone (governments, individuals, and businesses) is to reduce debt and spending. Those governments that are unable to live within their means already will be those that hurt the most in a downturn.

    Governments can pretty much be certain that revenues will fall, so they should be planning for how to reduce spending to keep it in line with the short-fall.

    Unfortunately, I think the picture is going to be very bleak as the recession picks up steam. Just thinking of what investment losses will do to pension plans, and other long-term liabilities just makes my skin crawl.

    What will King County do if employee pension funds lose a tonne of money from stock losses? Will they need to raise everyone’s taxes to make up the short-fall?

    Heck, even municipalities that don’t face job losses or revenue short-falls are seeing their costs of financing rise with all the problems on the debt markets. No one is going to come out of this unscathed.

  13. 13
    Markor says:

    I use King County parks often, Marymoor the most. I pay a ton of money in taxes for these parks. Everytime I go there, there are potholes in the parking lot that you could lose a small child in. There hasn’t been a parks levy that I’ve seen get voted down yet in my 10 years of living here. So what’s the excuse?

    One thing people tend to miss is the fact that the federal gov’t pays for a lot less of your services now than during the Clinton years, due to the emergency need to make the rich fabulously richer. (“I represent the haves and the have mores”, Bush said.) That means state gov’ts must fill the gap, hence higher taxes and/or less services.

  14. 14
    Sniglet says:

    By the way, any government that keeps funds in any kind of investment pool at all, should immediately sell any kind of security they might hold and put the entire proceeds solely into sovereign debt of G7 nations. Now is not the time to be chasing yields with asset backed securities, equities, or anything else.

  15. 15
    Olaf says:

    A $45 Million dollar deficit? Come on, Tim, that’s just a rounding error in the county’s $5 B budget. (Less than one percent of the whole, to be precise.) I agree in general that the national economy is in big trouble, and that western WA shouldn’t assume it’s “special,” but let’s keep some perspective. EVERY bit of financial news is not necessarily a piece of the Seattle Bubble picture.

    Also, for what it’s worth, I think this county (and this state) are run pretty darned well. I’ve lived in other states and other countries, and I have to say I’ve never felt so assured that my tax dollars are being well spent.

  16. 16
    David McManus says:

    “One thing people tend to miss is the fact that the federal gov’t pays for a lot less of your services now than during the Clinton years, due to the emergency need to make the rich fabulously richer. (”I represent the haves and the have mores”, Bush said.) That means state gov’ts must fill the gap, hence higher taxes and/or less services.”

    So lack of county services is Bush’s fault? Dude, get back on your meds. This county has NEVER met a tax it didn’t like. They have plenty of money, the problem is that they just waste it.

  17. 17
    Markor says:

    State spending up 33% since Gregoire took office, no wonder they’re in the hole.

    It is possible to save money by spending money; e.g. better preventative maintenance, like for ferries. Let’s hope the money is spent wisely.

    $45 million is pocket change for King County. It’s a liberal-run county, hence well managed, which explains why we hear about budget problems before they get out of hand, unlike say, Orange County, CA, which once imploded under “conservative” leadership. I don’t think there’s anything to worry about at the county budget level save a continued reduction in federal contributions as the nation as a whole is ruined.

  18. 18
    Marc says:

    Tim,

    The problem with your post is that it presupposes that King County is spending tax revenue wisely. I don’t have a citation but I recall reading various articles in the past year or two that indicated the county budget has grown at precipitous rate. Hat’s off to Sniglet for suggesting that the county learn to live within its mean. However, he and I part ways when it comes to his protectionist investment views. Pension fund investing is focused on the long term; cyclical downturns are no reason to fundamentally change investment appoach.

  19. 19
    David McManus says:

    And don’t forget Bush’s controlling of the weather and making it continuously rainy and cloudy here, but sunny everywhere else!

  20. 20
    Markor says:

    So lack of county services is Bush’s fault? Dude, get back on your meds. This county has NEVER met a tax it didn’t like. They have plenty of money, the problem is that they just waste it.

    It’s a fact that less of your federal taxes come back to you in the form of services, unless you like, say, the “service” a no-bid contract buys to build pre-condemned buildings in Iraq. Also every day a greater portion of your federal taxes pays for interest on debt, since the gov’t doesn’t pay down any principal.

    Give me an example of an egregious wasted expenditure at the county level. There’s always room for improvement. I can think of one: those automated toilets that the drug dealers and hookers love. That was a big mistake, but not criminal behavior like we see at the federal level. What can you think of?

  21. 21
    Markor says:

    Pension fund investing is focused on the long term; cyclical downturns are no reason to fundamentally change investment appoach.

    But not fundamentally changing the approach could spell disaster. There’s no guarantee this is a cyclical downturn. The country may well have reached its zenith, never again to be as well off. That’s especially possible when $trillions are being borrowed at the federal level, as they are now, on top of $trillions already borrowed. People tend to ignore the massively irresponsible federal borrowing, but it does spell doom for all but the rich.

    For example, since the 1980s the stock market has returned something like 10% annually. Since 1929 it has returned about 5%. Between 1929 and 2039 it may return 0% even after inflation.

  22. 22
    Michael says:

    Here is my favorite article of the day:

    http://www.bloomberg.com/apps/news?pid=20601087&sid=anevAV5cN_hU&refer=home

    I have been counting the number of times I hear the word “Depression”. In case anyone missed it Harpers had an article that stated that they expect the housing slump to bottom in 2012!

  23. 23
    b says:

    Marc –

    Buying and holding long term, over the cycles, is a strategy employed by the lazy. If you don’t want to have to deal with thinking, then you will probably be OK buying some large cap stocks at any price and hoping for the best in 30 years. These funds are actively managed by people who are highly paid. They should be moving assets around all of the time to maximize profit and minimize loss. Staying in risky markets right now with large sums of money, when they should be attempting to preserve capital to invest again another day, is foolish and irresponsible for their clients.

  24. 24
    Rachel says:

    Can you tell me why doing anything except spending the stimulus check is the right thing for the economy? Or is that just the right thing for the individuals? I’m no genius in economics, so I seriously don’t know what the right thing for the economy is.

    For what it’s worth, we’re spending ours on a new computer. It seems that since the relatively accepted proposal is to pump more money into the economy in the form of a stimulus check, then the right thing for me to do would be to spend it.

  25. 25
    Sniglet says:

    If you bought stocks at the top in the ’20s, you would have to wait until the ’50s just to reach parity. Buy and hold only works in bull markets. There are lengthy stretches of time where stock values go down, or nowhere at all.

    I suppose it depends upon what your definition of “long term” is. If it is a 30 or 50 year time-span, then maybe the theory of buy and hold would work.

    Of course, it depends WHAT you buy. Many companies simply cease to exist after 40 years.

  26. 26
    Tony Danza says:

    If you bought stocks at the top in the ’20s, you would have to wait until the ’50s just to reach parity. Buy and hold only works in bull markets. There are lengthy stretches of time where stock values go down, or nowhere at all.

    That would only matter if you put entire life savings into equities at the peak of the market. Ever heard of dollar cost averaging? Only fools try to time the market or interpret macro economic trends.

  27. 27
    Me says:

    Saw this today, looks like Washington is refing a lot more than average

    http://www.businessweek.com/common_ssi/map_of_misery.htm

  28. 28
    b says:

    Rachel – If its not spent on consumer goods then it does not stimulate the banks (who don’t get income from your debt pay down), nor on the consumer spending chain which is 70% of our GDP. Some folks might save it, which would help the banks, but with a negative savings rate in the country that is not a lot of people. I am planning on spending mine on the CA income taxes that I owe, you guys in WA are lucky on that front! In one end, out the other.

  29. 29
    Marc says:

    b,

    The last point in my post above is that pension funds should focus on long term growth and not blindly follow the market when it overreacts to cyclical downturns. I didn’t say anything about buying and holding strategies.

    A great way to obtain long term growth is to buy into industries with long term growth potential that everybody else is fire selling. Buffett is a proponent and I think it was Rockefeller who said something to the effect that the time to buy is when the streets run red.

  30. 30
    The Tim says:

    Me, that map is actually fairly old. I posted about it back in 2006. I’d be interested in seeing an updated version.

  31. 31
    Markor says:

    If you bought stocks at the top in the ’20s, you would have to wait until the ’50s just to reach parity. Buy and hold only works in bull markets. There are lengthy stretches of time where stock values go down, or nowhere at all.

    That would only matter if you put entire life savings into equities at the peak of the market. Ever heard of dollar cost averaging?

    There exists no stock market strategy that guarantees that your portfolio won’t go done in value, or be flat, over any period of time. You can lose money with dollar cost averaging over decades too.

  32. 32
    b says:

    Marc –

    And what are they supposed to buy with if they kept all of their money in downtrend markets? Folks like Buffet are in cash right now, so they can buy when the streets are red. Again, this is a strategy of moving into and out of markets depending on the markets circumstances. Right now staying in equities or commercial paper is stupid unless you think the bottom is in. There are better returns elsewhere, and much better returns if you have the capital to buy when there is blood in the streets.

  33. 33
    b says:

    Tony –
    Dollar cost averaging is the same as buying and holding, you just get to smooth out the price you paid. It is, again, the lazy investors way to hopefully get 7% when everything is said and done. Real returns are made by those “fools” who pay attention to crazy stuff like macroeconomic trends.

  34. 34
    Markor says:

    Buying and holding long term, over the cycles, is a strategy employed by the lazy. If you don’t want to have to deal with thinking, then you will probably be OK buying some large cap stocks at any price and hoping for the best in 30 years. These funds are actively managed by people who are highly paid. They should be moving assets around all of the time to maximize profit and minimize loss.

    The record is clear (with many many studies) that actively managed funds do not do as well in the long run as index (buy & hold) funds. That’s because hardly anyone, even fund managers, can skillfully predict the future, so the higher transaction costs & other expenses of actively managed funds (which just so happen to make those managers far higher salaries than the managers of the index funds) reduce their gains below those of index funds in the long run.

  35. 35
    b says:

    Markor –

    I should have been more clear, I was talking about the pension fund managers there. Not mutual fund managers compared to index funds. And you are right that they generally perform worse, mainly because of fees, transaction costs and the fact that most people just park their 401k into them. Most of those people are very good at actively managing steak dinners and prostitutes, but not much else. A pension fund should be seeking good returns while maintaining capital at all costs. Buying and holding into down market cycles is not a way to do that. Nobody would invest in a money market fund that told them “Hey, it might be 70 cents on the dollar today, but we promise things will be back up 10 years from now”.

  36. 36
    Markor says:

    A pension fund should be seeking good returns while maintaining capital at all costs. Buying and holding into down market cycles is not a way to do that.

    That implies that the manager can skillfully predict the future. That is often harder than it seems. For example, if all market players are convinced that the market will fall 10% and act on that, it’ll quickly become a random walk and almost all the players will lose money after transaction costs. (Somewhat like the game of musical chairs.) The bottom line is that the financial markets are zero-sum games (people win only at others’ expense), so the truly skillful winners tend to be those who bet on long-term trends with the concomitant low transaction costs. And even they may lose when they predict the long-term trend wrong.

    I agree that today a downturn looks like a sure thing. Since it’s a zero-sum game always, the losers will probably be the small investors and their 401Ks.

  37. 37
    laxtosnoco says:

    To Chris (#2), you should check the assessment on your landlord’s property using the King County assessor’s website. You might trust the guy, but why not verify too if it takes 30 seconds? A 20% increase in one year sounds fishy to me.

  38. 38
    b says:

    Markor –

    I think we are getting off on a tangent. I agree that making good returns over the long term is not easy, but nor is it extremely difficult because the people who “buy and hold” or park their 401k money are a much larger group these days than people who actively trade.

    The original point here that I was arguing against was from Marc that a pension fund should just buy and hold and ride out market cycles because they are thinking long term. Instead, a fund like that should be moving to safety from any market where they are starting to lose their bets, they should not be losing bets for a long time hoping to make it up at some point in the future. That is something you can do if you want with your 401k when you are 30 years old, not how you manage a large pension fund people are drawing on for the next 30 years.

  39. 39
    rose-colored-coolaid says:

    Just to summarize. Here is the list of investors who have a long-term track record of performing considerably better than the market average.

    Warren Buffett.

    With that list complete, everyone else will generally do about as well as the market. This isn’t to say you should give up. If a friend gives you a really good tip, investigate and invest in it. But if the best you can do is about the market average, don’t be ashamed of that either.

    I recommend that everyone do a little of both. A large part of your investment portfolio should be in indexed funds. These are proven, and cheaply managed. They usually out perform managed funds. Outside of that, pick a couple of long term trends that you believe will do especially well and get into those as well.

    And most of all, Good luck!

  40. 40
    explorer says:

    Indexed funds are conventional wisdom, for conventional times, I’m now convinced. Markor has it right in my case. My IRA broad based indexed MF’s are tanking, and I’m cutting my losses this week.

    When you LOSE $500 on a 5K investment in broad-based T R Price and Vanguard funds, time to head for the hills. Zero sum game indeed.

    On the other hand, the defined benefit plan I am a part of at work (City of Seattle) is still generating healthy interest, so far. Unlike the county, they don’t have a very large stake in MBS’s, but they do have some. On the other, other hand, the employee union voted against their self-interest, and is going to allow the city to raise contributions deducted from employee pay to cover future losses.

    Bone-headed, and not a good sign for the future. Stll, it does not look as bad as King County for the forseeable future.

  41. 41
    b says:

    RCC –

    Sorry, but that is not true. If it were, there would not be any professional investors, they would either have given Buffet all of their money or parked it in index funds. On balance, the average investor with the average amount of money doing the average amount of trading will average out to the market return. It is a bell curve, the goal being to get on the good side of it in the end. Considering how many people are ready to make extremely poor financial decisions, playing the game smart will very likely give you a net benefit in the end over sitting it out.

  42. 42
    Alan says:

    Some might argue that the result is not a bell curve. You may get a large number of people who do worse than ‘average’ and a few people who do outstanding.

  43. 43

    Anyway, how do you think individuals, families, and local governments can best prepare for a serious economic slowdown?

    Depends on how serious it is. If it’s serious, then individuals and families may want to use their IRS rebate checks to increase their investments in ammo and canned food.

    But seriously (pun), I think people should focus on saving for the worst of circumstances. If things get really bad, there will be more people out of work. It is essential to have cash on hand to make it through potential unemployment. This is especially true now, because credit card companies are starting to feel the credit crunch. The days of easy credit are ending fast, and Americans need to change their financial mindset. They want be able to rely on plastic to make it through tough times.

    For the relatively wealthy, I sure wouldn’t keep more than $100K in any one FDIC institution. Chances are very good that several banks are teetering on the edge of bankruptcy. Protect your assets!

  44. 44
    Markor says:

    Just to summarize. Here is the list of investors who have a long-term track record of performing considerably better than the market average.

    Warren Buffett.

    With that list complete, everyone else will generally do about as well as the market.

    Well put; I agree. And it can be argued that Buffett has long held the enviable position of being able to make his own markets, to be his own self-fulfilling prophecy, not just by people buying what he buys after he does, but also by being on the boards of many of the companies he owns stock in.

  45. 45
    Markor says:

    Sorry, but that is not true. If it were, there would not be any professional investors, they would either have given Buffet all of their money or parked it in index funds.

    If there were more investors with Buffet’s skill and track record, they’d be on the “richest people” lists like he is. There are no doubt some that are approaching Buffett, and some that spend their profits as they make them, but the list is probably small. Everyone else gets just below the market average or less in the long run.

  46. 46
    b says:

    Markor/RCC –

    You do not have to have made billions to beat market average! This discussion is getting quite ridiculous. If you average 10% a year on the measly investments us peons make, you have beaten the market and came out ahead of buying index stocks and are not anywhere near a billionaire.

  47. 47
    Sorin says:

    For what it’s worth, we’re spending ours on a new computer. It seems that since the relatively accepted proposal is to pump more money into the economy in the form of a stimulus check, then the right thing for me to do would be to spend it.

    It’s worth mentioning that those stimulus checks aren’t free money from your friendly federal government. They are loans against your tax bill next year. Think of it more like those zero interest for 12 months promotions. A year later, you get the bill from the IRS saying they want their $600 back with your 2008 return.

    Me, I don’t think I qualify for a check, but if I did, it would go straight into a money market account. I have no interest in perpetuating this economic bubble. Better it slowly deflate now than continue building and eventually pop. Just like a balloon, the bigger you blow it up, the higher the risk it will explode. All this stimulus bill is doing is blowing more air into the balloon to keep it over-inflated for a little while longer. It doesn’t address the lack of fundamental support.

  48. 48
    Buceri says:

    Gotta love Seattlelites; complaining about taxes, county and city services. Yeah, only King County hikes taxes. Every city, county and state will go into a deficit with the slowdown of the economy and real estate.

    You want to compare taxes? I don’t pay state taxes in FL; my local sales tax is 6-7%. I pay $3K in property taxes here in Tampa, FL for a 1800sq.ft. duplex (until a year ago my governor was the smartest Bush; new governor is Republican, the state house and senate are Republicans; and republicans have run the state for over 10 years now – taxes have skyrocketed); AND they all complain that the federal money is not coming down like it used to.

    My daughter’s classroom is a freaking trailer (and I live in a upper-middle class gated community – something you guys don’t need in Seattle); don’t make me laugh!!! Libraries in my city are open a few (very few) hours a day (of course, reading is for liberal pussies, so who cares!!); public transportation is non-existent; parks….what is that??? Bicycle lanes???? Please; real men drive trucks. Add to all that some of the most uneducated, unhealthy population in the country.

    Like the guy that’s moving to AZ wrote a few days ago; you guys don’t know how good you have it in Seattle. Believe me, you don’t.

  49. 49
    Markor says:

    Good info Buceri. I used to live in Idaho, which is also a Republican-dominated state, so I know what you mean. The fools voted to weaken the unions there so they could all get pay decreases and the rich could get richer. Now the average college graduate there gets about $10/hr while there are $million homes sprinkled all over to hold the overseers. Like most Republican states it’s a police state; you’ll typically see 5 cops in an hour and they’ll pull you over for going 37 in a 35.

  50. 50

    I’M HEAVY IN EURO BONDS

    You might try precious metals too, but don’t tell anyone.

  51. 51
    old timer says:

    They might have covered the shortfall by not chasing yield
    “King County could lose millions from investments”

    http://seattlepi.nwsource.com/local/352135_bonds21.html

    The thing is, Microsoft is doing ‘price reduced’ to move it’s product; Boeing can’t even build it’s product to any real schedule yet, and Starbucks is losing it’s footing. Things are going to slow down, and so should the State, Count,y and City expenditures.
    Go on, don’t bother to look where you’re going, but don’t start to cry when you trip and fall on the cracks that are opening.

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