The Multnomah County Budget Office delivered an update to its five-year budget outlook Thursday, March 10, revising Fiscal Year 2022 revenue upward by $3.4 million. The overall forecast has been revised up by $40 million.
The five-year financial forecast helps the Board assess the long-term financial implications of current and proposed policies and programs. The forecast anticipates a surplus of $19.3 million for FY 2023, which starts July 1, 2022, and lasts through June 30, 2023. That’s expected to become a $38.2 million surplus by FY 2027.
But a handful of risks and uncertainties, from COVID-19 to the war in Ukraine, have the potential to undermine those forecasts. Increases in forecast County surpluses also aren’t keeping pace with costs from higher inflation.
“It’s important to note that the pandemic is really driving what is happening in the economy,” said Jeff Renfro, the County’s economist. “There’s a tremendous amount of uncertainty.”
Disparities persist in economic recovery
Wages are growing rapidly. Currently, there are more job openings in Multnomah County than job-seekers. At the same time, people are feeling the pinch of inflation, Renfro said. That pain is compounded by rising housing costs. Portland recently experienced the largest year-over-year increase in listed rents in the country.
Economic disparities also persist. Some industries that disproportionately employ people of color haven’t fully recovered, Renfro said. While unemployment rates among white and Asian workers are returning to their historical norms, the rate for Black workers is lagging behind. “As the economy recovers, we’re still getting this inequitable recovery,” Renfro said.
With the strong job recovery, some industries are also taking a while to bounce back. Health care and social assistance employment remains 5% below pre-pandemic levels, which includes the child care workforce. Employment in leisure and hospitality remains 20% below pre-pandemic levels in Multnomah County, which is about 12,000 workers.
“Do we think that jobs in the leisure and travel industry are going to come back to Portland or do we not?” Commissioner Lori Stegmann asked.
“I see no structural reason why that stuff wouldn’t come back,” Renfro said. “I think we need to get the pandemic behind us a little bit more.”
In some cases, the economy has looked almost normal in recent months. While Multnomah County started the fiscal year with a low level of rental car activity, it appears to be improving. An uptick in motor vehicle rentals, combined with inflation, is driving up anticipated revenue for FY 2022 by $2.5 million.
The other major contributor is business income tax collections. In November 2021, the Budget Office revised the County’s FY 2022 budget upward by $29.8 million due to larger-than-expected business income tax revenue. In FY 2022, the County is on pace to collect $143 million revenue. In FY 2021, the County collected $136.2 million.
An extremely high level of refunds is offsetting some of those business income tax collections, however. Last year, Multnomah County issued more than $15 million in refunds. The County has already exceeded that level this year. While higher-than-usual corporate profits and refunds are expected to return to normal, the timing of those refunds can influence the County’s budget.
“If refunds remain high while corporate profits go down, we’re going to be in a tough position,” Renfro said.
Inflation poses risk to County’s financial outlook
Inflation also poses a serious risk to the County’s budget. And while the County’s surplus is increasing, it’s not enough to cover inflation. If inflation pushes personnel costs higher by just 1% every year up until FY 2027, the County’s forecasted surplus that year could shrink from $38 million to $21.2 million.
“It’s really interesting and startling to see the impact of inflation,” Commissioner Susheela Jayapal said. “That’s kind of remarkable and a wakeup call, I think, as we look at these numbers that look so great and then realize the impact inflation can have.”
Eventually, Renfro said, the Budget Office assumes inflation will slow down as the Federal Reserve increases interest rates. If that continues, as promised, inflation could level off by FY 2025.
“The underlying assumption is that in FY 2025 our inflation and our personnel cost growth goes back to normal,” Renfro said.
But there are a couple unknowns. For one, economists don’t know how a rise in interest rates would affect unemployment. But given the state of the current labor market, Renfro said, the Federal Reserve believes it can increase interest rates without dramatically affecting employment levels.
Then there’s the war in Ukraine. Because of the conflict, energy prices are increasing rapidly. And 10-15% of the world’s wheat is grown within Ukraine and Russia. The war could spur further increases in food prices that spread throughout the economy.
If the economy experiences inflation and contraction at the same time, known as stagflation (or stagnant growth plus inflation), that can make the Federal Reserve’s job harder. It’s yet to be seen how global events will play out and, in turn, affect the County’s budget.
“Overall there’s so much uncertainty and the inflation impacts, we just don’t know how much of a damper that is going to be on the economy,” Commissioner Jessica Vega Pederson said.
Departments submit their proposed budgets
On Friday, March 4, departments submitted their FY 2023 program offers and transmittal letters. This step in the yearly budget process signals departments’ budget priorities and goals for the upcoming fiscal year.
“That allows the budget to enter into the public realm so that we can start having public discussions, worksessions, community meetings, and having that public discussion of the budget priorities,” said Christian Elkin, the County’s budget director.
On May 5, Chair Deborah Kafoury is scheduled to release her proposed Multnomah County budget. After the Board approves the Chair’s budget, the County hosts solicits community feedback on budget priorities before passing a final, official budget. If all goes as planned, the Board will adopt that final budget June 16.
To stay up to date on the County’s budget timeline, follow the FY 2023 Budget Process online.