The forecast includes a $4 million (0.6%) decrease in predicted general fund revenue for FY 2022-23, which ends June 30. The budget office also expects a $2.6 million deficit in FY 2023-24, which starts July 1. The forecast is expected to improve slightly before the deficit grows to $10.5 million by FY 2028. Overall, the outlook is not significantly different from the budget office’s previous forecast, which was presented in November 2022.
“We’re not making really significant changes today,” said Jeff Renfro, the County’s economist. “We’re making relatively small changes.”
What’s driving the current outlook? A combination of national and local factors. Nationally, inflation is slowing, but core inflation — the change in the costs of goods and services, excluding energy and food — remains stubbornly high and will continue to affect the County’s bottom line.
On Tuesday, March 7, Federal Reserve Chair Jerome Powell warned that interest rates are “likely to be higher” than initially expected, suggesting more work to reduce inflation would follow. Raising interest rates is one of the strategies federal officials have used to tame inflation. The labor market is also still hot, increasing the risk of continued inflation, which, in turn, fuels concerns about a future recession.
Increased interest rates have affected the County’s recording fee collections, Renfro said, costing revenue. Recording fees are charged by the County for registering purchase or sale of real estate. With higher-than-anticipated rate increases affecting real estate transactions, the Budget Office is revising its recording fee assumption down by $1 million for FY 2023.
The budget office is also decreasing this year’s property tax assumption by $3 million due to an increase in property tax delinquency. This was previously predicted in response to the pandemic and is finally beginning to happen.
Recession risks: probably not ‘if,’ but ‘when?’
According to Renfro, the likeliest scenario is that core inflation remains elevated, followed by additional rate increases. While that increases the risk of a recession, because the labor market remains strong, the timing of the potential start of a recession would be pushed out.
Initial weekly unemployment claims are an early indicator of a recession. Unemployment claims will bump up as recession risk increases, and that has yet to happen. And while Multnomah County is still 12,000 jobs below pre-pandemic levels, its employment growth rate has increased significantly in recent months.
“The unemployment rate is still incredibly low,” Chair Jessica Vega Pederson said. “What about the number of people no longer participating in the workforce that no longer show up in the unemployment rate and how that has grown and what that looks like across age ranges and gender?”
Renfro said job openings remain elevated. But recently, women’s labor force participation has recovered from a decrease during the pandemic. Now, he said, the labor market has returned to a pre-pandemic trend that saw prime-age working men dropping out of the workforce. Powell, the Federal Reserve chair, has attributed that pre-COVID trend, in part, to the opioid crisis and a mismatch between the educational system and the economy’s needs, Renfro noted.
“I think that’s interesting and kind of impacts the work that we do in other areas here at the County, so I really appreciate you answering that question,” Chair Vega Pederson said.
Despite recession risks, forecast remains unchanged
The forecast remains largely unchanged because, despite recession risks, consumers generally have more savings than they did pre-pandemic. Higher levels of consumer spending are expected to buoy corporate profits and stave off any major declines in the short- to medium-term.
Renfro also noted some specific local issues that are affecting the County’s forecast. For instance, the Portland area has recently experienced a population decline, mirroring other urban cores across the country. That won’t directly affect the County’s major revenue sources in the short-term, but it does impact economic growth.
What’s driving increases in migration from urban cores? One major factor is rising housing costs, which are making it increasingly difficult for people to move to communities like Portland or stay to raise families. This affects assessed property values, which factor into the County’s budget over the medium term.
“Is there any forecasting about what you expect to happen with real market property values?” Commissioner Susheela Jayapal asked.
“I’m assuming almost everyone in Multnomah County still has room for their assessed value to do that annual 3% jump, regardless of what’s happening to the real market value,” Renfro said, noting annual limits on market-driven property tax increases in Oregon.
What’s on the horizon? In FY 2025 and beyond, the County is changing its assumptions about business income tax collection. Currently, business income tax collections are expected to be flat in FY 2024, but Renfro said he expects collections to return to growth in 2025, which would mean an $8 million swing (about 5% of business income tax revenues).
The recent increase in interest rates has also created an environment where fewer people want to buy or sell property, Renfro said. High interest rates add to housing costs when people buy and sell property, and, nationally, 99% of mortgage value has an interest rate that’s lower than the current interest rate, he added.
The amount of housing transactions this winter has resulted in the lowest four months of recording fee revenue in Multnomah County for at least 20 years. But, at some point, Renfro said those transactions will rebound due to pent-up demand.
Inflation is also driving up labor costs. Because of that, the budget office revised its predicted 3% cost of living adjustment for County personnel to 3.5% in FY 2025. The current labor contract is capped at 4% in FY 2025.
All said, the office anticipates a $2.6 million deficit in FY 2024 which becomes a $10.5 million deficit by 2028. And with the labor market as hot as it is, uncertainty remains over the timing of the next recession.
“The recession risk conversation we’re having in 2023 is going to be the recession risk conversation we’re having in 2024,” Renfro said.