Focus on Finance: Conservative Budgets in a Liberal City

Glen Lee is the Director of Finance for the City of Seattle, a position that he has held since 2010. Lee has worked for the Seattle municipal government under five mayoral administrations since 1994 and will continue to do so under the newly elected Mayor Ed Murray. Prior to his move to Seattle, Lee worked in the California State Legislature as a fiscal and policy analyst. Lee received a BS in agricultural economics from UC Berkeley and an MA in economics from California State University. 

The Seattle metropolitan area’s economy has managed to outpace many of the other 25 largest US metro areas since the recession. How has more conservative budget management aided in Seattle’s stability?

Certainly going into the recession and coming out, absolutely, cautious budget management helped. There are two or three ways to think about this. The first is, on a longer-term basis, our agreements and funding of the pension system, in particular, were relatively modest agreements, benefit packages, but more importantly the system was fully funded. Therefore, the required contribution was made. And so, while we have legacy costs from the recession and our portfolio decreased substantially, these issues are from that single event. They are not as a result of years and years of committing to benefits that we did not fund – on top of losing large portions of our portfolio – and I think that puts us in a far better position than many of my colleagues around the country are in.

On a shorter-range basis, to the credit of a prior administration, the economists were telling them and their decision makers that by the end of 2006-2007 mainstream expectations were for a recession. To their credit, they took tens of millions of dollars of new revenues that were coming in the door through a variety of taxes and set them aside for one-time capital expenses, rather than expand program areas. So when the recession hit, that served the then current administration very well because they had less to unwind. They had two or three percent of the budget that they could just take off the table because all those dollars were spent on one-time items. They still had to make very difficult cuts, but it was not as severe as it needed to be. I give credit to the prior administration for foreseeing the recession and then reacting to it.

What do you attribute this political mentality to? In other words, why is it different in Seattle than the other municipalities?

I think it is really curious because in today’s political environment – in terms of red and blue – the community is clearly blue. Clearly Seattle is left of center, progressive, however you want to describe that. Yet, on a financial basis, they are extremely conservative. Seattle residents are happy to raise their taxes with a vote for a whole variety of things. Very seldom do the citizens say no to a tax increase, but they hold the administrators of those resources accountable. They are not interested in riskier, “we’ll give you services but you don’t have to pay for it this year” type of governance.

I would call it a balanced large government view of the world – where people are okay to pay for it, but they don’t mind it being large – as opposed to what we think of in terms of today’s paradigm that folks who are more fiscal hawks also want government to shrink in size. I know that’s an over generalization, but that’s not true at all in Seattle. People like expanding roles in government, but they absolutely want fiscal responsibility and no long-term risks and so forth. I wouldn’t attribute that to any individual city manager. Rather, that’s reflected in the community and therefore is reflected in the elected officials who come to office.

Seattle’s 2014 proposed budget, which does acknowledge that growth outlooks continue to be slowed by the 2009 recession, points to growth in construction permits and real estate transactions as reasons to be optimistic about the City’s future. Do you expect this growth to eventually hit peak 2007 levels or does the city need to seek more revenue streams?

No, I don’t. The primary driver of the very expensive economy in the mid-2000s was a building boom, not only on the residential side, which the rest of the country went through, but also on the commercial side. And we, anecdotally, were able to identify literally hundreds of millions of dollars of investment from all over the world that were betting on apartments, commercial buildings, and office buildings – not only in the metropolitan area, but in particular in the city of Seattle. The underlying economics of employment growth and income growth didn’t sustain, would not sustain, the amount of capital that came in to the community.

We had this very much above-trend spurt of growth to the building stock that was all private sector. Of course, as that money was spent, we collected taxes on it and that led to a huge growth in our resources both for the Seattle and the immediate metropolitan area, but for the larger metropolitan area in the state as well. We really were very fortunate, I guess. On the other hand, we have a 20 percent vacancy rate in offices, but the perception is that space will fill over a generation or so.

Seattle, at least the previous administration, has advocated for a well-funded rainy day fund. Not all cities have done this. Would you advocate for more direct funding of some sort of emergency finance system over direct infrastructure investment, or something else entirely?

I would not. I think we have the appropriate balance for general government resources. Like every city, we have enterprises like an electric company and a water company. For general government resources, I think that setting aside reserves is an appropriate priority and that it is very interesting that there was a consensus with the mayor and council as they were laying people off to also build the reserve funds – pretty remarkable.

Now because revenues are generally exceeding forecast, there are mechanisms for those extra resources to go right back into the reserve funds. So it’s foreseeable, by the end of 2015, that we could have upwards of seven or eight percent of the general government budget in reserves. In other words, our reserves would be up to seven or eight percent of our general government expenditures, and for an entity our size, that’s pretty good. And, I would expect that to be fairly soon.

There has been an increase in employment in Seattle since the recession officially ended – over nine percent. The 2014 budget proposal lists a number of things that have attributed to that, including success in Boeing. Of course, in the early 1970s and 1960s Boeing fell dramatically and so too did Seattle. How is Seattle’s economy different now than it was then so it can take some of these fluctuations from large companies?

I would argue that the after-the-fact impacts of the 9/11 tragedy were not only concentrated in New York City, but also Seattle. Within five days of that tragic event, Boeing announced the lay off of over 30,000 employees. We disproportionately were hit by the recession of 2001, 2002, and 2003 as of course tragically New York City as well.

Just to be clear, we’ve had another Boeing bust, and we’ve built ourselves back up. But why are we different? It’s mainly because the economy has diversified into information technology, and it goes without saying that Microsoft is carrying the day. In fact, there was a point in time in 2004, 2005, and 2006 where the payroll at Microsoft was bigger than the payroll of Boeing. And, then of course, Microsoft as much as Boeing creates a lot of suppliers and spin off companies where we had, especially in the past decade, a tremendous amount of venture capital coming into the community to bet on different IT applications being developed by former Microsoft workers.

This had a huge impact on the economy in Seattle between 1998 and about 2005. I think now, the other side of IT is the development of Amazon.com. Publicly, they are saying they expect to employ over 30,000 people in downtown Seattle. Currently, they have roughly 6,000 or 7,000. That will continue to sustain the growth, and no matter what you think of them, they are really an IT company. So they’re putting a lot of pressure on the labor market in the Seattle region for highly trained technical IT folks – meaning graduate degree level folks. So I think that’s how we can survive Boeing busts. Make no mistake, for us to continue to thrive we need a robust Boeing presence, and I’m hoping that that continues.

In regard to transitioning between administrations, you are an unelected government official but you work very closely with elected officials. Seattle seems to have a good outlook going forward. How do you, through different transitions of elected officials, maintain that same level of output that you’ve experienced since the recession?

Well, there are specific goals that every administration brings to the table when they’re elected, and it’s not for people in my position to do anything but help them with those. Relative to the financial arena, we’re waiting for very specific visions or policies from the incoming administration. I think more broadly, we work extremely hard and have a history of developing very concise and yet robust transition documents and briefings. I’ve been involved in two other transitions, and I think we are very good nationally, relative to our peers, at our economic and fiscal forecasting functions, which are among the best in the country.

It’s part of the ethic I described a while ago. Our elected officials are happy to invest in those kinds of very sophisticated staffs, so that they can keep track of what’s happening financially. And I think that mindset or value of having a good grounding on our financial condition transcends any elected official that I’ve seen come in or out of the city government. I doubt that this incoming mayor is any different. I know he’s asking for all the financial information and forecasts that we can provide, and I’m very excited that there’s that kind of interest in these matters.