Budget office sees growing surplus in latest forecast, but inflation and war pose risks

March 11, 2022

The Multnomah County Budget Office released an update to its five-year budget outlook on Thursday, March 10, revising fiscal year 2022 revenue upward by $3.4 million. The overall forecast has been revised upwards by $40 million.

The five-year financial forecast helps the Council assess the long-term financial impact of current and proposed policies and programs. The forecast calls for a surplus of $19.3 million for fiscal year 2023, which begins July 1, 2022 and lasts until June 30, 2023. This is expected to become a surplus of $38.2 million by financial year 2027.

But a handful of risks and uncertainties, from COVID-19 to war in Ukraine, have the potential to undermine those forecasts. Increases in the county’s projected surplus are also not keeping up with the costs of higher inflation.

“It’s important to note that the pandemic is really driving what’s happening in the economy,” said county economist Jeff Renfro. “There is a lot of uncertainty.”

Disparities persist in economic recovery

Salaries are rising 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. This pain is compounded by rising housing costs. Portland recently saw the largest year-over-year increase in advertised rents in the countryside.

Economic disparities also persist. Some industries that disproportionately employ people of color have not fully recovered, Renfro said. While unemployment rates for white and Asian workers are returning to historic norms, the rate for black workers is lagging. “As the economy recovers, we still get this inequitable recovery,” Renfro said.

With the strong recovery in employment, some industries are also slow to rebound. Employment in health care and social assistance remains 5% below pre-pandemic levels, which includes the child care workforce. Leisure and hospitality employment remains 20% below pre-pandemic levels in Multnomah County, which has about 12,000 workers.

“Do we think the jobs in the leisure and travel industry are going to come back to Portland or not?” Commissioner Lori Stegman demand.

“I don’t see any structural reason why this stuff wouldn’t come back,” Renfro said. “I think we need to put the pandemic behind us a 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 car rental activity, it appears to be improving. A slight increase in motor vehicle rentals, combined with inflation, increases forecast revenue for fiscal 2022 by $2.5 million.

The other major contributor is corporate income tax collection. In November 2021, the Budget Office revised the county’s fiscal year 2022 budget upward by $29.8 million due to higher than expected corporate income tax revenue. In fiscal year 2022, the county is on track to collect $143 million in revenue. In fiscal year 2021, the county raised $136.2 million.

However, an extremely high level of refunds offsets some of these corporate income tax collections. Last year, Multnomah County issued more than $15 million in refunds. The county has already surpassed that level this year. While higher-than-usual corporate profits and refunds are expected to return to normal, the timing of those refunds may influence the county’s budget.

“If reimbursements stay high while corporate earnings decline, we’re going to be in a tough spot,” Renfro said.

Inflation poses a risk to the county’s financial outlook

Inflation also poses a serious risk to the county budget. And while the county’s surplus grows, it’s not enough to cover inflation. If inflation drives personnel costs up just 1% each year through fiscal 2027, the county’s projected surplus that year could drop from $38 million to $21.2 million.

“It’s really interesting and surprising to see the impact of inflation,” the commissioner said. Susheela JayapaI said. “It’s quite remarkable and a wake-up call, I think, as we look at these numbers that look so good and then realize the impact that inflation can have.”

Ultimately, Renfro said, the Budget Office assumes inflation will slow as the Federal Reserve raises interest rates. If this continues, as promised, inflation could stabilize by FY2025.

“The underlying assumption is that in fiscal year 2025 our inflation and growth in personnel costs will return to normal,” Renfro said.

But there are some unknowns. On the one hand, economists do not 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 raise interest rates without significantly affecting employment levels.

Then there is the war in Ukraine. Due to the conflict, energy prices are rising rapidly. And 10-15% of the world’s wheat is grown in Ukraine and Russia. The war could lead to further increases in food prices that would spread throughout the economy.

If the economy is experiencing inflation and contraction at the same time, known as stagflation (or stagnant growth plus inflation), it can make the job of the Federal Reserve more difficult. It remains to be seen how world events will play out and, in turn, affect the county budget.

“Overall, there’s so much uncertainty and the impacts of inflation, we just don’t know how much it’s going to dampen the economy,” the commissioner said. Jessica Vega Pederson noted.

The departments submit their draft budgets

On Friday, March 4, departments submitted their program offerings and side letters for fiscal year 2023. This step in the annual budget process signals departmental budget priorities and targets for the upcoming fiscal year.

“It allows the budget to enter the public domain so that we can start having public discussions, working sessions, community meetings and having this public discussion on budget priorities,” said Christian Elkin, director of the county budget.

On May 5, the President Deborah Kafoury must release its proposed budget for Multnomah County. After the council approves the president’s budget, county hosts seek community input on budget priorities before adopting a final official budget. If all goes as planned, the Council will adopt this final budget on 16 June.

To stay up to date on the county budget calendar, follow the FY2023 budget process in line.

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