Multnomah County Budget Office projects deficit for fiscal year 2024 amid risk of recession, inflation and higher personnel costs

November 18, 2022

The Multnomah County Budget Office released an update to its five-year budget outlook on Tuesday, November 15, forecasting a growing gap between revenue and expenditure in the latest General Fund forecast.

The five-year forecast helps the County Board of Commissioners assess the long-term financial implications and stability of current and proposed policies and programs. The forecast calls for a deficit of $2.6 million for fiscal year 2024, which begins July 1, 2023 and lasts until June 30, 2024. The deficit is expected to reach $15.4 million by fiscal year 2028 .

Business income and property tax collections are steady, said county economist Jeff Renfro. But they may be offset by factors such as increases in personnel costs in light of new collective agreements, growing recession risks and continued uncertainty about inflation.

“I will just say that now I think we are more likely to have a recession than not,” Renfro said. “And we incorporate that into some of our assumptions.”

Additionally, one-time funding from the American Rescue Plan Act, which supported a series of poverty, homelessness and health programs during the pandemic, is about to expire. President Deborah Kafoury said that while this funding was “fabulous and essential to providing services in our community,” the fiscal impact of continuing some of these programs would also increase costs.

Contradictions in the face of a growing risk of recession

While the most recent data shows inflation may be cooling, Renfro said, the Federal Reserve could keep interest rates higher longer than initially expected to ensure inflation falls. Each month that passes with higher interest rates increases the risk of recession, Renfro said.

Renfro noted that corporate profits rose massively during the most recent phase of the pandemic. This can in part be attributed to companies cutting costs by reducing the size of their physical space. But in the future, Renfro said, he expects increased pressure from inflation and rising personnel costs. Reduced profits would reduce county tax revenue.

In fiscal year 2023, Renfro said, the county could see its business income tax revenue decline 12% from the prior year.

The contradiction, Renfro said, is that household incomes continue to rise. Households have more savings than in the past. This means that households can continue to stimulate consumption, which is good for the economy.

Job growth in Multnomah County now exceeds growth in comparable metropolitan areas. Oregon has surpassed its pre-pandemic unemployment levels, and the county is expected to follow suit soon.

“Right now we’re basically at record highs (of unemployment),” Renfro said.

Inflation and rising interest rates have also reduced housing affordability, hitting low-income households the hardest. The decline in housing affordability will be exacerbated by increases in medium-term interest rates, as the slowdown makes the shortage worse. Data from the new Budget Office Data Library, created by County College intern Pari Magphanthang, confirmed these already existing disparities.

Curator Jessica Vega Pederson said rising interest rates underscore the need “to mitigate these disproportionate impacts through congressional action such as housing assistance, child support, or construction loans.”

Airport travel rebounds, but uncertainty remains over downtown business trends

The arrival of the pandemic has devastated domestic air travel at Portland International Airport. Since then, air transport has returned to a more traditional seasonal cycle, although at a lower level than before. Today, air transport, also affected by inflation, is about the same as ten years ago.

But even though air travel has been slow to recover, motor vehicle rental tax collections have returned to normal. This is because rental car prices are higher. Motor vehicle tax revenues also rebounded to normal levels.

“My hypothesis for the future is that, as supply chain issues and the rise priceproblems start to unwind, we’ll continue to get some kind of incremental traffic growth through Portland International Airport,” Renfro said.

Renfro noted surprising uncertainty in the downtown Portland commercial market. Many spaces, especially downtown, remain under lease even if they are not occupied on a regular basis. It’s unclear what will happen to the commercial real estate market as more and more of these leases expire.

Based on the structure of the county’s property tax system, Renfro said, the risk to the county’s commercial real estate market registry is somewhat limited. But property taxes make up 60% of county revenue, so even a small change will have an effect.

Regarding the use of commercial rental spaces in the city center, Curator Lori Stegmann said. “I know our board and other jurisdictions have had conversations about whether there should be some type of future incentive for commercial real estate to be converted to multifamily (housing), so more to come on that.”

On December 9, the Budget Office will release its annual budget handbook and guidance to help departments prepare their budgets for fiscal year 2024. Then, on February 13, 2023, departments will submit their budgets to the Budget Directorate. On February 24, the Budget Office will publish these program offers online.

The Budget Office will also release two other budget forecasts: one in March 2023 and one in May. On April 27, the president’s office will publish its draft budget, which is scheduled for adoption on June 18.

Commissioner Susheela Jayapal thanked Renfro for helping council think through all the factors that shape the county’s fiscal outlook.

“You do such a good job of clearly explaining these very difficult concepts,” she said. “Constantly managing all this uncertainty must be something of an economist’s nightmare.”

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