YAKIMA — The city of Yakima’s financial reserves could be entirely depleted within 10 years if no additional expense cuts are made and no more revenue options approved, city officials say.
If the city continues to borrow from its general fund reserves to pay for operational costs and not pay back the balance, half the reserve fund will be going to pay operational costs within five years, assistant city manager Ana Cortez said.
The Yakima City Council tentatively approved expense cuts Tuesday that would address an estimated $780,000 gap between next year’s expenses and revenue and allow additional funds to be placed in the general fund reserve. The general fund budget is $64 million.
“It’s going to take a lot of difficult decisions and a lot of hard work,” Yakima Mayor Kathy Coffey said. “There are going to be some painful decisions — there’s no doubt about that.”
Root of the problem
City officials are working to balance next year’s budget, but will still need to address the bigger issues related to the reserve, Cortez said.
Over the past five years, when unforeseen circumstances have led to a steep discrepancy between revenue and expenses, the city has pulled from general fund reserve — the city’s savings account — to pay for those expenses, which is what the reserve is for, Cortez said.
What the reserve is not intended for, she said, is paying for operational costs the city doesn’t have the money for in the general fund. Cortez said voter-approved road and park projects account for a good chunk of money coming out of reserves.
Charter amendments
In 2013 and 2014, voters approved amendments in the city charter to designate $2 million to fund capital improvements to street reconstruction and renovation and $750,000 for city parks and park facilities every year out of the general fund.
The charter amendments did not provide additional funding through a tax or fees, but rather designated funds from what the city already had.
The funds designated for streets are being used to pay for projects completed in 2014, while the $2 million in funds for parks are now paying debt on the Sozo Sports Complex and YMCA and Yakima Rotary Aquatic Center, according to city budget materials.
Debt on the projects will be paid off incrementally, with some completed in 2024 and 2028, and others continuing through 2042. The charter amendments called for annual increases for funding according to the West Region Consumer Price Index, which is higher than the regional CPI, according to city budget documents.
Cortez said that means there’s more than $2.75 million taken out of the general fund that can’t be redistributed.
The council agreed Thursday to place a measure on a ballot in a special election next year to give voters the option to repeal those charter amendments.
While the city will still be obligated to pay on debts until 2042, future generations would have more choice in how to spend money, Cortez said.
The city is dealing with other obligations, too. When a voter-approved bond to support capital needs for the Yakima Fire Department expired in 2014, the city had no revenue to replace the funds from the bond and pulled from the reserve, Cortez said.
Expenses, reserve fund
Emergency situations and unforeseen expenses also have contributed to the depletion of the reserve fund.
City revenue experienced shortfalls after a drought in 2015 affected the local agriculture industry, which accounts for about a third of the city’s economy, according to city budget documents. Residents feeling economic pressures didn’t buy as many local goods, which resulted in less sales tax revenue.
Further, the city didn’t reduce expenditures to account for the decrease in revenue and as a result, didn’t have the funds for negotiated salary increases for 2012 to 2014 and paid those out of reserves.
In 2014, the council used about $1.1 million in reserves to buy four Tiger Oil properties, expecting revenue from the sales of the properties to replenish the reserves, according to city budget documents.
Two of those properties have been sold, recovering $684,000. The city has prioritized the sale of one site in 2019, which would generate $300,000 to $400,000, and the other is undergoing environmental monitoring.
Payment of settlements and claims also pulled more than $3 million from reserves in 2016 and 2017. The city paid about $500,000 for an unprecedented number of medical claims in 2017.
After a local provider sued the city to restore the city’s health plan to a recognized Preferred Provider Organization (PPO), the city paid $750,000 for a backlog of claims. An additional $300,000 of the settlement is committed to be paid in 2018 and 2019.
In 2016, a lawsuit was filed against the city of Yakima by the American Civil Liberties Union alleging the city’s election system was discriminatory, resulting in a $1,846,014 judgment, which was paid for out of the reserve fund.
And in 2015, the city paid for unbudgeted expenses, including the repaving of Tahoma Cemetery roads, financial support of celebrations sponsored by other agencies and extended hours at Franklin Pool.
Cortez said these efforts stemmed from optimism among city officials who believed the worst was over, revenue would normalize and they’d have enough money.
Expenses, revenue
For decades, the city incrementally cut general fund expenses across the board to try to keep up with inflation, cost increases and a revenue stream that did not grow at the same rate expenses did, said city spokesman Randy Beehler.
Without council action, projections show that expenses are expected to increase by 2.4 percent in 2019, while revenue is expected to increase by 0.5 percent. City Manager Cliff Moore said that this year the city has taken a conservative approach to its projections by estimating expenses at the high end and revenue at the low end.
Beehler said that the battle of costs rising faster than revenue isn’t new. He said in his more than 25 years with the city, there have been four or five times where that issue has come to the forefront.
But now, in addition to revenue problems and higher expenses, the depletion of reserve funds and the reliance on those funds to pay for some of the city’s operational costs have contributed to the gravity of the problem, Cortez said.
Continuing to use the reserve to compensate for operational expenses and without a policy to replenish it, it has remained below the recommended amount and continues to decrease.
As it stands, the reserve is at $8.6 million, or 12.7 percent of the general fund. Under city policy, the reserve is supposed to 16.7 percent, meaning that the current reserve is about $2.8 million less than the goal, which equates to about two months of operating expenses.
If the city continues to use reserve funds to pay for operational expenses without replenishing those funds or seeking additional revenue sources, those reserves could be completely depleted by as early as 2025, Cortez said.
“The scary part is that not only are we challenging the reserves, we’re challenging everything else,” Cortez said.
That would mean no emergency funds, but because the city has been relying on those reserves to pay operational costs, that would mean there’s not enough money to run the city functions, she said.
Possible cuts
Those long-term concerns have been discussed by the council at several study sessions to evaluate the preliminary budget for 2019. But they’ve also been discussing short-term issues in the coming year.
At a meeting Tuesday, council members discussed cutting funds for city-funded celebrations such as AppleJam Battle of the Bands and Cinco de Mayo, reducing funds for travel and training, reducing the Yakima Fire Department’s reserve program and cutting vacant city positions. Council members also discussed closing Lions Pool, opting instead to discuss the possibility of moving operations to the Yakima School District first.
“We’re looking at all the cuts that we can make and all the things that we can do to be proactive,” Coffey said. “The important thing is that we’re not just looking at next year’s budget but the outlook for the next five years.”
While the tentatively approved expense cuts earlier this week would have addressed the gap between expenses and revenue and allowed the city to set aside some money for the reserve, decisions Thursday created another gap, Cortez said.
The council approved an additional $60,000 for capital facilities and $75,000 for the Yakima Police Activities League and postponed discussion of other budgetary measures that could help reduce costs and add revenue.
Cortez said that means the council must now address a $61,000 discrepancy between expenses and revenue for next year, most likely through cutting expenses.
With two study sessions and several public hearings to go, the decisions aren’t final, but at this point, Cortez said she doesn’t know what the council can cut. She said she’s asked the community development department to look at cutting expenses but she’s not optimistic.
