Facing a projected $43 million deficit in 2025, the city of Vancouver will have to make budget cuts for the first time in a decade due to inflation and slowing growth, according to City Manager Eric Holmes.
“We are entering into what we expect to be a challenging budget climate,” Holmes said to Vancouver City Council members at an April budget workshop.
The deficit is only about 2.5 percent of the city’s current budget, but it still poses a problem for departments unused to making cuts. Most departments will have a 15 percent gap in their budgets, Holmes said, while safety departments, including fire and police, will likely have a 5 percent gap.
“This is a reflection of an underlying structural deficit in the way local government services are funded that is reemerging after about a decade because we’ve had significant inflation and a slowing of growth that has impacted revenue,” Holmes said.
The main problem stems from revenue from property, sales and utility taxes, which make up about 84 percent of total revenue for the city.
The city can only increase property tax revenues by 1 percent each year, while service costs rise faster due to inflation, Holmes said. And because people are trying to conserve electricity and water, revenue from utility taxes has declined, he said.
A lack of new construction has put a damper on sales tax revenue, which softened in the first quarter of 2024 after a strong fourth quarter last year, according to the city. Staff expect the softening will continue into the next few years.
“When you look at … the portfolio revenues that we rely on, they’re either constrained by law, or they are constrained and somewhat volatile by the reality of what we’re taxing,” Holmes said.
Another reason for the deficit is a slowing of development in Vancouver.
Multifamily housing, such as apartment buildings, makes up a major part of Vancouver’s growth, but high interest rates and construction costs have put the brakes on many projects.
“That is a significant driver of overall revenues — new customers being added to our utilities, new consumption associated with that, as well as the sales tax on all of that construction materials and furnishings and appliances that go into new construction. All of that has slowed,” Holmes said.
Despite the looming deficit, the council voted Monday night to supplement the 2024 budget by $38.7 million.
Holmes said the city needed to make adjustments to the budget to continue funding current operations.
“Just because we are forecasting a deficit for the next biennium doesn’t mean that we freeze all decisions this biennium,” he said.
The council will have another workshop June 10 to discuss strategies to increase revenue. The city will hold a public hearing on the 2025-26 biennial budget on Nov. 18.
Editor’s note: This article has been updated to correct the size of the budget deficit.
