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How years of overspending drove Lynnwood deep into the red

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LYNNWOOD — It's a staggering number: $22.4 million.
That's how much cash Lynnwood needs to come up with to balance its budget. That's a quarter of the city's two-year budget. That amount could pay to run five of the city's smaller departments.
In order to fix it, Lynnwood leaders must cut dozens of jobs and raise taxes by millions of dollars.
Some elected Lynnwood leaders blame the economy. They say the recession is responsible for the mess. They couldn't possibly have seen it coming.
There's another reason, one which turned a downturn that other cities are weathering into a full-fledged financial disaster for Lynnwood.
That reason is overspending.
As early as 2004, Lynnwood's leaders were spending beyond the city's means. City leaders spent more and more every year, even after news of impending financial doom hit in the fall of 2008.
In the past five years, the amount leaders spent annually has ballooned by $13 million: to $46.7 million from $33.6 million. That's a nearly 40 percent spike.
Rather than curtail spending, the city drew money from its reserves until there wasn't any left. By the end of 2009, the city's operating fund was insolvent. To pay the bills, city leaders drained $2 million from a rainy-day fund and borrowed $3 million from a utility fund.
The state auditor in August blasted the city for its poor financial condition and put the blame directly on the city's elected officials.
“The Council has approved budgets that exceed available and estimated operating revenues,” noted the report.
“They made decisions, and they didn't have money to pay for some of those decisions,” said Mindy Chambers, an auditor's office spokeswoman.
Why? Why did the city spend so much, and why didn't city leaders do more to stop it?
Here's what we found.
1. Too much dependence on sales tax
Lynnwood is the commercial hub for Snohomish County. It boasts not only Alderwood mall, but a host of other businesses, including auto dealerships and furniture stores. City leaders have relied far more heavily on sales tax revenue to pay for city services than other municipalities. It's something past officials have talked about changing, but no one has addressed.
In fat times, it allowed the city to provide high-quality services without having to implement big raises in property taxes, utility taxes and fees.
It also left the city vulnerable to volatile dips when the economy declined.
That's exactly what happened in this latest recession. Between 2007 and 2009, the city lost nearly a quarter of its sales tax revenue. Now the mayor and some on the City Council say that this is the primary reason the city is in trouble.
The mayor and the council president described Lynnwood as a victim of the economy. Mayor Don Gough said the budget was in good shape until 2009.
“When people add it up, it looks like it's going super-negative,” he said.
In the next breath, Gough offered this: “We may have over-committed.”
“It's the economy,” said Council President Mark Smith. “Lynnwood is heavily reliant on sales tax for its general fund, and we've seen sales tax revenue declines that are what I view as catastrophic declines in the past two years. That's what's really been driving this.”
That's half the story.
When the economy soured, the city's dependence on sales tax exacerbated a problem that already existed. In 2005, the city had nearly $33.2 million in revenue to pay its bills, not including reserves or money it could move from other funds into its operating budget. Last year, sales tax receipts dropped dramatically, but the city actually had more total revenue coming in — $37.2 million — than it did in 2005.
Revenue generated from thousands of red-light camera tickets made up a lot of the difference.
Now compare that to spending. In 2005, the city spent $33.6 million. By 2009, they were spending $46.7 million. Revenues weren't keeping up even before the recession.
At the pace city leaders were spending, they would have driven the city off a financial cliff — the recession just pushed the city faster toward that cliff.
2. Personnel costs are way up
What is the city spending all that money on? Most of it can be tied to swelling personnel costs. The city spent $9 million more in 2009 on payroll and benefits than it did in 2005.
Among several reasons, the city hired more workers.
This year, the city of about 36,000 people has roughly 1 employee for every 100 residents. There are 342 regular full-timers, 22 regular part-timers and 77 part-time seasonal and temporary workers. The city's human resources director said her department was too busy this week to provide employment figures for previous years.
Health care costs also go up by double digits year after year.
City employees get what Councilwoman Kerri Lonergan-Dreke called a “beyond-a-Cadillac” plan. This is her first year serving on the council. She was appalled to learn employees pay no premiums at all for themselves and a fairly small premium for their dependents. That wouldn't work in the private sector, said Lonergan-Dreke, who owns the Lombardi's restaurants.
Additionally, some of the contracts with the city's five unions give employees yearly pay increases above the rate of inflation. Those contracts are difficult for the city to renegotiate.
Police make up a large portion of the city's personnel costs. In 2009, the city spent $10.4 million on police employees, up from $7.5 million in 2005. That's a 38 percent bump.
Other city departments had big personnel increases, too. For instance, Human Services doubled the amount it spent on people in the same time period.
The city also pays out hundreds of thousands of dollars annually on overtime. Employees from nearly every department racked up overtime hours, and those costs also mushroomed. In 2008, the city spent $1.2 million just on overtime.
The City Council also voted in 2008 to give full-time benefits to part-time employees — including the council members themselves. That decision makes Lonergan-Dreke bristle. She declined to take the benefits.
“I don't think it's the citizens' responsibility to pay for my benefits,” she said.
3. Public safety spending has climbed
Lynnwood's public safety budget includes police, fire and paramedics, as well as jail services.
Between 2005 and 2009, public safety spending went up by $8 million — a 43 percent increase. In 2005, the city spent $18 million on public safety and, by 2009, it was $25.9 million.
Some of that increase can be traced to burgeoning jail costs. The city has its own jail, and it contracts with other agencies to house prisoners.
In 2005 and 2006, jail costs were $1.9 million. The next two-year period, they had grown by nearly another million dollars.
Some of that spending is for Lynnwood's program-heavy police department, a regional leader that includes a narcotic task force, a SWAT team, a polygraph unit, a chaplain, a police Explorers program for youths, motorcycle officers and a special operations unit with undercover officers who can focus on specific crime problems in the city.
The mayor acknowledged the growth in public safety spending and said he takes responsibility. He said public safety remains a top priority for him. Lynnwood has tens of thousands of workers and shoppers flooding into the city daily, which means Lynnwood needs a larger, better-equipped force than other cities its size.
He also said the city had to pay for upgrades and new staff in certain areas that couldn't be ignored, such as low staffing at the jail.
4. The city is blowing the budget
Like most cities, Lynnwood amends its adopted budget as the year progresses. That gives the city a chance to adjust to changes in revenue and unexpected costs that come up.
Even after city leaders amended the budget, end-of-year reports show that some departments still were overspending, in some cases by hundreds of thousands of dollars. By the end of 2006, seven city departments had overspent their budgets. The same thing happened again at the end of the next two-year budget cycle in 2008 — except that time it was eight departments. For example, the city spent a half-million dollars more than expected on legal services alone. Detention and Correction overspent its budget by $854,000.
The city's two-year budget cycle may be part of the problem, said Lisa Utter, who served on the council until the end of 2009.
When it works well, it saves staff time and gives the city a break every other year from the arduous budget preparation. When revenues fall short or the city overspends in the first year, the second year can be a disaster.
“In a bad situation it has not served us well,” Utter said.
5. A failure to communicate
Council members said a big problem they have is the inability of the council and the mayor to work together in a professional manner.
The discord between the mayor and some of the council members, as well as disagreements among the council members themselves, made it far more difficult to recognize and solve the city's money problems. Nothing demonstrates that dysfunctional relationship more clearly than the council's vote earlier this year to strip the mayor of some of his powers.
“(The mayor) was a jerk and ended up alienating absolutely everybody,” said long-time Councilman Jim Smith, who served with Gough on the council and ran against him for mayor last year.
Some members of the council said they didn't realize the city was in serious financial trouble until the middle of 2009.
Smith said he saw the problems and brought up the need to cut back on its spending. “I was running around like a chicken with my head cut off screaming, ‘We've got some problems here,'” Smith said.
In the fall of 2008, then-Councilwoman Utter voted against the 2009-10 budget, partly because it seemed to her that when expenditures didn't match budget forecasts, the budget forecast was simply revised upward.
“That was a clear sign there were really big problems,” she said.
In recent interviews, and in council meetings at the time, many on the council expressed frustration that they weren't getting the information they needed to make good decisions. For example, up until recently, the council wasn't provided with monthly reports that showed how much money was flowing in and out of city coffers and how that compared to the adopted budget.
That frustration bubbled up at a meeting earlier this year, when several council members pressed former finance director John Moir hard for numbers. When they wouldn't stop interrupting him, he got up, walked out of the room and later quit. The finance director works under the mayor.
Gough insisted that plenty of financial information is available on the city's website. Indeed, there is an avalanche of graphs, charts, tables and Powerpoint presentations with dozens of slides, as well as complete yearly budgets dating back to 2005.
The mayor and his finance director also told the council repeatedly in memos in 2009 that the city needed to raise revenues.
“We shovel this out in tonnages, and my finance director has bent over backwards” to give council the information it needs, Gough said Thursday.
Longtime Councilman Ted Hikel agreed that he and his colleagues had access to plenty of financial information.
However, others felt differently. A few council members said they felt that during the worst of the crisis, the mayor didn't reveal the full extent of the city's money problems.
Utter said that while the mayor did talk about the need to raise revenues, he didn't clearly state the full gravity of the situation. She said they were told revenues were coming up short but solutions were available, such as drawing the difference from reserves.
What was missing in 2008 and 2009 was context for all the data and public, plain-spoken statements from the mayor about the rapid growth in spending and how that affected the city's financial health.
“The ultimate result is it wasn't always clear what the real status of the city budget was to the people reading it,” said Utter, who also ran against Gough for mayor in 2009.
6. Reluctance to make tough choices
The council and mayor did make cuts in the past year that saved millions of dollars.
What officials failed to do is make the deep cuts that are needed to keep the city in the black long-term, said South Snohomish County Chamber of Commerce president Jean Hales.
“I have a lot of empathy for the enormity of the problem the council is facing,” she said.
Now that the city is preparing to impose millions of dollars of tax increases, it doesn't appear that it will do anything to significantly change their spending habits.
“They have sidestepped that responsibility by increasing taxes to businesses and residents, rather than addressing their very real systematic problems,” she said.
Lynnwood's rich sales tax base should have put it in a better position to weather the economic downturn — if the city had slowed spending and beefed up its reserves.
“We need to make some changes,” Hales said. “This is not acceptable. Lynnwood should be the most viable and they are not because people have not managed the city's finances well.”
In 1999, the city put together a task force made up of business leaders to study the budget and make recommendations. Todd Brunner, owner of a construction company based in Lynnwood, was on that task force. Even then, it was clear the city was relying too heavily on the sales tax, he said.
In 2005, Brunner took another close look at the budget.
He was appalled to see how quickly the city was spending through its reserves, particularly in relatively good economic times. Brunner, who serves on the chamber board, said he quietly approached some city leaders with what he found. “I told them, ‘We aren't trying to embarrass you, but this is alarming.'”
Nothing changed.
“What the recession did was exacerbate the situation,” he said. “This was going to happen anyway. How many years can you sweep this under the rug?”
The reason may be lack of political will, Hales said. Since police and fire services make up such a large portion of the budget, cuts would undoubtedly have to come from those areas. Endorsements from police and fire unions can mean a lot to a politician up for re-election.
The other solution — raising other kinds of taxes such as property and utility taxes — is equally unpalatable for politicians.
“Too many policies are made according what will get people re-elected,” Hales said. “We have to get back to doing what's right for the right reasons.”

Reporter Debra Smith: 425-339-3197 or dsmith@heraldnet.com.
Story tags » LynnwoodTaxes

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