Auditors give Spokane books high marks but credit questions arise amid deficit

(The Center Square) – The meeting of the Finance and Administration committee earlier this week started with what was ostensibly good news but ended with more questions than answers. With an upcoming credit evaluation by various rating agencies, this could put the already cash-strapped city budget in even more of a bind.

“We conducted a financial statement audit for the period of Jan. 1 of 2022 through Dec. 31 of 2022,” said Assistant Audit Manager Larissa Nolte with the Washington State Auditor’s Office at Monday’s meeting. “We’re pleased to announce that we are issuing an unmodified clean audit opinion on these financial statements.”

Nolte also added the disclaimer that the purpose of such an audit is to “issue an opinion as to whether the information that’s included in the statements can be relied upon to make decisions,” leaving unsaid that it was not her job, to comment on the financial position of the city, nor the policy decisions from which lead to that position.

That position, according to previous reporting by The Center Square, is at least $9.5 million in the red for next year’s budget. Recent reporting by The Spokesman-Review could put that number north of $12 million, an amount that could wipe out the city’s dwindling $7 million in unallocated reserves.

The budget deficit has been used as a political cudgel leading up to the next mayoral election, with challenger Lisa Brown seeking to frame it as a failure of current Mayor Nadine Woodward’s to own. Woodward defended the city’s financials in August, saying in a social media post that much of the costs were unforeseen and out of the city’s control. She pointed to “record inflation that’s increased the costs of providing services, unprecedented workforce shortage that’s required big investments in people,” and revenues not pacing.

Other cities are facing inflationary pressure as well. The city of Seattle is facing a $221 million budget deficit that officials largely blame on increased costs.

It’s not just the deficit that concerned Spokane councilmembers at this week’s Finance and Administration committee meeting, it’s the city’s ability to get good financing rates on the ubiquitous tool of municipalities that cost-shift projects into the future: debt.

“Now that the audit is completed, we will be filing with the various entities our audited financial reports,” said Tonya Wallace, Spokane’ chief financial officer. “They will evaluate those reports and determine if any type of credit adjustment is required.”

Council President Lori Kinnear was concerned that the lack of reserves, which are currently about $50 million below their legal requirement according to the Spokane Municipal Code, which could affect the city’s credit rating.

“Given that our reserves are down, I would assume that there would be an adjustment. So my question is, should we be bumping up those reserves to look more attractive to [the credit rating agencies?]” asked Kinnear.

“They appreciate when we have reserves, but the credit review for our entity also encompasses many, many other factors,” said Wallace, before adding that reserves are only “a very small portion” of the rating process.

Kinnear was not satisfied.

She highlighted a point that Councilmember Michael Cathcart brought up earlier in the meeting. By law, the Spokane Municipal Code targets an unencumbered reserve fund of 25% of ongoing expenditures, stating she hoped that at least having a plan in place to get there would help in the rating process.

Councilmember Betsy Wilkerson, who is currently running for council president, disagreed that a plan alone was enough.

“I guess I’m concerned that we wrote the ordinance, it passed, but we really – at least I haven’t seen any steps towards that,” she said

“What are the incremental steps we’re taking towards that goal?” asked Wilkerson.

The meeting ended with more questions than answers. With a key employee departing the treasury department at the city, Wallace also warned that council expectations regarding response times for financial reporting requests needed to be tempered.