The Salem City Council may ask residents to pay new taxes or fees after the city's elected leaders spent millions reopening two fire stations and launching a homeless rental assistance program without having the money to pay for those services long-term.

The city's spending over the past two fiscal years, paired with rising labor costs, contributed to a budget gap that's expected to see explosive growth in years to come.

Next year the shortfall is predicted to reach $7.2 million, according to the most recent financial forecast. In three years it could reach $12 million. By fiscal year 2024, it could be $15.9 million if no action is taken before then.

Shortfalls of $1.3 million in 2017 and $1.8 million in 2018 were filled with working capital, a city savings account that could run dry by the 2023 budget year, according to the forecast.

City leaders are required to balance the budget every year. If they can't secure additional revenue in the coming years, they may have to pare back general-fund services, which range from police and firefighting to parks and city libraries.

As city councilors have spent more money, city staff have thrown red flags, saying non-recurring revenue can't keep paying for recurring expenses.

"The true bottom line is that we have a statutory responsibility to balance the budget," City Manager Steve Powers said. "We don't have money squirreled away."

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In an interview, Salem Budget Officer Kelley Jacobs pointed to fire stations in North and West Salem and a homeless assistance program — which helps get people off the street and into housing — as examples of cost drivers that have helped widen the budget gap.

City officials estimate it costs about $1.5 million a year to operate each fire station, so reopening two means officials must find an additional $3 million a year going forward.

"That enhanced level of service has an impact," Jacobs said.

The homeless program costs another $1.4 million per year, though it’s a service that residents wanted, Jacobs said.

'You have a spending problem'

Benefits packages and salaries are two major expenses, said John Charles, Jr., president and chief executive of the Cascade Policy Institute, a public policy research nonprofit based in Portland.

Charles said public sector leaders are willing to pass costs to taxpayers and don't bargain hard enough in labor negotiations. The idea that they can continue to agree to unsustainable retirement and health care benefits is itself "unsustainable," he said.

"You don’t have a revenue problem, you have a spending problem," Charles said. "So deal with it."

Meanwhile, Salem Mayor Chuck Bennett has questioned the city's working capital account's downhill slide.

"Every five years the slope looks like this," Bennett said at a December budget committee meeting where the forecast was revealed. "Every five years, we're off the cliff."

At that meeting, Jacobs stressed confidence in the forecast's accuracy. She pointed out that when past gaps between revenue and expenses have opened, city officials have cut jobs and closed fire stations.

When asked why spending hasn't been reined in if officials have expected working capital to be depleted "every five years," Bennett responded by email: "Spending has been reined in every budget for 20 years that I've been involved. That's why it stays five years away."

A city task force has suggested two ways the City Council could increase revenue: Ask voters to approve new city operating fees, added to utility bills, and levy an employee-paid payroll tax.

Those measures could generate at least $6 million in new general-fund revenue. Task force members will finalize their recommendation this month.

In the meantime, police, firefighting and other city services paid for in the general fund have been deemed "most at risk" from budget cuts, documents from the current fiscal year show.

However, "It's too early in this process to even begin speculating about 'what ifs' regarding affected services, revenue needs or increases or, especially, service cuts," Bennett said.

"We have a forecast and a revenue proposal that hasn't even been seen by the council. We don't have a budget proposal, any hearings by the citizens budget committee or any public comment," he said. "There's a long way to go."

Hundreds of factors sway budget

Hundreds of shifting forces sway the city's budget year to year, from routine employee turnover to rising public employee retirement costs.

One constant is that property taxes remain the biggest contributor to Salem's general fund, accounting for a projected $71 million of the $128 million in revenues forecast for next fiscal year.

City officials expect to spend $135 million to maintain current service levels, hence the budget gap.

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Powers said Measures 5 and 50 disconnected the growth of property taxes from population increases and property development.

Even so, the budget forecast assumes approximately 4 percent increases in property tax receipts every year.

Public Employees Retirement System employer contribution rates — which employers pay toward their workers' retirement — are expected to double in coming years.

Employer contribution rates were 21.07 percent in fiscal year 2018 for certain workers, and may rise to more than 40 percent in 2024, according to the forecast, which deemed the rates a "high" risk for the general fund.

The budget forecast also called labor agreements "a significant cost driver." Wage increases for city workers are pegged at 2 percent year to year in the forecast.

The amount is less than the 2.25- to 2.75-percent increases agreed to under the most recent labor contract with the American Federation of State, County and Municipal Employees Local 2067.

That union represents workers such as custodial workers, library assistants and administrative assistants. Its labor contract is good through fiscal year 2021.

City officials also will have a new cost to contend with: Operating and maintaining the 104,000-square-foot Salem police headquarters after construction finishes in late 2020. City officials didn't immediately say how much that would cost, however.

Property tax system 'handcuffed' cities

The League of Oregon Cities, a group that lobbies on behalf of cities in the Capitol, has claimed that Oregon's property tax system is "broken" and "far from equitable."

Many cities are now in a position where property taxes don't even cover police and fire services, said Wendy Johnson, an intergovernmental relations associate with the league.

Cities depend on property taxes as much as the state of Oregon depends on income taxes as a main source of revenue, she said.

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But Measures 5 and 50 "handcuffed" Oregon cities, she argued, preventing them from adequately using their main revenue source, capping rates and tinkering with the property valuation system. Cities' costs are rising past an adopted 3-percent growth limit, she said.

To shore up revenues, some cities have turned to charging residents fees. "Unless we fix the property tax system, we don't have a lot of other choices," Johnson said.

Jim Moore, a Pacific University politics professor, said property tax reform is "openly out on the table for the first time in a long time."

"It's a long way from there to a ballot measure," Moore said.

Email jbach@statesmanjournal.com, call (503) 399-6714 or follow on Twitter @jonathanmbach.

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