Kent city officials don’t expect to make any large cuts as they prepare the 2021-2022 biennial budget because of steps taken in May to counteract an estimated $15.7 million shortfall in 2020, part of which will carry over into next year.
Once the actual tax revenue losses are known later this year due to the economic impact of the COVID-19 pandemic, city leaders and staff will get a better grip on specifics for the budget.
“There’s a lot of unknowns,” Finance Director Paula Painter told the council as the budget process kicked off at a July 7 workshop. “The revenues are a little bit difficult to predict because of the timing restraints we run into. For example, there is a two-month lag in sales tax. For the month of April, we just start to see that information in June, so we are getting some of that information. The B&O tax is collected on a quarterly basis, so we will not see that until the end of this month. As we close out July, we will have a little bit more information to review on our revenues and where we anticipate revenues coming along.”
Painter said about $5 million of the reductions the city made in May will carry over into the 2021-2022 budget.
The city eliminated 11 positions, furloughed or reduced a couple dozen other jobs. The city decided to use $5 million from its general fund reserves to help cover the loss of revenue from sales and B&O taxes. The city also reduced capital expenditures by $3.2 million to keep more money in the general fund, and will use $1 million from the city’s Health and Wellness Fund to help cover lost revenue.
The city also put a hold on hiring five more police officers. And while the city didn’t put a freeze on new hires in any department, Mayor Dana Ralph said any new hire would be closely reviewed before approval.
Painter told the council the fund balance (”rainy day fund”) started the year at $34.4 million. She said that balance is at $31 million through May and will drop to about $26 million by the end of the year, with $3 million in the budget already planned to be spent and the spending of $5 million more.
The city will take big hits to sales tax revenue the rest of this year and in 2021. While the exact numbers remain to be determined, Painter said sales tax revenue is expected to drop from $36.4 million in 2019 to $29 million in 2020 and $26.6 million in 2021 before going up slightly to $27.4 million in 2022.
“The primary driver is that in 2020 we received six months of our annexation sales tax revenue (from the state) that will go away in 2021, for a reduction of $2.2 million in sales tax moving forward,” Painter said.
Kent had received that money each year for 10 years from the state in return for the annexation of the Panther Lake area in 2010. Further deficits in sales tax revenue is expected from the economic impact of the COVID-19 pandemic.
But not all tax revenue is dropping. Property tax revenue is expected to remain steady at about $31 million per year and utility taxes at $30 million per year. The B&O tax revenue could actually go up by a few million dollars in the next couple of years because of the council’s approval of higher square tax footage rates that started this year.
“These numbers will likely change,” Painter said. “Some will stay consistent, and as more information comes out we will make adjustments.”
City staff also will need to adjust for the union employee contracts that include pay raises in 2021 and 2022 based on the cost-of-living-adjustments (COLAs). City staff estimates that increase to be about 2% or 2.5% each year. Medical costs also will go up between 3% and 5%.
The general fund revenue that sat at $118.4 million in 2019, will drop to about $106.7 million in 2020, then to $105.9 million in 2021 before going up to about $109 million in 2022. The city must balance revenue with expenditures.
Ralph plans to present her 2021-2022 budget to the council on Sept. 29. Prior to that, department heads will present their budgets to administration and the council plans to have a budget retreat in August to review and discuss operating and capital requests. The council is scheduled to approve the budget on Nov. 17 after it reviews Ralph’s proposal and considers any adjustments.