The city of Kent faces “a bleak picture” financially over the next few years with the potential loss of millions of dollars of state-shared revenue as well as expenditures growing faster than revenues.
“It’s absolutely a bleak picture,” Finance Director Aaron BeMiller said at a City Council workshop Tuesday night. “The information is jaw dropping. The presentation is not to scare but to inform. But we need to incorporate a larger conversation with what we are seeing on our financial trending.”
Starting in 2020, Kent will lose about $4.7 million it receives each year from the state through an annexation sales tax credit after 24,000 residents in the Panther Lake area were annexed by the city in 2010. As part of the 10-year agreement, the city certifies an amount each year to receive from the state of the difference between expenses in the annexation area and anticipated revenues from property taxes, sales taxes and other sources.
Kent also is expected at some point, possibly in 2021 or sooner, to lose about $5 million per year it gets from the state (streamlined sales tax mitigation) to help compensate for revenue lost when legislators changed the state in 2008 from an origin-based system for local retail sales tax to a destination-based system.
Kent, with its large warehouse district, has many businesses that ship or deliver goods to other areas of the state. The sales tax is collected where the buyer purchases merchandise rather than where the product was shipped from.
With the state’s budget challenges, legislators aren’t expected to extend any annexation sales tax credit and eventually could take away the streamlined sales tax mitigation.
City leaders refer to the losses of state-shared revenue as Kent’s “fiscal cliff.”
“The fiscal cliff is the known reduction or elimination of revenue sources,” BeMiller said. “The sales tax annexation goes away in June 2020 with the full impact in 2021.”
Other potential losses from state cutbacks could start this year, including $560,000 the state helps pay toward the Law Enforcement Officers’ and Fire Fighters’ Retirement System (LEOFF); and $225,000 to help pay the fire insurance premium tax that helps cover LEOFF medical costs for firefighters.
Councilman Dennis Higgins summarized the budget and fiscal cliff workshop during the regular council meeting.
“If it comes to pass, as some of it certainly will, the council is going to have to plan for that and prepare for that by right-sizing its budget, looking at revenue options and staffing,” Higgins said. “This is a reality we know is coming and when we get into this fall (and budget preparation), the discussion we had will help us begin to take some steps to prepare for that.”
BeMiller also said the council needs to better address expenses and revenues.
“We often find ourselves budgeting revenues to meet the expenditure level that we want to have rather than budgeting expenditures to meet the revenue we have,” BeMiller said. “We have filled that gap multiple ways, but we haven’t gone far enough in having a structurally balanced budget.”
As far as how to resolve the loss of state-shared revenues, BeMiller listed several alternatives, including:
• Using $6 million in banked property tax capacity, which would increase city property taxes for a $300,000 home to $587 per year from $468, an increase of $119 per year.
• Vehicle tab fees, a charge on city residents that would be in addition to fees already paid by residents to the state and Sound Transit.
• A business and occupation tax rate increase, the city started a B&O tax rate in 2013 to help pay for street repairs. An increase would most likely help cover other costs.
• Voter-approved taxes, some type of levy to help pay for city services.
• Reduce expenses, possible staff cuts.
Councilman Les Thomas doubts residents want any tax increases.
“I don’t believe that our citizens want to be taxed anymore than they are presently,” Thomas said. “We have to begin cutting and figure out more revenue.”
Thomas suggested allowing recreational marijuana businesses, even though he has opposed those in the past. He also mentioned casinos as potential revenue sources. The city bans both businesses under its current code.
“We need to look at the whole picture, the whole city,” Higgins said. “What’s good for the business community and what’s good for the residents. We are going to have to look at every option on the table. We can’t have any sacred cows in that discussion.”
City finance staff will return at a July 5 council workshop to further discuss the budget and fiscal cliff.