A Kenai Peninsula Borough Assembly-generated proposition and the race for the borough mayor’s position this fall were factors in starting a dialogue about how borough residents are taxed and the balance between those taxing levels.
Proposition No. 1, which appeared before voters in October, sought to repeal the seasonal sales tax exemption on non-prepared foods across the borough. The exemption saves residents from paying sales tax on groceries from Sept. 1 to May 31 each year, but has resulted in a reduction of borough tax revenue to the tune of about $3 million annually.
The borough’s sales tax is dedicated to the Kenai Peninsula Borough School District, which meant the exemption — passed during the 2008 regular election and implemented in January of 2009 — would cause a revenue shortfall that would need to be made up from property tax collections or other borough revenue.
Assembly president Gary Knopp contends borough voters fully understood the consequences of the original vote in 2008, as evidenced by this October’s vote not to repeal it. Almost 70 percent of voters cast a ballot against the repeal, according to the borough election department.
“I can say that nobody in the borough, at the time, knew the implications of that and so now that it has been enacted for three years we know it has an impact of about $3 million annually,” Knopp said.
A talking point the proposition brought up was the balance between sales tax, property tax, borough surplus and overall school funding.
“I wanted to see that go on the ballot because many people said they did not understand that the loss of income from the sales tax holiday would then be less money for education,” current borough Mayor David Carey said. “Clearly people said that, particularly in the last three years as we talked about whether or not to fund education to the cap.”
The borough sales tax was previously increased from 2 percent to 3 percent to help balance the levels between sales tax and property tax, which was an initiative attributed to former borough mayor John Williams.
“So that’s why there was a decrease in the mill rate and an increase in the sales tax rate,” borough finance director Craig Chapman said.
However, with the sales tax increase and subsequent seasonal tax exemption, sales tax still only covers roughly 60 percent of the funding the borough contributes to the school district, Chapman said.
“Essentially half of the borough’s mill rate goes to support the schools in addition to the sales tax,” Chapman said.
Carey said residents had asked him whether giving up the tax exemption would save them money on property tax, or if they still pay the same amount.
“There were some who seemed to believe that if we simply would get rid of that exemption we would be able to take care of all of the school needs by simply the sales tax and then greatly lower property tax,” Carey said. “We’re not there.”
Excluding things like school capital projects and debt service, the school district received $25.9 million in funding in 2010 from borough sales tax, which was down from $28.5 million in 2009. In the same period, property tax collection funding for the schools increased from $12 million to $17 million.
Budgeted for 2012 are sales tax allocations totaling $28.67 million and $14.5 million in property taxes.
From 2008 to the 2012 budget, borough funding per student to the school district, aside from non-operational funding, increased from $4,076 per student to $4,749 due in part to an increasing school budget and decreasing enrollment.
“We funded everything without that additional $3 million in the ’12 budget,” Carey said, speaking to the grocery tax exemption. “The school district got what they said they needed and we … still held the fund balance and actually it increased … and we are doing very well.
“You can’t make the case that we need more money or else we can’t fund education.”
Carey noted however, the borough decided to not fund the school district to the cap for the last three years.
Borough wide property tax collections in the last several years have hovered between $27.5 million and $30 million, despite a 50 percent increase in assessed values over the past seven years, according to the borough.
“So the assessed values went up, but the mill rate went down,” Chapman said.
In 2009, the borough collected $27.5 million to fund general government operations from property tax. In 2011, that number is likely to land at $30.5 million, but is projected to decline in 2012 to $30.25 million due to an assessment protest from Tesoro, Chapman said.
In 2004, the borough was assessed at $4.2 billion and had a tax rate of 6.5 mills — excluding oil and gas property, which is taxed by the state and redistributed to the borough. In 2012, the borough is estimated to be assessed at $6.5 billion with a tax rate of 4.5 mills.
Along with the decrease in mill rates has come a draining of the borough’s fund balance, but the two are not completely linked, Chapman said.
In the late 1990s, the borough’s fund balance was hovering in the $25 million to $28 million range. It was determined that fund was in excess of what it needed to be, Chapman said, and the borough implemented a policy to drain it over the next few years by reducing the mill rate.
“The key point with that is that because we had excess fund balance, we used it as a revenue source,” Chapman said. “This happens with every governmental entity that’s out there. When you use up fund balance, you get to some point that you can’t utilize fund balance as a revenue source so there are two options … either increase your revenues, or decrease your expenses.”
At the end of the fiscal year, the borough will finish with a little over $21 million in fund balance, Chapman said. The recommended range, according to the borough’s policy developed in 2001 is to be between $14 million and $22 million.
Knopp said he was comfortable bringing the fund balance down along with passing unbalanced budgets to do so in the past, but was concerned about the future.
“It is not the tax exemption that’s been affecting our fund balance, it is just not managing our budgets,” Knopp said.
“The problem is that we are approaching our minimum now and we have made no efforts to stop the slide,” Knopp continued. “We haven’t made any cuts anywhere, and now it is going to have to happen. Either that or propose a mill rate increase, which I won’t support without some efforts to decrease some spending and bring that in balance.”
Carey said he was comfortable with where the borough’s fund balance is currently.
Regarding the balance between property and sales tax, Carey said he favored sales tax as a form of revenue because property tax dips into residents’ pockets twice.
“I want to see property tax stay as low as possible,” he said. “I would accept them paying less from property tax than from sales tax because every property owner is paying both sales and property.”
Borough Mayor-elect Mike Navarre said drawing down fund balance to make up a budget is “not a sustainable situation.”
“There are really two choices that you can make — you can try to find areas to reduce in the budget, which mostly means education because that is the biggest part of the budget, and the area that has grown the most in the last 10 years,” he said. “Or you can increase revenues through taxes or other fees and that’s what the borough is going to have to be faced with.”
Navarre said he would look at “all of those things” and where there might be other revenue increases beside increased taxes, such as potential increases in economic activity.
Regardless, he said he wants to do a “thorough analysis” of the overall balance between property tax and sales tax as it relates to funding.
“It was significantly different 10 or 12 years ago when I was mayor,” he said.