ACT sues borough

Sales tax, capital spending violations alleged

Posted: Wednesday, January 03, 2007

The Alliance of Concerned Taxpayers has filed a civil suit against the Kenai Peninsula Borough alleging that it is violating ordinances governing the collection of sales taxes and spending on capital projects.

Acting on behalf of the alliance, often referred to by its acronym ACT, Anchorage attorney Kenneth P. Jacobus filed the two-count civil action Dec. 26. As of Tuesday, the borough had not been formally served.

The first count seeks a Kenai Superior Court declaration that any future increases in the sales tax from its current 2 percent to its cap limit of 3 percent be accomplished only after garnering the approval of 60 percent of voters at the polls. The second count also seeks a court declaration, this one to the effect that the borough may not authorize capital projects in excess of $1 million without a public vote.

ACT’s assertions stem from long-running controversies arising from Kenai Peninsula Borough Assembly actions beginning in 2005 that resulted in 2005 ballot propositions on sales taxes and capital spending.

Concerning sales taxes:

Facing the prospect of rapidly increasing deficits, in June 2005 the assembly passed Ordinance 2005-09 that included three revenue-generating provisions, including raising the sales tax to from 2 percent to 3 percent. In doing so, the assembly based its authority on a 1965 ordinance that first established a 3-percent sales tax. That tax was reduced to 2 percent by ordinance in 1975. Re-raising the tax to 3 percent was discussed over the ensuing years, but the assembly didn’t take that step until June 2005.

Supported by a legal analysis from its attorney, the assembly claimed it had never relinquished its power to raise the tax to 3 percent by simple ordinance, despite the existence of a 2-percent tax for 20 years.

ACT members led a successful initiative drive during the summer of 2005 that placed Proposition 5 on that year’s fall ballot where it won the approval of voters. It capped the sales tax at 2 percent and required that any future increases be approved by a supermajority of voters.

Shortly after the election, however, ACT moved to seek repeal of all parts of Ordinance 2005-09. Beyond the sales tax increase, that ordinance had also established a new way of taxing recreational package sales, and permitted the use of Land Trust account funds for general budget expenditures while creating a method to ensure that that account would continue to grow.

A referendum seeking repeal was placed on the October 2006 ballot, but it applied to all parts of Ordinance 2005, effectively placing the controversial sales tax increase before the voters once again.

This time, perhaps because of a growing awareness of the potential for future deficits, voters said no to repeal of the ordinance, leaving decisions about sales tax levies and the other provisions of Ordinance 2005-09 in the hands of the assembly.

The sales tax was officially set at 2 percent in October 2006 immediately upon approval of the election results in order to prevent the 3-percent sales tax — in suspension since 2005 — from taking overnight effect and creating havoc for taxpayers and collectors.

Other events, including unanticipated state assistance to municipalities and budget-cutting measures taken by Borough Mayor John Williams upon taking office in late 2005, made foregoing a sales tax increase a relatively painless thing to do. A decision on any sales tax increase was deferred until the next budget cycle.

According to the borough, the 2006 referendum vote reaffirmed the assembly’s power to raise the sales tax to 3 percent without a vote, essentially reversing the impact of 2005’s Proposition 5.

ACT members, however, disagree, arguing that the sales tax cap of 2 percent and the provision for supermajority approval of future increases remain in effect.

Concerning capital spending:

Also in 2005, voters said yes to Proposition 4 (Initiative Ordinance 2005-01), putting a cap on capital spending without voter approval. That law now requires the borough to seek approval from 60 percent (a supermajority) of voters whenever it desires to spend $1 million or more on a capital improvement.

That restriction applies to all costs, including such things architectural, engineering, inspection, design, and administrative expenses, but not to expending insurance proceeds for fixing damaged property, or to expending funds from voter-approved bond issues.

ACT members allege that the borough has violated the spending cap law, citing two cases as examples.

In one case, ACT argues that the assembly acted improperly when, in June 2006, it approved spending up to $2 million on a lease-purchase agreement to replace a CT Scanner machine for South Peninsula Hospital.

In the borough’s view, the new scanner did not constitute a capital improvement requiring voter approval because it is a removable piece of equipment that replaced an existing machine.

In another, ACT members say the borough exceeded the $1 million cap when it awarded a $977,170 construction contract for replacing the Spruce Creek Bridge in Seward. While the construction costs fell below the $1 million cap, total costs (roughly $1.2 million) exceeded it after design services, interdepartmental charges, advertising and a contingency fund were included in the calculation. The borough believes the bridge job did not violate the $1 million ceiling for several reasons, including that some pre-construction costs had already been charged prior to the effective date of Initiative Ordinance 2005-01. Also, according to borough attorney Colette Thompson, there was an emergency nature to the bridge replacement work in that the existing bridge could not accommodate large fire trucks and the ballot measure had made no provision for emergencies.

She also said a constitutional issue is involved. The borough believes the initiative process cannot be used to make or repeal appropriations, or more generally, it cannot be used to limit the assembly’s budget authority to allocate funds between competing needs.

“This case may give us a chance to determine what the court thinks,” Thompson said.

“We’re not trying to tell the borough how to spend money,” Jacobus said Tuesday.

ACT is not attempting to stop the bridge project, he said, but rather wants assurances such expenditures in violation of the no-vote ceiling don’t happen again.

In his brief, Jacobus anchored his case in the Alaska Constitution and state statute.

“The levy and collection of an unauthorized tax, and the violation of an enacted initiative, such as are taking place here, are violations of due process of law guaranteed to citizens of Alaska by Article I, Section 7, of the Constitution of Alaska,” Jacobus said.

ACT wants court declarations that future sales tax levies and expenditures over $1 million require a supermajority vote; a court order that the borough not amend the tax and capital project limits for two years; an award of legal costs for the public interest litigants; and any other award the court might deem just and proper.

No court date has been set. The borough has not yet filed a response brief.

Hal Spence can be reached at

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