Borough forecast: poor

The Kenai Peninsula Borough will be drowning in red ink by fiscal year 2009 if drastic steps aren’t taken meet expenses and raise revenues, borough Mayor John Williams told the assembly Tuesday.

Several factors conspired to create the situation, Williams noted, including the loss of state aid to municipalities and rapidly rising retirement, health care and liability insurance obligations that cannot be avoided.

But he laid at least part of the blame on the success of Proposition 5, an Oct. 4 election ballot measure that reversed a 1-percent sales tax increase approved by the assembly last summer. It also required that future sales tax increases be approved by 60 percent of voters.

“The picture is very grim. With the passage of Proposition 5, the Kenai Peninsula Borough now finds itself on the brink of financial collapse,” Williams said.

Proposition 5’s success has forced the administration to scratch roughly $26 million in anticipated revenues from the current future budgets through fiscal year 2009. In all, he estimated the borough would face the loss of as much as $29.3 million in revenue over his administration’s four years.

Williams told the assembly he already had sliced more than $910,000 from the current budget. Unless some way can be found to enhance revenues, that’s likely just the start.

In the executive summary of the report, Williams continued leveling at Proposition 5.

“There is no doubt that Proposition 5 has served to destabilize government not only from an economic standpoint, but from a morale standpoint as well,” he said, adding that many employees now worry for their jobs. Some may choose not to remain, resulting, he said, in a loss of talent, institutional memory and experience.

Prop 5, he said, merely asked people if they wanted to cut government, without explaining what that government does and how it works.

Williams took about 30 minutes to present the much-anticipated “60-Day Transition Report,” his administration’s assessment of the current state of the borough’s finances. It is based, he said, on an in-depth review of the borough government by a 17-member transition team put together following his election.

The picture Williams drew wasn’t pretty, and the mayor warned it would take “draconian measures” to reverse a downward trend that is leading to fiscal disaster.

Just four years ago, he said, the borough’s fund balance, the amount left in the bank at the end of each preceding fiscal year, stood at a healthy $28.4 million — too healthy, critics charged.

Steps were taken to reduce its size, such as cutting the property tax mill rate and using the fund balance’s excess savings to balance annual budgets.

As that was going on, however, rising costs and reductions in state aid to municipality combined to drain the savings account too fast.

The assembly’s moves to boost revenues with a sales tax increase and other measures were met by a grass-roots challenge from the Alliance of Concerned Taxpayers, which promoted, among other things, Prop 5.

Other revenue enhancement measures also are being challenged by the group and may result in future ballot propositions.

With the cuts already taken and the future effects of Prop 5 figured in, it is projected the fund balance will be around $13.9 million by June, the end of the current fiscal year. If nothing is done to reverse the downward trend, the borough could find its fund balance nearly $9 million in the hole by then end of FY 2009, Williams said.

The new mayor disagreed with critics who said the fund balance had been “too high.” The borough is a $500 million corporation employing more than 1,400 people, not counting hospital employees, which easily justifies a fund balance of $28 million, he said.

“Be that as it may, it was decided it was too high so we had to begin to drop it,” he said. “The result is that we are on a downhill slide that at this point in time without draconian changes and draconian measures to correct it will lead us into a crashing position late in the year 2007.”

Immediately upon taking office in November, Williams’ administration began slashing the budget. The largest savings, $600,000, was realized by canceling funding for new financial planning software. He also made modest reductions to school expenditures, cut staff, limited cell phones, auto allowances, even reduced how much the grass would be cut at certain facilities, all in an attempt to reduce the current appropriations.

“My administration has made over $1.7 million in total cuts, starting with the FY 2006 budget and extending through FY 2009,” he said.

It won’t be nearly enough, he said, because of unavoidable and “significant cost increases” in health and liability insurance premiums and obligations to the Public Employee Retirement System (PERS), which amount to millions annually.

Reducing the property tax mill rate hasn’t helped. In FY 2000, the tax levy was 8 mills. But political pressure to cut taxes and reduce the fund balance led to a popular plan to lower the mill rate to 6.5 mills (reached in 2003) and tap the fund balance for lost revenue.

Williams noted that the reduction of the mill rate has resulted in a savings to taxpayers of more than $40 million over six years, far exceeding, he said, the increase in the cost of government.

Based on advice from financial advisers, the borough aimed for a balance between $12 million and $22 million. Over time, that balance fell toward the $12 million floor, even as critics of the government continued to charge that too little was being done to shave expenses.

Tuesday, Williams tossed a list of alternatives on the table for discussion. Some combination of them may be necessary “to prevent the collapse of the central general fund government.” They included selling the waste management facility, closing as many as five schools, reducing property tax exemptions for seniors and laying off 25 percent of the borough’s core workforce. Williams acknowledged many are bound to be unpopular.

James Price, a member of the Alliance of Concerned Taxpayers, said he was somewhat disappointed in the mayor’s transition report. He said it lacked specific details about additional spending cuts.

“But there was no lack of details on ways to raise taxes and fees,” he said.

The report should have included a greater emphasis on finding efficiencies and less of a focus on raising taxes, he said. Still, Price was willing to give the new mayor time.

“I hesitate to say things are awful or going in the wrong direction,” he said.

Williams said it was his administration’s goal to resolve the budget crisis and attempt to put the borough on a solid footing by the end of his term.

Cuts made and future possibilities

To meet the challenge posed by the success of Proposition 5 and the resulting loss of future revenues, Kenai Peninsula Borough Mayor John Williams has made several cuts to programs and personnel.

He also has presented the borough assembly with a list of options for further savings and boosting future revenues in an effort to stop the precipitous decline of the borough’s fund balance.

Here is a look at those cuts and options:

Cuts already taken:

· Reduced staff of Community and Economic Development Division, saving $59,800;

· Reduced school district funding by $70,000;

· Changed Finance Department staffing, saving $28,200;

· Reduced the borough landscaping budget by $60,000;

· Reduced communications costs by $7,500;

· Restructured payments for sales tax software, saving $58,200 over the short term;

· Reduced staff costs at the Office of Emergency Management by $10,050;

· Reduced car allowances, saving $4,000;

· Reduced payments to his own retirement and health care program by $12,400.

Further possible savings:

· Selling the waste management facility, saving the borough $1 million. Taxpayers would pay disposal fees to the purchasing entity.

· Closing up to five schools, saving an estimated $1.25 million. This would require approval by the Kenai Peninsula Borough Board of Education, which has the ultimate authority to shut schools down.

· Laying off one of every four general government workers, saving $3 million, but threatening the continuity of government services.

· Rolling back senior citizen, veterans and disabled persons property tax exemptions, saving roughly $505,000 annually.

· Closing kindergarten classes. This would not save money for the general government directly, but would offset losses the Department of Education may face if the borough were unable to continue funding education to the cap.

· Raising the mill rate to 8 mills, generating $2.25 million for each half-mill increase, or $6.75 million total. (Setting it at the maximum allowed by law, 8.3 mills, would bring in an additional $1.3 million).

· Imposing other tax changes for personal property, boats and aircraft.

· Imposing a $20 surcharge on property owners for the use of waste-management facilities.

· Establishing a nominal fee permit program for all new construction and commercial, residential and raw land sales to provide for more accurate property valuations.

Copies of the transition report are available from the borough office and can be found on the borough’s Web site at www.borough.kenai.ak.us.