The Kenai City Council's current plan for dealing with the gloomy financial situation the closure of Big Kmart and other factors have created for the city's budget will result in higher taxes and lost jobs for city employees.
The council and city's administration met for a work session Thursday evening to discuss next year's budget and city policy issues.
Several similar meetings have been held in the last few months where the council and city's administration worked out a budget policy plan for the 2003-04 fiscal year. This plan called for a balanced budget, a 1 mill property tax increase, a cost of living adjustment for city employees and for dependents of city employees to be charged for their health care premiums.
When Kmart announced its store closures, however, this plan essentially flew out the window.
When the council passed this fiscal year's budget in June, it anticipated having an estimated $170,000 deficit for the year. Since then, the city's financial outlook has declined due to several factors.
"There has been a gradual increase in the cost of providing services," said City Manager Linda Snow. "Personnel costs, utilities, insurance -- combine that with an extreme loss in revenue. Interest revenue has just dropped. We depend a lot on interest revenue here in the city of Kenai."
Then came the news of Big Kmart closing, which generates about $800,000 a year in sales tax revenue for the city. When the Kenai store closes in March, the city will lose an estimated $20,000 in sales tax revenue this fiscal year alone, according to estimates by Larry Semmens, the city's finance director.
Semmens stressed that all his estimates were at this point just that -- estimates. It is impossible to predict for sure what the numbers will be at the end of the year, much less next year. The city could be better or worse off than current estimates suggest.
The city received a few monetary windfalls this year to offset its losses. For instance, revenue from licenses and permits, ambulance fees and fish taxes are likely to be higher than what was originally estimated. The city also received a $359,000 settlement over property in Inlet Woods. That helps this year's bottom line but doesn't do much for next year's.
If the city makes no cuts to services, it faces an estimated $1.4 million deficit for next year -- and that includes the estimated increase in revenue a 1 mill property tax increase would bring.
This is obviously not the financial situation the city had hoped to find itself in for next year, but it may not be as bad as it sounds, since the city still has an estimated $7.3 million general fund balance that can cover the deficit.
"The good news is that the fund balance is commendable, the fund balance is healthy," Snow said. "... The bad news is, though, that that fund balance is finite; it won't last forever."
The city has limited tools to work with in tackling this situation. It can have a balanced budget by raising taxes to generate more revenue or by cutting services -- which also means cutting jobs -- to lower its costs. Or the city can continue to operate on a deficit budget until its savings are gone.
In Thursday's meeting, the city's administration presented its budget recommendations to the council. It called for taking a wait-and-see stance in the budget by enacting a combination of these measures.
Snow proposed that the council raise the mill rate by 1.5 mills next year, bringing the mill rate from 3.5 to 5. She also recommended making $100,000 to $200,000 in budget cuts and using the general fund balance to cover deficit that's left over.
"We recommend you do not decimate public services this year," Snow said. "... Then we see what the coming year brings. If during the second year it's all doom and gloom everywhere, then we will have no choice but to recommend to the council some drastic, drastic cuts."
But if something positive happens for the city next year, namely another large sales tax generator coming to Kenai, those drastic cuts won't be as necessary. With the amount of money the city has in reserve, the administration's position is the city can afford to wait a year and see what happens.
"I'm in total agreement that we need to look at the budget that's here and cut those things that make sense to cut," Semmens said. "But I really don't think that when we're sitting on $7 million of fund balance that we should decimate services."
After some discussion, the council agreed to part of this plan but wanted to make more budget cuts than the administration recommended.
"The other way to look at it is if you continue to drive down our balance and do not start to cut services in a timely manner, all of a sudden we end up where we were (several years ago with no budget reserve and a deficit)," said Kenai Mayor John Williams. "I'd rather begin to cut services."
Council member Joe Moore recommended the administration make $500,000 in budget cuts for the 2003-04 fiscal year budget for the council to review.
Snow said cutting that amount of money would probably result in cutting eight to 10 full-time jobs. The administration prepared a bare bones budget for the fiscal year 2002-03 as it is, so any cuts to the budget at this point would mean personnel cuts.
Semmens cautioned that if the council laid people off now and wanted to rehire them a few years down the road if the financial situation got better, those trained and skilled people may not be around to hire back.
Moore responded that he wanted to see the cuts made in the budget more for conversation purposes.
"I don't think anybody here wants to do that, but let's see it. Let's see the blood," he said. "I don't think this is realistic, but I think it's a good place to start."
Along with the $500,000 in cuts, the council agreed to drop the cost of living adjustment for city employees in next year's budget and agreed to require them to make some level of contribution to their health care premiums, which they have never done before.
Single employees will still have their premium paid, but coverage for dependents will have a charge. This will generate an estimated $50,000 in savings for the city.
"I would like to see them make some kind of contribution," council member Pat Porter said. "I used to be a city employee, and I would hate to see this coming down the pike, but I don't know what else to do."
Setting the mill rate took a little more discussion. Williams was particularly in favor of raising it by 1.5 mills.
Council member Jim Bookey was the most vocal opponent, saying a 1.5 mill increase would be too large a burden for the taxpayers of Kenai.
"The general public is facing the same problems the city is facing ... increases in insurance, electricity, wages and everything else," he said.
His objections were outvoted as the council decided to support a 1.5 mill increase for now.
"Where else can you live in Alaska and pay this low a mill rate?" asked Porter. "Even if we raise it a mill and a half."
Semmens put together a quick estimate of what impact these measures will have on next year's budget. He estimated the mill rate increase, the $500,000 in budget cuts and the estimated $50,000 saved from employee insurance charges would reduce the estimated budget deficit from $1,467,691 to $759,891.
The administration will take these directives and use them to put together a budget for the 2003-04 fiscal year. The budget process is a long and complex one, so administration members won't be able to say until the budget comes out in April what services and jobs will be cut.
Snow said cuts will be made by doing a functional unit analysis, which means each department or division head will meet with her and present their analysis of how the department can be reorganized and what services they can do without to deal with a certain percentage of cuts.
Porter said she looked forward to hearing what the general public thought about the budget and the council's current budget plan.
"It isn't all doom and gloom in Kenai," she said. "We're trying to find something, but this could all change before we do the budget. Maybe something good could happen before then and we won't have to do any of it. ... Kenai is a good place to live and will continue to be because we will make it strong."
Taking a more reserved tact, Williams ended his comments by saying "If it's not bad, it's certainly gloomy."
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