The anti-sales tax measure approved by voters in October had the impact of a knife in the heart of borough government, according to Kenai Peninsula Borough Mayor John Williams.
Proposition 5 overturned a 1-percent sales tax increase written into law by the borough assembly in June and imposed a requirement that any future sales tax increase be approved by a 60-percent majority of voters.
Speaking to a Homer Chamber of Commerce luncheon audience Tuesday, the mayor, now four months into his administration, said the loss of the sales tax revenue exacerbated an already uncomfortable budget dilemma brought on, in large part, by economic factors beyond the borough’s control.
His administration, he said, already has responded with cuts to save the borough roughly $1.7 million over three years. It won’t be enough. He predicted that if no other steps were taken, the borough would be about $9 million in the hole by the time his term expires in 2008.
The borough is now writing the fiscal year 2007 budget due for completion in May or early June.
Williams said he will present to the assembly cost-savings measures meant to stop the bleeding, including rolling back the senior property tax exemption to the state-mandated $150,000 level, raising the 911 fees, increasing the tax on motor vehicles by about $24 over two years and making service areas pay fees for administrative functions the borough has been performing for free.
Schools may not see borough funding to the “cap” set by federal law, as has been the historic practice of the Kenai Peninsula Borough. Williams has told school officials that school funding may be held at current levels.
Williams also suggested that an increase in the mill rate was not out of the question. He said his goal was to bring in a balanced budget that left a prudent $14 million annual reserve (called the fund balance).
If rising property assessments generate sufficient funds, a mill rate may not be necessary, he said, but he didn’t rule it out.
The borough’s current predicament was the result of several factors, some within and some beyond borough control.
Responding to public demands back in 2000 that its sizable fund balance, then around $28 million, be reduced, the administration of former Mayor Dale Bagley and the assembly began lowering the mill rate to its present 6.5 mills.
Over the years, it has effectively returned $40 million to taxpayers in the form of uncollected taxes, Williams said. Meanwhile, spending to run general government operations increased less than $2 million, he said.
However, the costs of unavoidable obligations such as the public employee retirement program, employee health care, liability insurance and more have begun increasing dramatically.
For instance, mandated contributions to the retirement system will eat up roughly 27.5 percent of the borough budget by 2009.
Health insurance costs are rising the quickest.
“Health care has gone astronomical,” Williams said. Worse, those costs cannot be accurately predicted several years out, he added.
Williams described the borough government like a three-legged stool. General government operates on about $24 million a year, but $7 million of that is transferred to schools, a leg that has its own $34.5 million budget, leaving the general government with funding of about $17 million. Representing the third leg are the various service areas, which have a combined budget of about $23.3 million.
Prop 5 had no impact on the schools and service area budgets, but it had a huge impact on the general government budget, which, Williams noted, performs numerous vital services and is responsible for roughly $800 million in capital assets over a territory the size of West Virginia with just 144 employees, a figure that may soon be reduced.
“Seven million dollars was cut from a $17 million budget,” he said. “How do you do that and keep functioning?”
Last year, as it became apparent the fund balance was dropping too fast and in danger of falling well below the roughly $13 million floor that borough’s financial advisers said would be prudent, the assembly acted.
“They applied the air brakes,” Williams said, by approving an increase in the 2-percent sales tax to 3-percent and taking other tax steps affecting the way recreational package sales were taxed, and regarding use of the borough’s Land Trust Fund.
“Then Prop 5 came along, and the air brakes failed,” Williams said.
A grass-roots effort launched by a group calling itself the Alliance of Concerned Taxpayers, or ACT, succeeded in promoting the ballot proposition to reverse the sales tax. In October, 54 percent of voters approved.
Through a complicated set of events, the entirety of the assembly ordinance that created the tax increase and other revenue measures will be back on the ballot in October, giving voters at least the opportunity to change their minds.
Williams said he hopes more voters are better informed at that time and that they will “kick Proposition 5 out the window.”
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