Borough faces budget choices

Assembly must decide on sales tax increase, property tax exemption level

Posted: Monday, April 18, 2005

Kenai Peninsula Borough Mayor Dale Bagley will officially introduce the administration's fiscal year 2006 budget ordinance at Tuesday's assembly meeting, a spending plan that relies on boosting the borough sales tax to 3 percent to make ends meet.

That's a half percent higher than proposed in Ordinance 2005-09, introduced March 15, which proposed adding .5 percent to the current 2-percent borough sales tax. That ordinance is scheduled for a public hearing.

In an April 7 memo to the assembly, Finance Director Scott Holt said that after further review, doubling the initial proposed increase to a full percent is warranted in order to "maintain the general fund balance in compliance with the fund balance policy and to allow for items in the budget not considered when this was introduced.

"The budget being proposed for FY 2006 includes this increase in the sales tax rate," Holt said.

Mayor Bagley also wants the assembly to decide between competing ordinances proposing changes to the unlimited property tax exemption currently available to senior citizens, disabled veterans and the surviving spouses of those residents over 60 years of age.

Ordinance 2005-07, sponsored and introduced March 1 by assembly member Pete Sprague, of Soldotna, would lower the unlimited exemption to the first $300,000 in assessed value. Bagley offered an ordinance March 15 that would cut the exemption to the first $200,000, making significantly more properties subject to at least some property taxes.

Both measures would mean an increase in property tax revenues to the borough, but the lower ceiling would provide more than $278,000 annually.

The assembly will have to consider the proposed tax increases as the body takes up the budget measure, Ordinance 2005-19. The spending plan would appropriate nearly $60.2 million for the July 1, 2005-June 30, 2006 fiscal year, including almost $13.8 million to run government day-to-day operations (the general fund). The bill also would transfer just over $35 million to the Kenai Peninsula Borough School District. (See related story, this page).

When Bagley first assumed the office in late 1999 and for several years afterward, the borough enjoyed a substantial fund balance hovering around $25 million. Because that savings account was so healthy, the administration and assembly were able to lower the property tax mill rate three times, from its initial 8 mills to the current 6.5 mills. The borough sales tax, meanwhile, remained stable at 2 percent.

With roughly half a year to go before leaving office, Bagley was philosophical about the necessity of considering tax increases. The borough is facing circumstances beyond its control, he said.

"There is a lot of misunderstanding out there," he said. "It's definitely isn't because of what the borough has done."

The end of the state revenue-sharing program, changes to public employee retirement programs (PERS) and increases in education funding (actually a good thing, Bagley noted) that require a larger borough match, have all contributed to driving up the cost of running government services but were not changes initiated by the borough.

Something that was within the borough's control was the borough's policy to reduce the size of its fund balance, Bagley said. Public sentiment in the late 1990s was clear, however — the fund balance was too high. Borough auditors reinforced that notion and recommended reducing the size of the savings account to somewhere between $12 million and $22 million.

Lowering property taxes created the necessary downward pressure, and as government costs rose above available revenues, the fund balance fell into the appropriate range. However, the subsequent loss of revenue sharing, rising retirement obligations and growing education needs have pushed the fund balance to the lower end of the safe zone, requiring an increase in taxes to avoid a projected $5 million to $7 million deficit.

"The bottom line is we have got to find the money for the budget," Bagley said.

The mayor said he wants to hear from residents about where they think government spending might be cut, but he added he did not think cutting, alone, would solve the current fiscal dilemma.

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