Rapidly falling property values in the Cook Inlet oil and gas infrastructure may soon force borough budget-writers to move where they have been reluctant to go before toward cutting services and jobs and increasing taxes, borough officials warned this week.
That sobering reality emerged Tuesday afternoon when Kenai Peninsula Borough finance officials presented the assembly with new revenue projections based on unanticipated reductions the value of oil-patch real property.
State assessors slashed the value of industry real estate covered under state tax law by $56 million, effectively cutting borough revenue by almost $384,000. Meanwhile, borough assessors were doing the same thing to industry assets covered under borough tax law, further reducing projected revenues by just over $156,000. Together, the anticipated losses amounted to about $540,000.
Meanwhile, increases in state funding to schools will require additional borough appropriations of up to $786,000.
Another brushstroke is needed to paint a clear picture of the new budget realities.
For the past several years, the borough has enjoyed a fund balance what's left over after expenses each year hovering around $25 million. Considered higher than necessary, the borough has attempted to reduce that figure to an optimum range between $12 million and $22 million by setting low property taxes and making appropriate draws from the fund balance.
As written, the draft FY 2005 budget anticipated a draw of around $3.5 million, dropping the balance to around $16 million. Further draws were expected to reduce the savings further until it flattened out at around $12 million in FY 2008.
But the unexpected decreases in oil property tax revenues and the added appropriations to schools could mean a fund-balance draw more like $4.8 million this year. If oil-patch assessments continue to fall, the fund balance could fall below what fiscal prudence says the borough should keep in reserve.
The various budget options presented Tuesday offered the assembly a range of suggestions for countering the shortfall, including cutting capital expenditures and raising taxes, but they did not incorporate possible reductions in operating expenses, such as cuts in services or work-force levels.
Under some of the eight options, the fund balance falls below the optimum range by FY 2007. In one case one with no changes except the new assessments the fund balance virtually disappears by FY 2008.
"We were unpleasantly surprised," Assembly President Pete Sprague of Soldotna said of Tuesday's news. "I'm obviously very concerned about it."
Some options include cutting school capital expenditures by $710,000 in FY 2005, and limiting capital expenditures to no more than $1.6 million in future years. However, the assembly still must face cutting operational costs. That won't be easy. The bulk of the proposed $57.2 million budget goes to funding schools. General government operations accounts for only $13.5 million.
"We only have a small portion we can play with," said Scott Holt, borough finance director.
Proposed spending already amounts to a "no-growth" budget, he said. Increases due to jumps in personnel costs have been absorbed by shaving expenses elsewhere, he said.
"We are looking at opportunities to try to make adjustments wherever we can including reducing expenditures and ways to derive more revenues," Holt said.
Doing nothing is not an option, assembly member Chris Moss of Homer said Thursday.
"We have to make some modifications," he said.
That could mean both raising taxes property and sales and cutting the budget, he said.
"Late-breaking news always throws a monkey wrench into the best laid plans," said assembly member Ron Long of Seward. "We probably should have done a better job of anticipating the impact of the state stepping up education funding, but the impact of (lower state assessments), that was a hit."
"It will be difficult to cut services," Sprague said, adding that the borough has enjoyed comfortable sailing in recent years with its high fund balance. "This reality has hit us pretty hard in a short period of time."
Solving all the new difficulties in the FY 2005 budget is not realistic. More likely are adjustments in the FY 2005 budget and more next year, Long said. Those adjustments could include higher taxes, larger draws on the fund reserve account, finding more efficiencies in government and perhaps rolling back services.
Of all the alternatives so far presented to the assembly, one would clearly maintain the fund balance in the optimum range, even resulting in a slight upward swing by FY 2008. Called "Projection F," it would include spending the full $786,000 in added school funding this year and over the following three, cutting school capital spending this coming year by $710,000 and limiting expenditures to no more than $1.6 million from FY 2006 through FY 2008, and setting the borough mill rate at 6.7 mills (an increase of two-tenths mill over the current levy, which would add $20 to the annual tax bill for a $100,000 home).
It also would require increasing the sales tax cap, which would mean applying the borough's 2 percent sales tax to the first $1,000 of purchase value, instead of the current $500. Estimates suggest that would bring in over $814,000 annually.
However, Tuesday night the assembly rejected that move by a 4-5 vote, after hearing claims by some business owners that upping the cap would drive business away. A reconsideration vote on the tax-cap measure, Ordinance 2004-13, is expected at a special meeting on the budget June 14, beginning at 2 p.m. Assembly members also are expected to discuss in detail the various alternatives presented by the finance department and act on the budget ordinance.
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