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Budget gets a closer look

Posted: Thursday, October 13, 2005

Fallout from the election failure of a proposed bed tax and the success of an initiative-driven effort to cap the borough sales tax at 2 percent could mean a $7.9 million budget shortfall in fiscal year 2007, Kenai Peninsula Borough Finance Director Scott Holt warned this week.

To meet the anticipated reduction in revenues, the borough may have to postpone or forego capital projects in coming fiscal year cycles and is likely to face increasing difficulty funding schools to the legal local limit as it has traditionally done, borough officials are saying.

On Oct. 4, borough voters turned down Proposition 1, which would have authorized a bed tax on hotels, motels and bed-and-breakfast operations of up to 4 percent. Meanwhile, voters approved Proposition 5, which caps the borough sales tax rate at 2 percent and requires a 60-percent supermajority of voters to authorize an increase.

Together, the tax measures were expected to have produced millions of dollars in increased revenues at at time when the borough is facing rapidly rising — and in some cases unavoidable — cost increases, such as those tied to retirement benefits in contracts with public employees and teachers.

Prop 5 rolled back an assembly move earlier this year that was to have upped the sales tax to 3 percent beginning in January.

In a memo to the Kenai Peninsula Borough Assembly, Holt said that given available information, the assembly and new administration (a new mayor will be elected Oct. 25) could continue to operate without changing the current fiscal year 2006 operating budget.

"However, if we assume historical increases in assessed values and other revenues, hold the expenditures to minimal or not increases, and fully funding the school district, then a shortfall can be anticipated for FY 2007 amounting to approximately $7,896,000," he said.

The reduction of revenues from not receiving an increase in sales and bed taxes will leave the borough with a fund balance of about $12.8 million by the end of this fiscal year on June 30. That's only $1.14 million above the minimum required under borough policies. A $7.9 million shortfall in FY 2007 could drop that balance to around $5 million.

Several financial factors have helped hold up the fund balance so far, Holt noted. Strong tourists seasons in 2004 and 2005 provided $700,000 more than expected in sales tax revenues; the borough got some $150,000 more in PLT (payments in lieu of taxes from federal use of taxable property); and reductions in prior-year unrealized losses on investments and increased earnings this year resulted in $1 million more than expected.

Holt also said that total expenditures during FY 2005 came in at 98 percent of the amount actually budgeted. That was reflected in the higher-than-projected ending fund balance in June of this year, he said.

But that was then. The new budget realities could paint a different picture in the next year or so.

"The assembly essentially has very limited ability to increase revenue at this time, but does have the ability to make adjustments in the approved expenditures budget," Holt told the assembly. "This could be done by reductions in expenditures, deferral or canceling of approved projects and other methods to reduce costs."

The FY 2006 budget in-cludes a few large-ticket items, Holt noted.

A new sales tax software package already approved by the assembly is to be paid for out of the equipment replacement fund. Its only impact on the general fund would be a required payback (from the general fund to the equipment account) of $235,000 a year.

Two others are a new emergency generator for the administration building and acquisition of finance and personnel software that would be used by the borough and school district.

Beyond these, the rest of the general fund budget includes day-to-day operating expenses, Holt said.

"During the next few months, guidelines and decisions considering this projected loss in revenues will need to be made by the assembly and the incoming administration as we begin the process of developing the budget for FY 2007," he said.

"I'm concerned," assembly member Paul Fischer of Kasilof said. "The way I look at it ... we'll have in our account about $5 million without any increase in taxes" by the fiscal year 2007 budget.

Fischer asked Mayor Dale Bagley if the sales tax software package purchased could be put off or canceled.

"Unless I get new direction, or the new mayor gets new direction, we will proceed with this software, which is much needed," Bagley said.

Fischer said he did not think the assembly should wait until the FY 2007 budget but should look at the current budget for savings. He suggested that anything that could be put off should be put off, and further that the assembly meet as soon as possible with the new mayor to make decisions about the current budget.

Milli Martin of Diamond Ridge said the software was needed and the assembly should think carefully before pulling that contract.

Martin also said she was surprised by the outcome of the sales tax proposition.

"I kind of fear that it may be a reflection of a lack of public understanding, but they have spoken," she said. "Maybe I don't agree with the outcome, but I do respect the message we were given. We will make whatever adjustments we have to make."

Grace Merkes of Sterling said the new revenue paradigm would be "a learning experience for all of us."

Assembly President Gary Superman of Nikiski, who opposed Proposition 5, said he intends to make some written observations about the election results in the near future.

"There are some things that need to be out there," he said. "If I were to sum up the election, I would think back on the Rocky movies."

He then paraphrased a line from Rocky III spoken by the character Clubber Lang, played by Mr. T.

"They ask him, 'Well, what's your prediction for the fight?' He said, 'Pain,'" Superman recalled, saying that's what can be expected during the next budget session.



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