If all expenses and revenues shake out as predicted, the Kenai Peninsula Borough will have to draw about $4.15 million out of its fund balance in the next fiscal year.
The Kenai Peninsula Borough Assembly passed an approximately $82 million budget at its June 6 meeting, with no tax increases or new revenues included. Of that, about $49.7 million goes to support the Kenai Peninsula Borough School District.
However, to compensate for an additional $1.5 million contribution to the school district and other cost increases, Borough Mayor Mike Navarre proposed in his initial budget to raise the general fund mill rate from 4.5 mills to 5 mills, raising an additional approximately $4 million to help cover the increase. The assembly balked at the increase, voting it down. The assembly also voted down a proposed measure to reduce the borough’s seasonal nonprepared food tax exemption from nine months to six months.
Navarre expressed frustration at the June 6 assembly meeting about the assembly’s refusal to raise any additional revenue to cover expenses, saying it is irresponsible to draw too much out of the fund balance to cover operating expenses.
“I get it. The economy is contracting. There’s no good time to raise taxes,” Navarre said during the June 6 meeting “… I get it, that people struggle during downturns in economies and contractions in the economy, but when’s the last time you heard when the economy was good that we should raise taxes and put money back into the fund balance in order to make sure that when the economy turns down that we’ll have adequate funds in our fund balance in order to make sure we can ride through an economic downturn?”
At a joint luncheon of the Kenai and Soldotna chambers of commerce Wednesday, Navarre’s chief of staff Larry Persily explained the borough’s options going forward for buffering the fund balance. If nothing is done to raise new revenue or significantly cut expenses, the borough will use up its fund balance by fiscal year 2021, he said.
“You can’t,” he said. “Realistically, you can’t go negative on your fund balance.”
The fund balance isn’t just a savings account — it serves as a way to cover expenses between periods of sales and property tax incomes and can cover unexpected expenses, such as a wildfire or an unforeseen increase in operating costs. The borough also invests its fund balance and brings in an additional approximately $1 million in revenue each year, Persily said.
The borough keeps its fund balance above $8 million. Without significant cuts or new revenue, the balance will fall below that level by fiscal year 2019, he said.
“If you look at the fund balance, it’s not all cash in the bank,” he said. “Some of it is money that’s owed by property owners and by Homer. To account for that … you end up with about $8 million, which … the mayor believes it should not drop below.”
The borough’s general fund draws from two primary sources of revenue: a 3 percent sales tax and the 4.5 mill rate. Property taxes are projected to bring in approximately $54 million in fiscal year 2018, and the sales tax is projected to bring in approximately $29 million, spiking in the summer. However, in the past few years, the sales tax revenue has come in below the projected amount, in part because of lower gas prices, Persily said. In 2009, borough residents also voted to increase the amount of personal property value exempt from taxes from $20,000 to $50,000, decreasing borough property tax revenue by about $1.3 million. When the seasonal nonprepared food tax exemption was instated in 2009, borough revenues fell about $3.3 million as well, he said.
One of Navarre’s priorities before he leaves office — he will be term-limited out and Kenai Peninsula voters will choose a new mayor in the October municipal regular election — is to stabilize the fund balance, Persily said. Part of that is identifying a new source of revenue. The assembly in 2018 could choose to raise the mill rate for the fiscal year 2019 budget, but the administration is also looking at other options, including a bed tax and raising the sales tax cap from the current $500 to $1,000, he said.
The bed tax, which could be either a sales tax on each room night or an excise tax, is still under legal review, he said. The sales tax cap increase failed when it went to voters in the October 2016 election, but Navarre plans to ask the assembly to send it to the ballot again, Persily said.
“His plan is to ask the assembly to put the tax cap question back before voters in October, to give people the choice,” he said.
Reach Elizabeth Earl at elizabeth.earl@peninsulaclarion.com.
