Declining sales taxes, anticipated reductions in state revenue sharing and pension funding, the rearrangement of a state meal program, and a probable rise in the cost of health care may complicate Kenai’s attempts to balance its budget in the coming years, according to Kenai City Manager Rick Koch.

At a Dec. 13 Kenai City Council worksession, Koch asked council members to consider that revenue this year may be $436,563 less than anticipated, and that a “worst case” scenario for funding in 2017 could result a budget deficit of $974,540 for the fiscal year that will start in July 2017.

The revenue shortfall Koch estimates the council may face when budgeting for fiscal year 2018 — from June 2017 to June 2018 — comes mostly from a projected sales tax earnings roughly $375,000 less than expected. The expected shortfall, Koch said, was “not huge, taken in the context of the big numbers,” but still significant. Last fiscal year, Kenai took in $7.25 million in sales tax, according to that year’s budget.

Other factors in Koch’s estimated revenue decline include a $50,000 loss of state funding for the Choice Waiver meals program and an $11,000 loss of lapsed expenditures.

To offset these projected shortfalls, Koch gave council members 15 recommended cuts to planned city spending. These include forgoing purchases of hose and respiratory equipment for the City of Kenai Fire Department, shelving for the library, a mower for the Parks and Recreation Department, a stand-up desk for the Planning and Zoning Department, $20,000 in improvements to the Kenai Recreation Center, $5,000 for city employee appreciation events, $16,000 for outside legal counsel, $40,000 for employee travel and transportation expenses, and $35,000 planned for the design of an outdoor event park. Recommended cuts total $231,268 in savings — not enough to compensate for the $436,563 revenue loss.

Even if council members plan to make all the cuts Koch suggested to offset the projected revenue loss, they would have to start their fiscal 2018 budget by taking $205,295 from city savings to compensate for the remaining lost revenue.

This hit is not severe in itself. Kenai currently has an undesignated fund balance — the accumulated savings from previous years in which revenues exceeded expenses — of about $7 million, from which it can draw to fund deficit budgets. However, Koch’s worst-case funding scenario for fiscal year 2018 would add state funding cuts and likely increased health care liability to the projected losses from sales tax and the meal program.

In creating a worst-case budget scenario for that year, Koch added to the potential $205,295 fiscal 2017 deficit from this year’s budget, lost contributions from the state’s revenue-sharing and public employee pension programs — which contributed $277,930 and $281,404 to this year’s budget, respectively — and a 15 percent rise in health care costs, which from this year’s health spending of $1,406,078, would result in an extra expense of $210,911. Altogether, the worst case scenario presents a deficit of just under $1 million.

Municipal revenue sharing, in which the state government contributes money to municipal projects, and Public Employee Retirement System (PERS) pensions, in which the state contributes to the retirement savings of municipal employees hired before July 2006, are two expenses that Alaska legislators attempted to cut from this year’s state budget, which ended up with an approximately $3 billion deficit of its own.

Local government employers contribute 22 percent of the retirement payments for PERS employees, while the employees themselves contribute around 7 percent and the state pays the rest, according to the Alaska Department of Administration Division of Retirement and Benefits. Responsibility for PERS payments have been a long-time matter of dispute between the state and local governments.

In March 2016 Senate Finance Committee co-chairs Senator Pete Kelly (R-Fairbanks) and Anna MacKinnon (R-Eagle River) introduced a bill that would have shifted some of the state’s $6.7 billion unfunded pension liability to municipalities by raising the employer contribution to 26.5 percent by 2018. Koch said this bill, which died in the Senate Finance Committee, would have created an approximately $300,000 expense for Kenai.

A successful cost-cutting bill introduced by Kelly and MacKinnon that month shifted some of the state’s municipal revenue sharing from larger cities to smaller ones. One version of the bill would have taken Kenai’s slice of shared revenue from $435,368 to $221,136, though Koch said the amended version that passed only reduced Kenai’s share by about $100,000.

With the continuing urgency of the state budget deficit, Koch — who opposed both bills — believes this year’s legislators will also seek to cut PERS contributions and Municipal Revenue sharing.

“I think it’s sort of low-hanging fruit again, because folks won’t point at the state legislature and say ‘you’re harming us by doing this,’” Koch said in an interview Friday. “They’ll look at the local government and say ‘you’re harming us by doing this’ if local governments have to either cut services or increase revenue.”

With a $7 million unrestricted fund balance, Koch said Kenai is “very well-prepared, given the fund balance we carry, for this kind of painful exercise if we have to go through it.” Nonetheless, deficit spending is not a long-term solution.

“If we said ‘Gee, we’re going to have a million dollar shortfall for two years, but then we’re going to be OK’ — you’d say ‘Alright, that’s why we have these fund balances,’” Koch said. “But if it’s going to be a million dollars every year, it would be silly to say ‘Let’s start burning through fund balance,’ because in seven years you’d have no money.”

Reach Ben Boettger at ben.boettger@peninsulaclarion.com.