Kenai water and sewer tax exemption fails

A proposal to exempt Kenai’s residential water and sewer services from city sales taxes failed at Wednesday night’s Kenai city council meeting. Of the council’s seven members, only the ordinance’s sponsor, council member Mike Boyle, voted in favor of it.

“This came from the public to me, as a request to introduce this,” Boyle said. “The idea is simply that that those necessities of life should not be taxed — that philosophy’s out there. This is a city service, and in one essence, if we’re charging for public sewer and water, that’s a tax in and of itself. So we’re taxing our services that we provide to the city. I kept it simple, kept it just the city’s utilities as opposed to going beyond, although someday that’s an option we should perhaps pursue.”

Kenai’s city government is the sole provider of water and sewer services in Kenai, though some homeowners have private wells and septic systems unconnected to the city system. The city of Kenai and the Kenai Peninsula Borough each levy their three percent sales tax on the monthly charges that city water and sewer users pay for the services.

For a single-family residence connected to city water and sewer, eliminating Kenai’s share of the sales tax would take $2.61 off the total $92.31 monthly charge for city water and sewer, according to an email from Kenai Finance Director Terry Eubank. The Kenai Peninsula Borough’s three percent sales tax would remain.

Boyle estimated sales tax revenue lost to the exemption would be around $50,000, an amount he described as “a drop in the bucket” compared to the city’s total general fund revenue — budgeted at $14.7 million in the present fiscal year. His proposal had no measure to make up the revenue from another source.

Council member Tim Navarre said the change could set an unfavorable precedent of adjusting the cost of Kenai’s services without adequately examining the impacts.

“You do the water and sewer and next it will be the gas and electric, and it starts adding up,” Navarre said. “There’s a shift. What we have to do is understand, is it an equitable shift, and who’s getting the benefit, and who’s the cost going to on the other side, when it shifts to the other side?”

Utilities accounted for about $10.8 million in taxable sales in fiscal year 2016, according to the city’s Comprehensive Annual Financial Report of that year. That figure includes not only city-provided water and sewer, but also gas and electricity provided by the privately-managed but publicly-regulated utilities ENSTAR and Homer Electric Association, respectively.

Kenai Mayor Brian Gabriel and council member Henry Knackstedt said removing sales tax on city water connections would be unfair to residents — such as themselves — who have private wells and septic, and who pay sales taxes for installation of wells, septic pumping, the electricity that runs the system’s pumps, and other related services.

“This would be relief for others who have city water and sewer, but I’m in the city and paying somewhat equivalent taxes, if you will — it kind of works out that way in the long run,” Knackstedt said.

Council member Bob Molloy initially gave support to the ordinance, but by the end the council’s discussion said he’d been “persuaded that this is an item we should look at in the budget process,” but not one he’d vote for at that meeting.

Council member Jim Glendenning also said he’d favor looking more thoroughly at water and sewer costs in the future. He and Boyle said Kenai residents had spoken to them about high water and sewer bills.

Since 2011, Kenai has raised its monthly water charge for a single-family residence from $13.78 to $35.66, and its sewer charge from $40.35 to $51.40. The increase was recommended in a 2011 city-commissioned study by the engineering consultancy CH2M Hill, which estimated that by fiscal year 2030 the operations and maintenance costs for Kenai’s aging water and sewer system — parts of which were then about 30 years old, according to previous Clarion coverage — would increase to nearly $3.9 million, and that about $22.3 million in capital improvements would be needed to maintain the existing services by that year.

“With limited federal and state assistance available, the City must rely predominantly on water and sewer rates to fund the projected system costs over the next 20 years,” the study states.

Eubank said the water and sewer fees had remained flat for many years prior to the 2011 rate study, which updated the last rate study in 2003. At the time, the sewer charge brought in about $1.3 million to the city water and sewer fund and the water charge $463,677. CH2M Hill recommended increasing the water charge by 50 percent in fiscal 2012, with increases of up to 12 percent in subsequent years, as well as sewer charge increases of up to 5 percent.

“That was sort of the reason for that real steep couple years where we had that climb,” Gabriel said, of the expenses accounted for the CH2M Hill study. “Because in my opinion, that can had been kicked down the road, and whenever you kick a can down the road, somebody eventually pays for it later on to catch up. Hopefully we’re getting to where we need to be on those funds.”

After fiscal 2019 (set to start July 1, 2018), the CH2M Hill study calls for the rising water and sewer charges to level out at an annual two percent increase until fiscal 2030.

Reach Ben Boettger at ben.boettger@peninsulaclarion.com

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