City’s budget deficit cuts and tax increases explained

By Josh Amato 
Guest contributor 

Analysis 

The City of Sammamish budget is in a structural deficit — the amount of money coming into the General Fund (operations) is less than the expenses going out. 

With this year’s  original spending proposal, the biennial budget was in a $16.6m deficit. The deficit could  be fixed by raising taxes, cutting expenses, using Fund Balance (reserves), or a mix of all three. The Council has known this day would come for a long time – as far back as 2016. But it seems no matter who won the last election, nearly every candidate was opposed to increasing revenue. There was no candidate in 2019 willing to say new taxes would be necessary, except one: Mark Baughman in 2017. 

“At the Candidates Forum, the other seven candidates stated their firm opposition to new taxes and then turned around to support bonds to pay for roads,” Sammamish Comment reported at the time. “When it came Baughman’s turn, he was the only candidate to declare that bonds may require a tax hike to pay for them. It’s a truth that needs telling, and Baughman told the truth.”

Baughman was defeated by Jason Ritchie  

So here we are.

The City is highly reliant on property taxes, which are estimated to bring in roughly $65.5m in revenue. Sales tax is estimated to bring in around $11.3m, a large portion of which is attributable to online shopping. These two revenue sources, that span the two year budget period, make up the majority of the General Fund. Unlike Redmond or Issaquah, Sammamish doesn’t have box retail, car dealerships, or hotels, which are significant sales tax drivers. 

How we got here

One of the reasons we’re in this deficit position is because the various councils over the last 11 years opted to not raise property taxes, relying on additional revenue from growth. Our residents have been enjoying increased service without an increase in direct cost. The only way for that to continue, however, is if the city continues to grow.

source: 11/10/2020 City Council meeting

And, as the last election made clear, there is significant heartburn over that proposition.

The growth over the last 11 years has brought in more revenue to the city in the form of impact fees and increased property tax revenue from new development. 

With the moratorium in place, impact fees and revenue growth from property taxes on new development  have shrunk substantially, making apparent much sooner the problems related to relying on only growth to fund budget increases. The effect of 11 years’ worth of lost tax revenue from choosing not to increase taxes is also exacerbating the challenge.

There were plenty of warnings the “crossover” point was coming.

How Property Tax Increases Work (for the City)

There have been many changes to property taxes in Washington over the years and everyone lives in many taxing districts, which adds to the confusion of where our money goes. The Department of Revenue has a helpful short writeup and MRSC has a complex writeup for deeper explanations.

Each district is permitted to raise an additional 1% for their budget from property taxes every year (with taxes from new development  as added on top) unless voters approve an even higher increase in the form of a levy lid lift or additional levies or bonds for specific needs. One can find out how much of the property taxes are voter-approved and are going directly to the city by using the Assessor’s Transparency Tool.

A higher property valuation doesn’t necessarily mean the total amount of taxes paid to the city has increased. Assuming the city doesn’t take the 1% increase and assuming everyone’s property values all increased at the exact same percentage, everyone would see their rate decline and the total amount they pay to the city stay the same.

However, in the real world, someone might have an addition to their house, or an improved road, or new school and all those details impact values. Which is how valuations can impact the total property tax bill. If  a property valuation goes up at a greater rate than other properties in the community, that property  will be paying more in property taxes. But, property valuation increase by itself doesn’t necessarily mean the total amount of taxes  paid to the city goes up.

Where we’re at

City Manager, Dave Rudat

As of this writing, the council is mulling over what to do. City Manager Dave Rudat presented his original budget, which includes additional police service and an 11% property tax increase from banked capacity, which is not as bad as it sounds. For the average property ($900,000 assessed value) in Sammamish the tax increase will be $154 each year. With this tax increase, the budget still has a $10.9m deficit. 

Additional recommendations are to use the Fund Balance, which is typically used for one-time capital expenses, to pay for Fire Station improvement ($3.4m) and street overlay expenses. The council already voted to pay for the Fire Station improvements out of Fund Balance. This lowers the deficit to $7.5m. What’s left to consider is how to pay for the street overlay program. This is a debatable capital expense. Some might argue it is maintenance and some might argue that since the overlay increases the life of the road by such a long time, it is really a capital expense. The overlay program is $6.4m. If it is counted as a capital expense, that leaves a $1.1m deficit.

source: 11/9/2020 City Council meeting 

It could be argued that covering the $1.1m deficit with reserves would be acceptable, as the sales tax revenue estimated in the budget could be underestimated by as much as $500,000 and the FTE costs are inflated to account for the unknown benefit expenses and exact pay grade for yet-to-be-hired employees. Corrections could be made in the mid-biennial budget review in 2021 if necessary.

However, a truly balanced budget would require no deficit in the General Fund, which means more revenue must be found or additional cuts must be made. The additional revenue can come in the form of a utility tax, an idea that has been floated in at least one council meeting but has yet to make serious headway.

There are also many options on the table for cuts. One of the requests made by City Council was identification of $13.2m in cuts so they could understand what a tax increase might be paying for. The City Manager put the list together, a number of items within that document can be chosen to bridge the $1.1m gap if additional revenue or fund balance spending is unacceptable.

The council needs to decide quickly. The City has until November 30 to submit the total levy amount to the assessor.

Going Forward

It should be clear to the City Council that the path the city is on is not sustainable if our residents desire a high level of service from the city. There are many competing interests in the city and everyone has ideas about priorities. Such priorities include an arborist to protect our trees, more police protection, additional code enforcement to stop developers from breaking the rules, improved infrastructure, more parks, increased social services, and so on.

All of those items cost money, and the city is simply out of it. No matter where we stand on cuts or tax increases , the council is supposed to take your wants and needs into consideration as they inform themselves of the facts and make decisions.

References:

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2 thoughts on “City’s budget deficit cuts and tax increases explained

  1. Remember a few years ago how the City had so much “excess” to spend on the community center…”No problem – projected surpluses out as far as we can see to the horizon”: self serving myopic vision.

    What percentage of residents ever use that albatros? Enjoy your commute and new ‘service’ levels – great time to be retired…

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