Kent City Council is considering changing the destination of property tax revenue

A proposal to change the way the City of Kent spends its property tax revenue could help prevent the general fund balance from declining rapidly over the next few years.

With an inflation rate of 8.5% in April, the city’s chief financial officer, Paula Painter, suggested to city council during a 2023-2024 budget workshop on May 17 that it use more sales tax and utility tax revenues to pay general fund operating costs and spend half of property tax revenues on the capital fund rather than all on the general fund. The capital fund helps pay for projects such as streets, parks, facilities, vehicle fleets and information technology.

“If we leave everything status quo with income, growth and expenses, we expect to reduce the fund balance,” Painter said.

Painter predicted that a fund balance of $41.3 million in 2023 could drop to $17.9 million by 2026 if no changes are made. The council maintains a large fund balance account to protect against unforeseen events that would adversely affect the financial position of the city.

“We hit something we didn’t expect and that’s high inflation,” Painter said.

Under the current system, 100% of property tax revenues are paid into the general fund. With the proposed change, 52.5% would go to the capital fund and 47.5% to the general fund.

With property tax increases capped at 1% each year, Painter said this is causing a structural imbalance between income and spending, which will increase even more due to wages and contracts tied to the rate of inflation. Property taxes bring in 25% of general fund revenue.

“Operating expenses are growing at the rate of inflation and with a capped property tax, we’re still going to have a problem,” Painter said. “It’s important to change our reliance on property taxes.”

To offset the loss of property tax revenue to the general fund, 100% of sales tax revenue would go to the general fund rather than the 80/20 split which sends the smallest amount of money to the resource fund. capital. Revenue from the utility tax would be split 90/10 rather than the current 59/31.

Painter said revenue from sales and utility taxes can grow at higher rates than property taxes and help keep up with inflation.

“This slows the impact on the general fund balance and absorbs ongoing costs without reduction,” Painter said. “And that gives us time to address the structural imbalance.”

The change would keep the fund balance at more than $40 million for the next few years and at $36.6 million in 2026, Painter said.

The city’s business and occupancy tax would continue to go 100% to the capital resources fund, as would the real estate excise tax the city collects when a person sells a property.

With this change, the capital resources fund would take a hit.

Under the current plan, the fund would be approximately $15.5 million in 2023 and would drop to approximately $10.6 million by 2026. With the proposed change, the fund would be $13.1 million in 2023 and would drop to around $5.6 million by 2026.

“You have given us food for thought,” said Councilor Zandria Michaud.

The board should approve ordinances for the changes.

“Thanks for the first look,” said board member Marli Larimer. “I like what we have in front of us. I think that makes sense.

Board Chairman Bill Boyce was unable to attend the workshop. But Painter said she spoke to Boyce about the proposal and he said he supported her.

Painter said when Mayor Dana Ralph brings his 2023-24 budget to council on Sept. 20, including the plan with the changes in revenue destination, it will be a status quo budget with no new hires or staffing initiatives, no new taxes and no unplanned tax hikes.

The mayor plans to do a budget tour (dates to be determined) to gather feedback from residents before formulating his proposal in September. The council will hold workshops in September and October before voting on the 2023-2024 budget on November 15.

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