HomeMy WebLinkAboutOrd2011-002 FAILE D Sponsored by: Oates
Introduction: April 11, 2011
Public Hearing: April 25, 2011
Postponed to: May 23, 2011
Enactment:
CITY OF SEWARD, ALASKA
ORDINANCE 2011 -002
AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF
SEWARD, ALASKA, INCREASING THE CITY SALES TAX
FROM FOUR PERCENT TO FOUR - AND - ONE -HALF PERCENT,
BEGINNING JANUARY 1, 2012
WHEREAS, the Seward City Council passed Resolution 2010 -129 on January
24, 2011, authorizing the issuance of general obligation bonds in a principal amount not
to exceed $3.73 million to pay for library /museum capital improvements; and
WHEREAS, prior to Council approval of a general obligation bond issue, an
election was held on October 6, 2009 at which the voters agreed by a vote of 301 to 203
(Proposition 3) to incur debt and issue general obligation bonds in an amount not to
exceed $5 million for financing capital improvements related to the library museum; and
WHEREAS, during the election of October 6, 2009, voters rejected by a vote of
288 to 233, an advisory question (advisory questions are not binding on the City Council)
asking whether they favored an increase in the sales tax rate from 4.0% to 4.5% to cover
a portion of the proposed library/museum operating and construction costs; and
WHEREAS, since that time, the Seward City Council has diligently sought
revenue alternatives to generate the funds to pay for capital and operating costs
associated with the library /museum, including a seasonal sales tax, an alcohol /tobacco
tax, and a property tax increase equal to one mill which was rejected by the Council on
January 24, 2011 via Resolution 2010 -0130, with each of these options resulting in
apparent insurmountable legal and practical challenges to implementation; and
WHEREAS, the City Council finds that the library/museum project has
generated substantial support in the community, sufficient to warrant an increase in sales
taxes necessary to fund construction and operations of the project; and
WHEREAS, the City Council has exhausted viable funding options for the
library /museum project, and finds that an increase in the sales tax rate is the most
equitable way to raise funds to pay for the project, since it spreads the burden of the costs
of the project to individuals who live in Seward, as well as those who will visit Seward
• and utilize the library /museum.
NOW THEREFORE, THE CITY COUNCIL OF THE CITY OF SEWARD,
ALASKA, HEREBY ORDAINS that:
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Section 1: Section 5.35.035, Imposition of sales tax, subsection 5.35.035(A), is
hereby amended to read as follows (Strikeout = delete; Underline = add):
A. There is levied and imposed, in addition to all other taxes and fees of every
kind now imposed by law, a consumer's sales tax on all retail sales of tangible
personal property, the lease or rental of tangible personal property or real
property, and the purchase of taxable services, the same to be collected in the
amount of three (four) percent of the gross proceeds of each taxable sale or
taxable service. : - - - a . • ! ! - - . - . . ... -t to be collected
shall be four percent of the grass proceeds of each taxable sale or taxable
sere. Beginning January 1, 2012, the sales tax amount to be collected shall
be four - and - one- halfpercent (4.5 %) of the gross proceeds of each taxable sale
or taxable service. Beginning January 1, 2027, the tax shall be four percent
(4 %).
Section 2: Seward City Code Section 5.35.055, Computation; addition of tax to
total retail price; tax schedule, subsection 5.35.055 (A), is hereby amended to read as
follows (Strikeout = delete; Underline = add):
5.35.055. Computation; addition of tax to total retail price; tax schedule.
A. The amount of the sales tax to be added to the sales price, charge or rental
shall be three (3) four (4) percent of the sale price, charge or rental rounded
off to the nearest cent by eliminating any fraction of one -half cent or less and
by increasing any fraction over one -half cent to the next highest cent. Each
seller shall be furnished the schedule of tax payable on each taxable amount
from $0.01 to $100.00. Any one sale of items separately priced shall be taxed
upon the aggregate amount. Beginning April 1, 2003January 1, 2012, the
amount of the sales tax to be added to the sale price, charge or rental shall be
increased by one one -half percent to four and one -half percent (4.5 %) of the
sale price, charge or rental. Beginning January 1, 2027, the tax shall be four
percent (4 %).
Section 3. This Ordinance shall take effect thirty (30) days following its
enactment.
ENACTED BY THE CITY COUNCIL OF THE CITY OF SEWARD,
ALASKA this 23` day of May, 2011.
..r
CITY OF SEWARD, ALASKA
ORDINANCE 2011 -002
THE CITY OF SEWARD, ALASKA
FAILED
Willard E. Dunham, Mayor
AYES: Casagranda
NOES: Valdatta, Bardarson, Smith, Keil, Shafer, Dunham
ABSENT: None
ABSTAIN: None
ATTEST:
FAILED
Johanna Kinney, City Clerk
(City Seal)
Council Agenda Statement
Meeting Date: April 11, 2011 tc 1 ;:
M g p I IA
From: Phillip Oates, City Manager p, r
Agenda Item: Increase in sales tax rate to fund library/museum project
BACKGROUND & JUSTIFICATION:
The Seward City Council ( "Council ") has been diligently seeking revenue sources to fund the capital and
operating costs associated with the Library/Museum Project ( "Project "), following approval by voters at an
election on October 6, 2009, of a general obligation bond in an amount not to exceed $5 million. At that same
election, voters were asked by way of an advisory vote (advisory votes are not binding on the City Council but
are intended to gauge the level of public support for or against a particular issue), whether they supported a
0.5% increase in the sales tax rate (from 4% to 4.5 %) to cover a portion of the operating and capital costs of
the Project. Voters rejected the question by a vote of 288 to 233 (56% to 44 %).
Since the election, Council has evaluated numerous possible revenue alternatives to fund the Project. Council
rejected the idea of an increase in the property tax mill rate on January 24, 2011, via Resolution 2010 -0130,
based in part, on the fact that property taxes in Seward impact less than 700 individuals since so much property
in Seward is tax - exempt. This revenue source would not fairly spread the burden of financing the project
among the potential users of the library/museum.
The Seward City Council evaluated a seasonal sales tax option in March and April, 2011, but after hearing
from the Kenai Peninsula Borough ( "KPB" or "Borough ") finance director at a work session on March 14, was
informed that a seasonal sales tax option places a significant hardship on KPB as well as on local businesses.
Specifically, the KPB finance director estimated that costs associated with a Borough effort to implement a
seasonal sales tax in Seward would exceed $100,000. Not only would the Borough likely expect to pass the
cost on to the City of Seward, but they could not guarantee their computer system could be modified to
facilitate the change. When asked about the existing seasonal sales tax in Seldovia — and why Seward was a
challenge if the seasonal tax was already in place in Seldovia -- Council members were told that the Borough
and local Seldovia businesses were experiencing considerable problems, including: Borough staff had to
manually adjust every tax return to properly compute tax liability; taxpayers had difficulty understanding how
to properly compute and report the tax; businesses often did not have the technical capabilities or the computer
systems in place to accomplish the reporting; there was considerable confusion regarding the appropriate tax
rate to use at the time of the sale versus the time of the service (for example, a sale that takes place in January
at a lower rate of tax, for a service that will be provided in July when the tax rate is higher). Ultimately, the
Borough finance director strongly urged the Council not to consider a seasonal sales tax, and based on the
potential cost to the City and the fact that Seward business filers could face up to six different tax schemes at
various times of the year, the administration agrees that the seasonal sales tax is not a good option.
The City Council has also requested information regarding the possibility of imposing an alcohol/tobacco tax.
This option is very complex and involves legal and practical obstacles which appear to be insurmountable. For
example:
a. State law requires that if alcohol is to be taxed at a higher rate than other general sales tax items, at
least one other item must be charged at that higher rate. This results in a variable sales tax rate which
the Borough is unwilling to administer. For the City to administer a variable sales tax, a significant
investment in software, additional staffing for administration and collections, and legal fees associated
with collections, would be required. While this is legally possible, it is very costly.
b. The administration considered a possible tax on the wholesale rather than retail price, in order for City
staff to handle the administrative requirements of the variable tax (there would be considerably fewer
wholesale rather than retail filers, and therefore, presumably Tess cost and burden). However, for
various reasons, this is not a viable legal option. (For example, we cannot have both a wholesale and a
retail tax on alcohol/tobacco; a wholesale tax would require a taxable transaction to occur within the
City limits, and this option does not preclude taxpayers' buying alcohol and tobacco outside of Seward
in order to avoid tax liability.)
c. Consideration was given to an excise tax which is essentially a tax on the importation of tobacco and
alcohol, but we are not legally allowed to have an excise tax on alcohol, and since we have a sales tax
on tobacco sales, we cannot also implement an excise tax on tobacco.
There are numerous other challenges associated with various efforts to tax alcohol and tobacco, and those will
be discussed by the City Attorney in detail, at the Council meeting of April 25, 2011.
Another option evaluated by the administration is the possible use of existing City resources (cash) to fund the
project. While it may seem a preferred alternative to raising taxes, it has significant risks which have the
potential to cause serious financial harm to the City. Such a strategy is ill- advised based in part, on the
following:
1. For more than a decade, the City has failed to meet its own policy of maintaining 3 -6 months'
General Fund reserves, for the purpose of meeting unforeseen needs and emergencies, or
covering deficits in other City funds. In 2010, the City received a one -time EXXON Valdez
oil spill settlement which enabled us to finally reach the lower end of the recommended range
of adequate reserves. The level of reserves is one of the most significant indicators of fiscal
health of a City; insufficient reserves can be a serious problem. Over the years, "unforeseen
needs and emergencies" have not been uncommon and have resulted in numerous unexpected
major draws on General Fund reserves (closure of the hospital; Harbor deficits; SMIC
deficits; natural disasters; Sewage lagoon failure; Water /Sewer fund debt elimination, hospital
operating losses, etc.)
2. The General Fund is legally responsible to cover deficits in all City funds. The SMIC Fund
has operated in the red for many years, requiring subsidy from the General Fund. The Harbor
Enterprise Fund and the Electric Enterprise Fund both failed to meet bond reserve
requirements in 2009 (for the first time in decades) based on escalating costs, lower passenger
numbers, unexpected major repairs, insufficient rate structures, etc. These challenges reflect
structural budget problems which require a disciplined longer -term financial strategy to
resolve. For two consecutive years, harbor passenger fees were not sufficient to cover the
costs of bonded debt in the harbor. Prior year passenger fee surpluses covered the shortfall,
but those funds are nearly depleted and will not be available if passenger fee levels do not
return to previous levels.
3. The capital budget process identified critical repair and replacement needs in enterprise funds,
where resources are not in place to meet those needs. Many of the most critical needs have
not been funded, let alone other important capital needs, due to lack of cash in the enterprise
funds. In addition, enterprise funds have not been contributing to major repair and
replacement or depreciation Funds, due to lack of cash, opposition to rate increases, and
public pressure to spend cash. This has left the City is the position of having little to no cash
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on -hand in the enterprise funds to pay for major repairs, and with a financial condition that is
not likely to support the issuance of future debt without alternative or increased revenue
sources. If an enterprise fund has no resources to cover major unavoidable repairs, it cannot
simply go to the bank to borrow money, or issue bonds. Rather, it must borrow reserves from
the General Fund until such time as it can return to a positive cash position. In 2010, the
Harbor, SMIC, and Electric Funds all borrowed from the General Fund at some point in the
year to pay their bills (they had run out of cash). That is a warning sign that cannot be
ignored.
4. The City faces risks associated with national changes to healthcare and the corresponding
unknown impact of those changes on the financial health of our hospital and long -term care
facilities. Any financial losses in those operations will be borne by the taxpayers, are difficult
to project in advance, have not been budgeted, and can be substantial.
5. Previous reserves in the Motor Pool Fund — which were being accumulated in order to replace
existing heavy equipment and vehicles in a systematic manner to avoid single year negative
budgetary "hits" and the need to pay interest from financing equipment -- have been borrowed
to cover other City needs (such as paying off retirement costs associated with hospital PERS).
The amount of cash reserves in that fund at the end of 2010 is approximately equal to the
principal balance owed on outstanding loans on equipment being financed by the Motor Pool.
The purpose of the Fund is to eliminate borrowing costs, but because cash has been used for
other purposes, the City continues to pay interest to borrow for heavy equipment needs.
There are other reasons why utilizing existing City resources to construct a library/museum poses a significant
risk to the financial health of the City, but these highlights identify the major reasons.
The City Council and administration have both worked very hard to identify potential sources of funding for
this project that do not involve sales tax. This project has received wide community and statewide support.
Seward taxpayers rejected the idea of a one - half - percent increase in the sales tax rate when they voted in
October 2009. At that time however, it is unlikely that anyone could have foreseen the difficulties of finding a
viable funding source that did not involve sales tax. The administration finds that there are few, if any, funding
alternatives. Unfortunately, a modification to the sales tax rate appears to disenfranchise the voters who
rejected that option during the advisory vote. However, it would appear that this option may be the only viable
option for funding the project which was approved by the voters in 2009. Ultimately, the difficulty we face in
identifying a viable funding solution makes it all the more important that we develop a plan before we move
forward with major project commitments. Without a clear and viable revenue source to pay for the project, it is
ill-advised to begin construction.
CONSISTENCY CHECKLIST
Where applicable, this agenda statement is consistent with the Seward City Code, Charter, Comprehensive
Plans, Land Use Plans, Strategic Plan and City Council Rules of Procedures.
Other:
ATTORNEY REVIEW X( Yes No
FISCAL NOTE
The imposition of an additional 0.5% year -round sales tax can be expected to generate approximately
$450,000 per year. Assuming that the project moves forward soon, bonds are issued within one year, and
additional operating costs are capped at $150,000 per year (as opposed to the previous estimated cost of
$260,828), this funding level will support a $3.5 million bond over either 20 or 25 years. The costs over
20 years would be approximately $445,000 per year; over 25 years would be approximately $420,000 per
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year. Alternatively, if the project were postponed long enough to accumulate two years' worth of
additional tax revenue, it may be possible to reduce the term of financing to 10 years or Tess. It would take
approximately 8 years to accumulate sufficient revenues from a 0.5% sales tax increase to fully pay for the
construction costs without borrowing money, assuming no increase in construction costs. Clearly, costs
would be expected to increase over time, the longer construction is delayed.
Approved by Finance: �'� re � 1 J
RECOMMENDATION 'V
Seward City Council approve Ordinance 201 1 -, increasing the sales tax rate from 4.0% to 4.5 %.
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