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March 08, 2012
City needs to prepare for shortfalls
EDMONDS, Washington (STPNS) -- Mayor Dave Earling is warning of critical times Edmonds will face in the near future if new revenue streams are not acquired, and he wants residents and officials to be prepared.
In short, based on projected revenues and expenses, by the year 2013, Edmonds will face a $800,000 shortfall; by 2016 that number could be as high as $3.5 million.
Those numbers are estimates, of course. The figures change depending on how much money is received from the State for property and sales taxes. And, since the recession hit, those figures are down significantly.
Beginning in 2008, revenue for the city has been declining or flatlining while expenses have increased. Revenue has not been able to keep pace with growth in expenses for local government.
Earling says property and sales taxes make up the majority of revenue for cities’ general funds.
The assessed value of all properties in Snohomish County has declined by 16 percent since 2009, but total property taxes paid in 2009-2011 are up by 3.6 percent.
“There are a number of ways that lower assessed values could still result in higher taxes paid overall by property owners,” Earling said.
“These include voter support for a bond levy for schools or cities, or voter approval of special purpose districts like a regional fire authority or metropolitan parks district.”
The majority of property taxes go toward state and local education (over 61 percent in 2011).
The following graphic shows how property taxes are collected by a taxing jurisdiction:
As you can see, property taxes collected by cities are a relatively small proportion of total taxes paid.
Under state law, cities can assess a 1 percent property tax increase over the prior year, but many cities are seeing costs rising 3 to 5 percent.
Monies collected from sales tax are much the same. The City of Edmonds receives a low percentage of the money collected here.
The sales tax rate in Snohomish County ranges from 8.6 percent to 9.5 percent. The state collects the majority of the tax, 6.5 percent, and counties and cities share the remainder.
“Generally speaking, the amount cities receive from sales taxes is less than one penny (0.85%) of the total 9.5 cents (9.5%) collected on each $1 purchase,” Earling said. “For example, on a sale of $10, sales tax collected by the state is 95 cents; of this amount, the state gives cities approximately 8 cents.”
And economic activity is down, bringing in even less revenue.
In Edmonds, taxable sales declined from $607,095,013 in 2007 to $498,941,554 in 2010, a decline of nearly 18 percent in three years.
“This places a growing burden on city councils to adapt to a new reality,” Earling said. “Although cities have generally taken different approaches to dealing with their budget crisis, the approaches generally fall into three broad categories; revenue increases, overall expenditure reductions or targeted service cutbacks or elimination.”
For revenue increases, cities have two options; to increase existing revenue sources, and enacting new taxes and fees on residents and businesses.
Several cities have enacted or increased utility taxes.
Some cities, including Edmonds, have been unsuccessful, while others, including the City of Shoreline, have won voter approval for property tax increases.
Last year, Edmonds voters rejected three separate levy proposals.
Reducing the amount of money spent by the city is also an option, although Edmonds is already running a tight ship compared to other local cities.
For instance, Edmonds has a population of 40,000 people and a city staff of 199; Lynnwood has a population of 39,000 and a city staff of more than 450.
“Cities have also been creative in implementing overall expenditure reductions,” Earling said. “For instance, Everett and Edmonds delayed filling or have yet to fill vacant positions.
“Lynnwood eliminated positions in its 2011-12 budget and Edmonds chose not to fund certain positions; both have implemented employee furloughs and held vacant positions open in order to reduce their budgets during the past few years.”
Another option is “Targeted Service Reductions or Elimination.”
For example, the City of Everett delayed its sidewalk repair program after reassigning four employees to perform utility-related work for several years. And other cities have delayed funds for transportation infrastructure.
All this means hard decisions need to be made. And Earling wants both city officials and residents to begin working on what needs to be done.
“We need to have the honest conversation now,” he said. “It’s sobering.”
For instance, city expenses are projected to increase about 3.2 percent annually, while revenue is expected to increase by about 1.4 percent annually between 2012 and 2016. Below is an illustration of what this means for the City of Edmonds.
The purple line represents ending fund balance (revenue minus expenditures) in the general fund.
As you can see, with expenses exceeding revenue by a growing amount, the fund balance is projected to be depleted within the next few years. Edmonds is not unique in this respect, either.
“The implication of this disparity between revenue growth and expenditure growth is that cities will be bringing in less money than they are spending,” Earling said.
“This means less money is available for future uses should the resources be needed. It also means that there is less money available in the city’s general fund to cover shortfalls…”
Earling says the answer is to identify ways to bring expenses in line with revenue.
“Options include cities tying revenue increases in taxes and fees to cost-of-living increases; negotiating employee compensation increases tied to no more than annual cost-of-living increases; cutting programs and eliminating positions; hoping a general economic recovery will benefit sales tax revenue and property taxes revenue through increased assessed value within the city; or growing their way out of the recession through economic development,” he said.
“City of Edmonds officials and staff are reviewing all options and working hard to minimize or reduce expenses, grow revenue, and diversify its tax base to sustain governmental operations,” he said. “It will be a challenge…”
Note: To see graphics in this story go to www.edmondsbeacon.com
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