Deliberations are underway for the city of Issaquah’s proposed 2020 budget, which includes the consideration of increasing property taxes, utility taxes, utility rates and parks fees.

The Oct. 21 Issaquah city council meeting included additional revenue information and two public hearings regarding the proposed budget and revenue sources.

The city council will continue to look at ways to address the anticipated $5.2 million general fund deficit in the coming year. Projected sales tax revenues did not come in at the level as anticipated in 2019, which will leave a shortfall unless addressed.

Before the two public hearings began, Mayor Mary Lou Pauly spoke about supplemental information on possible revenue strategies to aid in council discussion moving forward, beginning with the Oct. 23 budget study session, which was the first budget session seeing a deliberative council following several weeks of informative presentations and overviews of departments and projects.

The budget conversation will continue on Nov. 6.

Supplemental revenue information

A memo (https://bit.ly/2PvPkL6) was sent to the council earlier that day and was included in the meeting’s agenda packet. Pauly explained the memo and read some parts aloud, saying that she and her staff would be ready to answer questions ahead of deliberations.

“Revenue increases are a key component in my proposal for closing the forecasted $5.2 million general fund shortfall in 2020,” Pauly read from the memo. “It is critical that as (the) council deliberates the proposed budget beginning Oct. 23 that it come to consensus on whether it supports the revenue increases as proposed as a first step in its deliberative process and prior to beginning the second phase of deliberations where (the) council discusses additional expenditures or proposed reductions in expenditures to better align the proposed budget with the council priorities.”

The memo had a series of tables.

The first table outlines three scenarios: The revenue recommendations from the mayor’s original budget proposal including utility taxes and property taxes; a scenario that would have lesser utility tax increases; a scenario that would have no tax increases at all.

“The hope here is that these tables can show you the magnitude of impact depending on which scenario, revenue strategy the council chooses to go with,” Pauly said. “I have also heard that there has been council concern over the cumulative impact of rate increases and/or tax increases.”

A water utility fund table shows the expected rate revenues in 2019, the mayor’s proposed budget, and an alternative that is the rate increase proposed before the addition of the water treatment plant. The table shows the differences in revenue between the two 2020 scenarios as $567,342.

Already the council had adopted a 3.5-percent increase on the water utility rate scheduled to go into effect Jan. 1. What is before the council now is whether to increase that 3.5 percent to 9 percent — an additional 5.5 percent for the water treatment plant. Proposed budget revenue projections are based on the 9 percent increase in 2020.

“I recognize that decisions to increase tax rates are difficult. I did not take this decision lightly when developing my proposed budget,” Polly read from the memo. “Our resources have not kept pace with demand. I see raising revenues as an important variable to ensure that we can continue to provide high-quality services to Issaquah residents. But I also recognize that there are impacts on our taxpayers and that the council needs to consider all options as it deliberates the budget.”

The council had some time at the meeting to ask questions and receive clarification from finance director Beth Goldberg about the proposed utility rate and tax changes.

Goldberg explained that right now the city has a utility tax on the water utility of 2.33 percent and the proposed budget contemplates increasing that to 6 percent. There are currently no utility taxes in place on the sewer and stormwater utilities and there are no utility rate increases for those proposed in the budget for 2020 other than what’s already adopted. But, the budget does propose increasing the utility taxes on those from zero to 6 percent, so that there would be uniformity across all of the utilities.

Property tax

Then the first public hearing of the evening, on AB 7757 – 2020 Levy and Revenue Sources, kicked off with a presentation by Goldberg about property taxes and other revenue information. She explained that state law requires a public hearing about revenues before a city can adopt property taxes. She also mentioned that she had new numbers after receiving updated property tax data from the King County Assessor’s Office.

The proposed property tax levy was set to come back as an ordinance for consideration for adoption on Nov. 4. The is what will set the property tax rates for residents for 2020 and set the course for revenues the city can expect to receive from property taxes.

In the mayor’s proposed 2020 budget, property tax provides about 18.8 percent of the city’s projected general fund revenues, totaling about $9.5 million. In 2019, the property levy generated $9.1 million, which represented about 17 percent of general fund revenue.

Sales tax continues to be the largest revenue source, at 31.6 percent and about $15.8 million.

The proposed budget recommends levying a 1-percent property tax increase, as allowed by state law each year, to capture the value of new construction and capture the banked capacity. State law allows jurisdictions to collect the banked capacity that has accumulated over the years in which that jurisdiction has not chosen to enact a 1-percent property tax increase.

The city has a modest amount of banked capacity that amassed between 2009 – 2013 when the city chose to not levy the 1-percent property tax increase, which the administration is recommending for use as part of the 2020 levy. According to data from the county assessor, the total amount of banked capacity available to the city is $167,622.

Using the banked capacity would add about $12 to the average annual Issaquah homeowner’s tax bill for 2020. The 1-percent increase isn’t a 1-percent increase on how much each person will pay but is rather a 1-percent overall increase on what was collected by the city in the year prior.

The estimated annual property tax bill for the average Issaquah homeowner for 2020 is $697 (Issaquah portion), which is up from $646 in 2019 . What people actually pay for total property tax is much higher, as there are also property taxes for the county, school districts and other special tax districts.

Goldberg explained that in Washington State property taxes can grow 1 percent plus the value of new construction each year. But often, that rate is much less than the rate at which costs are increasing, which leads to structural deficits.

The value of new construction for 2020 is about $213 million, meaning the city can draw about $169,000 in property tax revenue from new construction. Goldberg said this basically occurs automatically, and the decision to be made regards the 1-percent increase and banked capacity.

Goldberg said that when setting the rates for next year the city also will take into account a refinancing of a 2009 bond series that is currently outstanding.

“Interest rates are favorable enough that we are eligible to do a refunding in December, and we will be coming back with a bond ordinance on Nov. 4 that would allow us to do that refunding, and that would save about $166,000 in debt service costs between now and 2029,” she said. “So that is factored into the rates. Unfortunately it’s a very small impact, but where we can, we are trying to capture a savings for Issaquah rate payers.”

Then in the public hearing only one person gave comment. Several council members expressed wanting to continue the conversation after the Oct. 23 and 28 deliberations and allow more time for public input.

“We still have some substantive deliberations to occur. And to the extent that the community might have feedback for us, I’d like to hear it,” Councilmember Stacy Goodman said.

The council voted unanimously to leave the public hearing open until the Nov. 4 meeting.

Preliminary budget hearing

A second hearing took place that evening on Agenda Bill 7758 — Proposed 2020 Budget, including Salary Ordinance.

Goldberg gave a brief presentation. She explained that RCW 35A.33 requires cities to hold two public hearings prior to adopting the budget.

It was a preliminary hearing. The final public hearing is scheduled for Nov. 18 for the proposed budget including amendments. One person spoke during the preliminary hearing, and there will be more opportunity to speak on Nov. 18.

Proposed expenditures in the 2020 budget total $148.2 million. Of that, $50.2 million comes from the general fund. About $42 million would come from enterprise funds — that’s the water, sewer and stormwater utilities rate and tax revenues.

The largest chunk of the $50.2 million general fund goes to public safety and law enforcement functions like fire and police services and municipal court.

The proposed general fund budget closes the $5.2 million predicted gap. The gap was created by revenue weakness and a shortfall of general fund revenue, including previously forecasted sales tax income that didn’t come through.

The proposed budget is balanced through a combination of expenditure reductions and revenue increases. The overall result is that the proposed 2020 budget is nearly $3 million lower than 2019.

Calendar

Goldberg and Mayor Pauly also went over the timeline for budget deliberations and adoptions of budget components.

Mayor Pauly had originally presented her proposed 2020 budget on Sept. 24. The council held study sessions to overview it on Oct. 7, 8 and 14. Then the preliminary public hearing was Oct. 21. Deliberative study sessions followed on Oct. 23 and 28.

At the Nov. 4 regular meeting, the 2020 levy (property tax) and revenue sources hearing will continue, and the council will choose whether to adopt that ordinance. That same day, there will also be an introduction of potential revenue sources for the 2020 budget including utility tax and parks fees. Those will be deliberated and would come back to council for adoption on Nov. 18.

Nov. 18 is also when council will have a second budget public hearing and is set to adopt the final proposed budget including any amendments.

Deliberation discussions at the Oct. 23 and 28 council study sessions were lengthy, and various revisions to the proposed budget were discussed. Video recordings of those deliberations can be viewed on the city’s YouTube channel.

Further options are being explored. Staff action between the two meetings led to more material being discussed.

The council did not get all the way through the list of items they wished to discuss on the budget proposal, and deliberations are set to continue on Nov. 6.