Local Government Financing Plan

Final Report of the Washington State Local Governance Study Commission.

…the underlying structural problem for King County budgeting is the mismatch between tax base and service costs in the unincorporated areas. The solution to this, which is encouraged by the Growth Management Act, is to ensure that the remaining unincorporated areas within the urban growth area get annexed to an adjacent city

King County Budget Brief 2009 – Washington Research Council

The state has established a significant number of requirements for cities and counties over the years, but has not delivered a reasonable set of alternatives for them to raise the funds necessary to deliver on those requirements. The plight of cities and counties has been exacerbated by the recent changes in tax policy driven by initiatives that have reduced the growth of property tax and eliminated most of the money from the MVET, most of which was distributed to counties as revenue sharing.

In this 2009 legislative session I will not be able to deliver a broad, well-thought-through set of policies on this topic that balances the responsibilities of local governments with their taxing authority or other revenue sources. I will take this up in the interim when we have more time and fewer distractions. In the meantime, the state needs to provide some options for local governments to avoid fiscal disasters.

My strategy here is to propose a number of changes, some permanent and some temporary, that provide local governments with the ability to respond to this temporary fiscal crisis. In some cases this is the ability to generate additional local revenue, in other cases it’s the removal of rules about supplantation that provide additional flexibility to these governments so that they can respond to the needs of their citizens in these difficult times.

Flexibility
Some additional flexibility in the use of existing revenue would allow local governments to respond in the way best suited to dealing with the current disaster. The flexibility would be provided for the next three years, hopefully getting us through this economic crisis. Prior to the expiration of this flexibility, we will schedule a thorough review of the policy. There is some contention between cities and counties on this option and we will need to work out a temporary solution for the next three years and then a permanent solution, if necessary.

1. Allow cities and counties to use the 0.25% REET they already can collect to maintain parks, instead of being restricted to purchasing them only. I have concerns about using a somewhat volatile revenue source for a recurring expense, and am willing to review this in the future, but for now we should not be purchasing parks we cannot afford to maintain.

2. Temporarily remove non-supplant language from some current revenue streams. Cities and counties are winding up in the situation that they are not able to pay for the existing base of services, and then because of the non-supplant language they are not able to use the voter-approved add-on. Again, this is a temporary solution.

a. .1% local option mental health chemical dependency Sales and Use Tax (SUT)

b. .3% local option criminal justice SUT

c. Any levy lid increases

Additional Revenue Options
Both cities and counties are looking for additional revenue sources. Before we allow this on a permanent basis, we should make sure we can get through the current crisis.

1. Allow counties to collect a utility tax in unincorporated areas. The counties need additional revenue to provide adequate levels of service to their unincorporated residents. The use of this revenue should be dedicated to providing local services in unincorporated areas.

2. Shift some of the current county voter-approved 0.3% sales tax for public safety to be councilmatic, remove non-supplant language, and allow cities to use it if the counties do not. This option will require work, and is also part of the flexibility section of this proposal.

Review the Relationship Between Cities and Counties
All new options in this proposal should be viewed as temporary and subject to a legislative review of the relationship between cities and counties in terms of services provided. There is a large body of work on this subject and it is unlikely to require further exploration, though a legislative committee needs to take on the task of wading through the reports and creating a substantive proposal for updating the revenue package for local governments. The House Finance Committee will take this on in the interim, with the cooperation of the local government committee if they so desire.

All revenue changes in this proposal should sunset in three years to allow this process to play out.

Local Financing Plan for King County
King County has a budget problem — about $100 million in their operating budget.

Part of their situation is due to the fact that King County is nearing the end-game of the maturation of government formed as a result of the Growth Management Act, with the eventual goal being that cities are the preferred service provider in urban areas. Counties and other specific service districts are to provide service in more rural areas. As a result of the overlap of special purpose districts, cities, and the county, there is significant needless overhead expense in providing services to taxpayers in unincorporated King County.

The county estimates that 1/3 of their budget shortfall is due to cross-subsidization of unincorporated urban areas by the rest of the county.

Plan:

1. Give the King County Council temporary authority to impose a utility tax on unincorporated areas of the county. Restrict the use of this revenue to providing local services outside the urban growth area (UGA), or for unincorporated areas inside the UGA, in that specific area.

2. Provide a set of tools to make annexations easier inside the UGA.

3. Create a set of financial incentives for cities to complete the annexations, both positive and negative.

4. Allow cities to charge their utility tax, which is a general-purpose tax, in all parts of the city, regardless of the presence of a special purpose district. Also provide additional tools for assumptions of special purpose districts as part of annexations or as part of simplifying the taxing and service delivery infrastructure in King County.

As part of the maturation of the growth management process in King County, we intend to follow through on the planned annexations inside King County’s UGA. By the end of a three year period, all area inside the UGA should be part of a city. This will result in significant savings due to elimination of overlapping governments. We should also see significant improvements in transparency because it will be clear who the elected official responsible for providing services is.

Rural residents should benefit from this change, as the taxes that King County charges to provide local services should be clearer and dedicated to that purpose. The cost savings of the loss of the urban unincorporated areas to the county will be a net positive for rural residents.

This proposal includes a package of changes to the annexation statutes in King County that will make it significantly easier to complete these annexations. We also include some financial changes that will help simplify taxing authority and provide additional incentive for cities to complete annexations and residents to desire them.

Overhead Reduction
In addition to this structural problem, King County is widely perceived to have an overhead problem. It is beyond the ability of the Legislature while in session to evaluate the truth of this, but if true, overhead/administrative costs need to be addressed before additional revenue is provided on a permanent basis.

To address this, the state auditor and I are collaborating on a performance audit of King County’s overhead allocation system, comparing them to similar governments across the country to glean information about best practices that would allow the county to make improvements. Should the improvements not occur, it is unlikely that temporary revenue options would be extended.

Summary
In summary, I propose a relatively complex package of temporary revenue adjustments, including increased flexibility in the use of their current taxes, while we work through the fallout from the federal economic disaster. A legislative review of existing studies about the revenue structure of cities and counties will happen prior to the expiration of the tax package, allowing the legislature to make informed changes at that time.

As usual, the problem is more complex in King County. In addition to the fixes for cities and counties mentioned above, I propose a set of changes to our annexation system to help resolve a long-term structural problem that King County and its collection of cities and taxing districts seems unable to resolve without help from the state.

The addition of a performance audit of the overhead system should provide additional tools to help the county resolve its budget problem.

About the Author

Ross
I am the Director of the Department of Early Learning for Washington State. I formerly represented the 48th Legislative District in the State House of Representatives, chairing the Appropriations committee and spent many a year at Microsoft.