Econ 919: Kenai eyeing tax increase to make up for loss of state funds

Mar 13, 2020


The city of Kenai is preparing its fiscal year 2021 budget with several areas of economic strength but still will likely need to implement a tax increase or user fees to make up for the loss in state support for capital projects.

Kenai Mayor Brian Gabriel and City Manager Paul Ostrander gave a presentation on the city’s budget last week.

There were several bright spots. Sales tax revenue continues an upward trend. The city’s 3 percent tax rate generates about $244 million, with sales tax revenue making up 54 percent of the city budget. That number should increase even more next year when online sales are taxed, as well.

Property tax is about 29 percent of the city’s budget, with a 4.35 mill rate. But money from the state has declined precipitously in recent years. Shared revenue, mostly in the form of fish taxes, is holding steady, while community revenue sharing funds have been considerably reduced and are likely to drop another $100,000 this year.

Ostrander says the biggest hit is in capital projects.


“We were receiving upwards to $7 million a year, that’s annually from the state for capital,” he said. “… But as you can see in 2016, 17, 18 and 19, that went to zero. And all indications are that that’s going to continue to be zero. This is a shift from what we’ve seen historically. Where the state previously provided capital dollars. It appears that, going forward, they’ll not be providing that, so this is a gap that we’re going to have to look to fill.”

That creates a budgetary problem. Like many municipalities, Kenai deferred projects to see if state money would be restored, only appropriating $400,000 a year for maintenance for the last five years. But the city’s new capital improvements plan calls for spending an average of $1.2 million a year just to keep its current infrastructure, buildings and streets in good order.

“This is almost exclusively maintenance of existing infrastructure. This isn’t about building new buildings or shiny new structures, this is just about maintaining what we own,” Ostrander said.

The city instituted an efficiencies initiative in 2019.

“All city employees are essentially asked how they do things, why they do things that way and if there’s some way they can do them better,” Ostrander said.

Changes resulting from the initiative resulted in $29,000 in savings this year and more than $63,000 in annual savings going forward. But efficiencies alone won’t fill the budget gap. Neither will spending from savings. The council established a fund balance policy in 2017 that requires a balanced budget.

“They must, in fact, pass a budget where expenditures equal revenues. As we know, the state’s been struggling with the answer to that question for the last four years. But here at the city, because of the council’s leadership, we’ve got that on the books,” Ostrander said.

All this is to say that there will likely be an increase in taxes or some other revenue-generation measure coming in next year’s budget.

“It’s going to be a combination of things, certainly. We need to continue to look at how we can do things more efficiently. We need to look for ways that we can cut but at the same time not impact the level of service that we provide to residents. I think revenue is going to be a portion of this, which means that you need to have some type of mechanism to increase that revenue. It’s either going to be through some type of increase in the tax level or potentially a user-based fee of some kind."

Ostrander says the budget is still in development and will be released in April.

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