Memorandum 16-051 Revenue Outlook for the City of Homer

Memorandum 16-051

TO:                       Mayor Wythe and Homer City Council            

FROM:                 Katie Koester, City Manager

DATE:                  March 16, 2016

SUBJECT:         Revenue Outlook for City of Homer

The Council has asked to look at the revenue situation for the City of Homer holistically in a series of work sessions. The City does not have the staff or experience to come up with economic projections far into the future; however, we can look at our historical trends and analyze externalities that have the potential to affect the economy of Homer and future revenue for the City of Homer. Revenue comes from two main sources: property taxes and sales taxes. The health of property value and taxable sales are both related to the general health of the economy, which makes looking at outside factors that could affect revenue valuable. As you can see from the attached chart, both property taxes and sales taxes have increased over the years until 2016 when we estimated a 1% decrease in taxable sales.

Opportunities

Growth in Tourism

Low oil prices have helped spur an increase in tourism. According to the Kenai Peninsula Tourism Marketing Council, 2nd and 3rd quarter sales for primary tourism businesses is up by over 8%.

Growth in Healthcare

Statewide, healthcare is the largest employer and is expected to grow despite downturns in other sectors. With Homer’s aging population the demand for health care services is likely to increase.

Alaska LNG

If Alaska LNG takes off, it has the potential to positively affect the Homer economy, especially in the marine trades and during the construction phase.

Diversity

Relative to the rest of the state, the Kenai Peninsula has a diverse economy, which is strongly reflected in Homer. According to the Department of Labor our top employers are government (including the school district), leisure and hospitality (proxy for tourism), retail trade and education and health services.  Commercial fishing also has a large impact on the economy but is not included in DOL statistics.

Potential Action from the Borough to Clean up Tax Code

The Kenai Peninsula Borough has engaged in a process to clean up their tax code. Though many of the proposed changes may be revenue neutral, the Assembly has postponed action on items like increasing the sales tax cap until this review has taken place. The earliest the Borough anticipates these changes taking effect is July 1, 2017. Nevertheless, now could be a good time for the City to put the wheels in motion to encourage the Borough to consider certain changes.

Potential Threats/Unknowns

The Legislature is looking for funds under every rock and will continue to target municipalities. There has already been much chatter in Juneau about raising the percentage municipalities contribute into PERS. Every percent it is raised equals $61,000 to the City. If the state removed the cap on municipal PERS contributions it would be devastating to local budgets - the normal cost has fluctuated up to 44% in the past (that would double our contribution rate from $1.35M to $2.7M). Obviously this has a direct and substantial impact to Homer.

Aging Population

There are many positive economic impacts to retirees including that they infuse new money into the economy with their pensions/retirement and contribute significantly to the volunteer workforce. However, one impact of the population over 65 increasing is declining property tax base because of the mandatory senior property tax exemption. From 2012 to 2027 – in 15 years, the population of residents over 65 in Homer is expected to double.  In 2012 the mandatory senior property tax exemption equated to $216,000 in lost revenue. This figure will continue to increase.

Uncertainty

The uncertainty of Alaska’s economic climate, the price of oil, and what, if anything, the legislature is going to do to address the budget has left businesses and investments in a holding pattern. This is a statewide problem.

State Budget Cuts

State budget cuts will put pressure on local municipalities to fill in the gap in services. There will be job losses in communities as education, municipalities, and state departments struggle with reduced budgets. 

State Revenue Options

The State needs new revenue to pay for basic services. Ideas being thrown around range from capping the PFD, sales tax, fuel tax, sin tax, and income tax. Depending on which combination of these revenue sources the State chooses will affect both the voters appetite for taxes and the City’s need for them (for example, a statewide sales tax would be devastating to municipalities).

Reductions in Oil and Gas Employment

We all have friends or neighbors who work on the North Slope. Many oil and gas companies have either cut positions or indicated drastic cuts in their Alaska workforce. Those are high paying jobs, and some of these people live in Homer.

In summary, the revenue forecast for the City of Homer is uncertain, but we are not alone. The Council is aware that the state budget crisis will continue to impact municipalities and has scheduled these worksessions to tackle that very issue. To what extent could revenue decline? That is difficult to gauge with the unknowns: state taxes, state budget cuts, and how a potential economic downturn will affect the greater Homer economy. Controlling spending will need to be a persistent and painful part of the conversation. However, if we are going to get there by the time the suspension of HART runs out without wholesale and drastic reductions in services, new revenue will be necessary. I sincerely appreciate the Council’s recognition of this issue and willingness to devote time and attention to solving it.

Enc:

City of Homer Revenue/Expenditures Chart

Excerpt from Alaska Business Magazine, “Alaska’s Economy: Historical Trends and Future Outlook,” January 2016.