LONG RANGE FISCAL PLAN

CITY OF HOMER

May, 2004

5/10/04 City Council Resolution 04-45A
05/25/04 City Council Resolution 04-51

TABLE OF CONTENTS

Page

1 INTRODUCTION……………………………………………………… 4

2. OVERVIEW / BACKGROUND FOR PLANNING …………………. 4

3. ECONOMIC TRENDS ………………………………………………. 6

4. GENERAL FUND ……………………………………………………. 6

4.1 Overview of G.F. Services and Demand for Expanded Services

4.2 Projections for Future Operational Needs

4.3 Projections for Future Capital Needs

4.4 Revenue Sources and Projected Revenues

4.5 The Projected Fiscal Gap

4.6 Closing the Gap

4.7 Budget Reduction Options / Criteria for Setting Priorities

4.8 Revenue Enhancement Options / Criteria for Setting Priorities

5. PORT AND HARBOR FUND ………………………………………… 13

5.1 Overview of P&H Services and Demand for Services

5.2 Projections for Future Operational Needs

5.3 Projections for Future Capital Needs

5.4 Revenue Sources

5.5 The Projected Fiscal Gap

5.6 Budget Reduction Options

5.7 Revenue Enhancement Options

6. SUMMARY…………………………………………………………… 16

7. DATA SOURCES……………………………………………………… 16

LIST OF APPENDICES

APPENDIX A. Summary of Long Term Debt

APPENDIX B: General Fund Expenses by Function

APPENDIX C: General Fund Expenditure Projections

APPENDIX D: Projected Revenues and Expenditures / FY 01 to FY 09

APPENDIX E. General Fund / Projected Growth

APPENDIX F: Projected New Library Budget

APPENDIX G: Projected New Animal Shelter Budget

APPENDIX H: General Fund Revenues

APPENDIX I: General Fund Projected Revenues v. Projected Expenses

APPENDIX J: Port and Harbor / Projected Revenues and Revenues

APPENDIX K: Port and Harbor / Projected Growth

APPENDIX L. Port and Harbor Projected Revenues vs. Projected Expenses

INTRODUCTION

The Homer City Council began the long and deliberative process of preparing an Operating Budget for FY 04 in the late summer and fall of 2003. During this process, it was apparent to the Council that balancing both the General Fund and Port and Harbor Fund budgets while maintaining the level of services that Homer residents desired was going to be a difficult task. There were many factors contributing to this problem. For the General Fund, it was primarily rising costs and increased demands for services. For the Port and Harbor Fund, the most immediate problem was the pending departure of an important tenant and consumer of port services.

The City administration submitted a draft General Fund budget for consideration by the Council that was balanced in that revenues equaled expenditures. Unfortunately, in order to balance the budget, the administration was forced to make many painful budget cuts and deny requests from the Departments for necessary and vital equipment purchases and other expenditures. After much deliberation, the Council added approximately $450,000 back into the budget by raising user fees and utilizing the projected excess General Fund Balance from FY 03.

The Council recognized at the time that it might not have those options available to it when it started to develop an FY 05 Budget. It understood that it might be faced with a $450,000 budget deficit immediately if revenues remained constant from the year before. In addition, the Administration presented the Council with a list of anticipated new obligations and increased costs, many of which were out of the City’s control. The Council decided that it would be very prudent for it to embark on a long range fiscal planning exercise so that it could inform the public about pending fiscal issues and be prepared to meet its long term obligations. The Council made a commitment to set aside the first six months of 2004 for fiscal planning so that the process would be complete and a plan adopted prior to the start of the FY05 Budget development process.

This document is a result of the long range fiscal planning effort the Council engaged in. The Council held a series of all day and half day workshops in February, March, and April. It co-sponsored a full day economic development and fiscal planning forum with the Homer Chamber of Commerce. And finally, it took a number of steps to engage the public and the business community and that dialog is expected to continue into the future.

2. OVERVIEW / BACKGROUND FOR PLANNING

The Council began the planning process with the understanding that the City had a very solid fiscal foundation. It is important to recognize that the City was not engaging in the planning process because of an immediate fiscal crisis or because there was something that needed to be fixed. The Council wanted to be proactive and plan for the future because it recognized that costs were escalating, the City was growing quickly, and the associated demand for services was growing as well. The fact of the matter is that prior administrations and City Councils should be commended for their management, prudence, and fiscal restraint.

Compared to other municipalities, the City of Homer is in very good shape overall. There is ample evidence to support this assertion. For example, the City has been operating with a balanced budget for many years and has not experienced deficit spending. The City has maintained a healthy fund balance in the General Fund in order to provide a safety net and enhance investment opportunities. The City has adequate reserves, a very good credit rating, and a relatively low debt load (Appendix A). It has increased its contributions to the fleet reserve account and to depreciation accounts in recent years. It has received very high reviews for financial management, for innovation, and for efficient use of the resources it has. Finally, the City has a very skilled, motivated, and productive work force.

As noted above, the Council embarked on this planning process because it understood that the pressures to “grow the budget” would be increasing in the next five to ten years and it did not want future Councils and the community to be caught off guard. Following is a brief description of some of the fiscal pressures that the Council must address:

• Community Growth: Homer is growing at a steady pace and the trend is expected to continue. The indicators of this growth include population estimates, zoning permits, retail sales, property values, real estate activity. More people and more business activity translates into increased demand for services.
• Service Area Growth: Homer serves as a regional hub and it provides a wide variety of public services to areas outside of the City limits. These areas, especially the area immediately adjacent to the community, are growing rapidly as well. This puts an added burden on the City’s infrastructure and facilities.
• Rising Costs: The cost of doing business continues to rise. The City has absorbed tremendous increases in things like health insurance, workers compensation insurance, and Public Employees Retirement Program (PERS) premiums.
• State Assistance: Financial assistance and shared revenues from the State have all but disappeared. The Revenue Sharing and Municipal Assistance Program and the Municipal Capital Matching Grant Program have been eliminated. There is very little capital or discretionary funding left from the State of Alaska.
• New Accounting Requirements: The new GASB 34 rules have forced municipalities to move toward fully funding depreciation and placing more money into equipment reserves. Although this idea has some merit, it can place a severe strain on the operating budget.
• Unfunded Mandates: As the Federal, State, and Borough governments struggle with their own financial issues, it appears as though the trend of issuing unfunded mandates and pushing more responsibility for providing public services onto local governments will continue.
• Keeping Ahead of the Curve: Although the City has been operating with a balance budget, the budget has been essentially flat for the past few years. This means that the City has experienced budget reductions because it is not keeping up with inflation. Further, it has deferred decisions on new equipment purchases and necessary personnel. It has also not been able to fund depreciation and fleet reserve accounts to the levels desirable. As a result, the City has some catching up to do.
• Capital Projects: The City has embarked on a significant capital project program that has wide spread support and will increase the economic vitality and quality of life in Homer. The projects scheduled for construction in the next few years include a new library, new ice rink, and new animal shelter. Plans for development of the town center and a new civic and convention center are being discussed. While these projects are desirable, they represent significant capital, maintenance, and operations costs that must be planned for.

3. ECONOMIC TRENDS

The City’s economy can best be described as stable and growing at a very steady rate. All of the leading economic indicators support that contention and have been trending upward for the past decade. These indicators include retail sales, sales taxes, assessed property valuations, property taxes, population estimates, zoning permits, utility hook-ups, subdivision plats, the value of construction projects, business permits, and employment data.

Homer’s economy is relatively diverse and is based upon commercial fishing, tourism, the recreation industry, arts and music, small businesses, professional services, and the health, education, social service, and government sectors. Overall growth appears to be heavily influenced by the arrival of retirees, people building second homes, and professional and self employed workers who simply wish to be in Homer because of its high quality of life.

The City has identified growth opportunities in the areas of Port and Harbor operations, tourism, education, health services, retail and wholesale, professional services, arts and culture, and business travel (conventions). These sectors are attractive to the community because they are consistent with the character of the community and they build upon what Homer already has.

Major projects that could have very significant economic impacts include Enstar Natural Gas’s proposed natural gas pipeline to Homer, the Pebble gold and copper mine near Iliamna, oil and gas lease sales in lower Cook Inlet, expansion at South Peninsula Hospital, expansion at the University of Alaska / Kachemak Bay Campus, completion of the new Islands and Ocean Visitor Center and office complex, and several large retail and wholesale projects. The next few construction seasons are expected to be very robust. In addition to the already healthy housing sector, there are a number of City and State road, water and sewer, and building projects expected to be underway.

4. GENERAL FUND

4.1 Overview of Services / Demand of Expanded Services

The City of Homer provides a variety of basic public services including police, fire, emergency medical, public works, water and sewer, library, planning, and animal control. It also provides funding to support a number of other services such as the museum, the community schools program, and various cultural and education oriented organizations. The reader can learn more about General Fund expenditures by reviewing the City’s Operating Budget and Audit documents. The demand for public services is growing and it has been most apparent in the areas of code enforcement, community planning, economic development activities, and the desire for new and improved public facilities. The General Fund Budget for FY 2004 is $7,510,500.00. Appendices B and C contain graphic illustrations of General Fund Expenditures.

4.2 Projections for Future Operational Needs

The City anticipates that the General Fund Budget will grow in the next five to ten years due to the economic and political forces described in Section 2. The City Finance Department attempted to quantify the anticipated increases and the results of that analysis appear in Appendix D. It is understood that there will always be room to debate the assumptions and basic premises contained in any analysis of this type. However, it must be noted and emphasized that the City anticipates that General Fund expenditures could increase from $7,510500 in FY 04 to $13,241,993 in FY 2009. This means that the budget could almost double in five years. A more detailed breakdown of projected General Fund increases appears in Appendix E and projected budgets for the new library and animal shelter appear in Appendices F and G. Although the Council will have ways to reduce or avoid some of these increases and revenues are expected to increase over the same five years, this scenario demonstrates that the Council is wise to address this issue now.

4.3 Projections for Future Capital Needs

The City has embarked on an ambitious capital construction agenda. Within the next two years, plans call for the construction of a new library, a new ice arena/multi-purpose facility, and a new animal shelter. In addition, plans are being discussed for development in the town center and for a new civic and convention center. The library, ice rink, and animal shelter projects all enjoy the benefits of having a very dedicated group of advocates and fundraisers. At the time this plan was drafted, it was anticipated that the City might need to increase its long term debt by borrowing approximately $2 to $3 million for the library and $500,000 for the animal shelter in order to complete the financing for these projects. This could add up to $200,000 per year in debt service payments. The City has assumed responsibility for purchasing the land and installing the water, sewer, and road improvements for the ice arena. The total cost of these investments could run as high as $1.5 Million depending upon how the project is financed and who ultimately participates. Costs associated with Town Center and Civic Center development have not been defined and are unknown at this time.

In addition, many City buildings are old and are either in need of repair or have outlived their usefulness. One building that needs to be replaced as soon as possible is the Harbor Masters office. This building is too small, is in disrepair, and barely meets applicable building codes. Other buildings that need to be either expanded, remodeled, or replaced within the next ten years include the Fire Department, the Police Department, the Public Works Department, and City Hall. Council noted that it would be beneficial for the City to development a capital project priority and replacement list for the next ten years. The reader can learn more about the City’s capital priorities by reviewing its CIP and Legislative Priorities lists.

4.4 Revenue Sources / Projected Revenues

The City anticipates that it will receive $ 7,088,010 in General Fund Revenues in FY 04. The sources of General Fund Revenues are depicted in Appendix H. The City receives approximately 38 per cent of its revenue from the sales and use tax, 27 per cent from property taxes, 15 per cent from other financing sources, and 11% from fees for services.

Appendix D shows projected revenues through FY 09 assuming that there are no changes in tax rates or fee schedules. The projections are based upon recent trends and data published by the Kenai Peninsula Borough and assume a 2% rate of growth. The City considers this assumption to be conservative.

4.5 The Projected Fiscal Gap

Appendix I compares projected revenues with projected expenditures through FY 09. It is readily apparent that the fiscal gap could grow and expand very rapidly. The deficit between revenues and expenditures could be as large as $5,000,000 by FY 09. Although this could be seen as a worst case scenario, it graphically illustrates what future Councils could be faced with if the City does not address this issue now. The Council has tools available to it to restrain growth and to raise new revenues in order to balance the budget in future years. Those tools are discussed below.

4.6 Closing the Projected Gap

The fundamentals of balancing budgets are basic and very simple. The Council can either reduce expenditures, raise new revenues, or adopt some combination of both. The Council would like to fashion a fiscal plan that provides a framework for making the tough decisions that lie ahead. It would also like to develop a “glide path” to a balanced budget in the future which provides for reasonable taxation and the level of services that residents of the community desire.

4.7 Budget Reduction Options / Criteria for Setting Priorities

During the fiscal planning workshops, the Council reviewed all of the public services that are currently provided by the City. The Council discussed the fact that the City provides very little beyond the basic public services that one would normally expect from City government. The Council engaged in a conversation regarding the perceived demand for services and public satisfaction with existing services. The discussion centered around recent public testimony on a variety of topics, a survey conducted by the City two years ago, and various other sources of information. After significant debate, the Council concluded that there is strong demand for the services that the City currently provides and that it did not want to eliminate any of them at this time. In short, the Council concluded that it wanted to find a way to continue to fund all existing services at some basic or baseline level.

During this debate, the Council also recognized that the demand for City Services is growing at a noticeable rate. In recent years, this has become particularly apparent in requests for enhanced library, animal control, community planning, code enforcement, and parks and recreation services. In addition, during this past year the Council received a number of inquires regarding direct City participation in social service programs.

The Administration and the City Council discussed additional ways to reduce Department budgets and create a more efficient use of limited resources. During this discussion, it was clear and generally understood that City Department budgets are already very lean and frugal as a result of budget reductions and deferred appropriations in recent years. Department budgets have not been keeping up with inflation and have not grown proportionately with the growth of the City and corresponding growth in demand for services.

The Council reached the conclusion that it would be very difficult to find additional cuts of any magnitude without eliminating entire programs and reducing the workforce. Reducing the workforce would be difficult because some Departments are already staffed at the minimum level necessary to meet State and Federal regulations. The Council and Administration agreed that although additional budget reductions would be difficult, they would continue to look for ways to restrain spending.

As noted above, one of the ways to balance future budgets is to make budget cuts and reduce appropriations. This can often be a politically and emotionally painful process. The impacts of such decisions can affect communities in profound ways. When political bodies and other organizations engage in this type of debate and decision-making, it is often useful to have a set of guidelines or criteria which establish the rules and framework within which these decisions can be made. Following is a list of suggested criteria for the Homer City Council to use when deliberating budget reductions.

Criteria For Setting Priorities

• The City’s Mission: Does the function or service being considered for funding fall within the City’s mandated or adopted powers?
• Multipliers: Will the proposed budget cut jeopardize the City’s ability to attract other sources of matching money or the City’s ability to collect revenues?
• City Priorities: Will the proposed reduction jeopardize other City priorities, goals, objectives, or requirements.
• Efficiencies: Can the service or function under discussion be provided more cheaply or in a different manner?
• Partners: Is it possible to find private, non-profit, or other partners that will help provide or fund a service?
• Other Providers: Are there other groups that could provide a needed service? In other words, if the City doesn’t do it, is there someone else who will?
• Social, Economic, and Environmental Impacts: What are the impacts of budget cuts to the community at large. Not all budget cuts are created equal in this sense and some have greater consequences than others (both desirable and undesirable).
• Equity: Does the proposed cut disproportionately impact one sector of the community or will the cut be felt across the board?
• Department Budgets: Across the board cuts are not always the most effective way to reduce budgets. Some Departments may be better able to absorb cuts than others and some may provide services that are a higher priority than others.
• Ripple Effects: Not all cuts are equal in terms of their impacts to the community. For example, making a $10,000 cut to equipment purchases at the water treatment plant may have a greater impact than a $10,000 cut in transfers to the fleet reserves.

4.8 Revenue Enhancement Options / Criteria for Setting Priorities

The City Council’s primary motivation for engaging in the long range fiscal planning process was the fact that it recognized that both operational costs and the demand for public services were expected to increase significantly in the next few years. The most immediate concerns are the rising costs of insurance generally and the capital, maintenance, and operational funds that will be needed to construct and support the new library, animal shelter, and ice rink. In addition, the Council expressed concern about it’s ability to continue to provide services that are regional in nature because they serve both the residents of Homer and the rapidly growing area just outside the City limits; whose population already meets or exceeds that of the City.

Following is a list of revenue enhancement options that were identified by the Council. The list was divided into Short Term Options and Long Term Options. Short Term Options include steps that the City can take in a relatively short amount of time that would produce revenues to assist with the FY 05 and FY 06 Operating budgets. Long Term Options are generally focused upon methods that might lead to a more equitable distribution of the responsibility for providing the basic public services that everyone in the region enjoys and benefits from. These options will take time to implement and generally involve political action and/or changes in laws or regulations.

NOTE: It is very important to note here that the following list of options is not prioritized. Further, this is a simply description of options available to the Council and is presented for discussion purposes only. The Council has not decided or made any commitment to implement any of these options and will not do so until the final fiscal plan is adopted.

Short Term Options

• Raise Property Taxes: The City has a tax cap of 6 mils and is currently levying a tax of 5 mils. Exceeding the 6 mil tax cap would require that the City eliminate the Sales and Use Tax. The City Finance Department estimates that a .5 mil increase would raise approximately $169,80 and that a 1 mil increase would raise approximately $339,739.
• Raise the Sales and Use Tax: The City currently levies a 2% general sales tax, a .75 HARP sales tax, and a .75 HAWSP sales tax; for a total sales tax of 3.5%. The 2% general sales tax represents $2,577,469 in revenues. The City Finance Department estimates that for the general sales tax, a .5 % increase would raise approximately $645,494 and a 1% increase would raise approximately $1,290,000.
• Raise Sales Tax Cap: The current cap on taxable sales is $500.00. This cap was implemented 1965. Both the Borough and the City have discussed the potential of raising the cap from $500 to $1,000. The Borough Finance Department conservatively estimates that doing so could raise an additional $300,000 for Homer.
• Implement Seasonal Sales Tax: The City Finance Department estimates that (assuming the tax would be effective from April through September) a .5% increase in the sales tax would raise approximately $306,621 and a 1% increase would raise approximately $613,243.
• Implement a Bed Tax: A Hotel-Motel Accommodations tax or “Bed Tax” was identified as a natural fit for Homer in the sense that it is a very common and well established tax that is levied by many communities; especially those with a thriving tourist and visitor industry. No current estimates on potential revenues have been produced. During the planning sessions, the Council as a whole did not seem particularly interested in this option for a variety of reasons. However, it will remain an option in the future.
• A Combination of Tax Measures: The Council actively discussed the possibility of increasing the sales tax and simultaneously lowering property taxes. The advantage to this approach would be that it would raise new revenues, lower the property tax burden on City residents, and more equitably distribute the burden of paying for City services and facilities among visitors and non-City residents.
• Redirect HAWSP and HARP Revenues: The Council noted that the HARP Fund in particular was growing and not being fully utilized. Council noted that one possibility to raise additional General Fund Revenues without raising taxes would be to ask the voters if they would approve redirecting a portion of those funds to other uses, including other types of capital projects. Both Funds receive about $900,000 in revenue per year. Both Funds have significant debt service obligations.
• Raise User Fees: The Fee Schedule was revised and certain fees were raised during the last budget cycle. A comparison of the City fee structure and those a similar municipalities shows that additional, targeted adjustments are possible.
• Differential User Fees: The City could charge different fees for residents and non-residents. This is an idea that has been discussed many times and may still have potential to both raise revenues and help equalize the tax burden.

Long Term Options

• Service Areas: The Council discussed the possibilities for encouraging the formation of more Borough Service Areas similar to the KESA model. The Council was particularly interested in a broad based, recreation oriented Service Area that could help support regional services such as the library, animal shelter, parks and recreation, ice rink, and so on.
• State Assistance: The Council discussed the need to stay active and engaged as the State continues to reduce its assistance to local governments. The Council specifically noted that the City should support restoration of the Revenue Sharing Program and the proposed Community Dividend, support the POMV concept, and help the State resolve fiscal problems with PERS . It also noted that the State was threatening certain current and potential City revenues through various Sales Tax, Accommodation Tax, and “Head Tax” proposals.
• Cooperation with Borough: The Council expressed a desire to increase cooperation with the Borough regarding fiscal issues. It discussed sharing PILT payments, resurrecting the animal shelter funding proposal, submitting a proposal for Borough Revenue Sharing, and other ideas.
• Economic Development: One way to increase revenues is to stimulate economic development and growth. The Council discussed ways to do that in a way that was consistent with the community’s values and character.
• Annexation: Studying the feasibility of annexing additional territory was discussed as a long term option. The Council discussed the merits of encouraging areas outside of the City limits to join the City by limiting the extension of City services and utilities, including, but not limited to, establishing a cap on the amount of water that can be trucked outside of the City limits. In short, the extension of services would be contingent upon annexation.
• Formation of a New Borough: There was general discussion about the advantages and disadvantages of forming a new South Peninsula Borough.
• Promote Formation by others of a Water Utility Outside of City Limits

Criteria for Setting Priorities

Following is a set of suggested Criteria that the Council could use when determining the preferred revenue enhancement options.

• How Much Would it Raise: Would a proposed increase make a significant contribution to closing the fiscal gap? Would it do so in combination with other increases? It is often preferable to spend energy and resources on increases that have big impacts rather than on those which are small and incremental.
• The Timetable: The Council is facing significant deficits in the next few years. New revenues need to be identified and implemented quickly. Revenue increases that can be implemented quickly have an advantage over those that cannot.
• Administrative Costs: Revenue enhancement measures that do not require large amounts of staff or other resources to implement are generally preferable to those that have significant administrative costs.
• Political Support: The advantage goes to those potential revenue increases that have the most broad based political support in the community.
• Tax Equity / Business: The Council has stated that it prefers taxes that are broad based and do not target individual business sectors. Therefore, taxes that do so have the advantage.
• Tax Equity Generally: Does the tax disproportionately affect certain sectors of the community? Is it fair and equitable across all populations, user groups, and tax payers? Taxes that are closest to being fair and equitable are preferred.
• Opportunities / Threats: The Council must consider whether to levy certain types of taxes in order to preempt potential actions by the State government that might limit the City’s revenue options in the future.
• Diminishing Returns: In levying any new tax or tax increase, the Council must balance the potential benefits of increased revenues against potential undesirable consequences.

5. PORT AND HARBOR FUND

5.1 Overview of Port and Harbor Services and Demand for Services

The mission of the Port and Harbor Department is to provide safe port and harbor facilities for our commercial clients, recreational users, and the general public; to manage and maintain these facilities cost effectively, and to administer our Tariff and procedures fairly and equitably for all users. Homer harbor facilities include a harbor with 920 reserved stalls and more than 6,000 feet of transient mooring space, a five lane boat launch ramp, a barge landing ramp, a wood and a steel grid, 2 fuel floats, and a large and well equipped commercial fish dock. The Port facilities include the Deep Water dock used primarily for cargo shipment, and the new Pioneer Dock which is used by the U.S. Coast Guard, the Alaska Marine Highway System, cruise ships, and other commercial traffic.

The Homer Port and Harbor is operated as an enterprise fund. This essentially means that Port and Harbor operations are expected to be sustainable and self-supporting. Port and Harbor fees are adjusted periodically so that revenues meet expenditures and also provide for maintenance, depreciation, and capital investment. Port and Harbor fees are subject to an approved Tariff and are adjusted according to an adopted rate model. The FY 04 Port and Harbor budget is $2,768,504.00.

The demand for harbor facilities and services is strong and growing. Strong growth in the sport fishing, tourism, and recreation industry generally is driving this demand. As the population of Homer and Southcentral Alaska grows, more and more people are discovering that Homer is a great place to recreate and moor a boat. The harbor currently has a waiting list for slips that ranges from 164 to 180 applicants. Applicants for smaller slips generally wait 1 to 1.5 years and applicants for larger slips can often wait up to three years.

Demand for port facilities and services is not as robust as the harbor at the present time however, the City fully expect that to change in the next few years. The Port of Homer is well positioned geographically to handle both regional and global barge and container ship commerce. The City has ample upland space available for marine industrial uses and excellent dock and port facilities. The city is presently studying major improvements to the Deep Water Dock to facilitate development.

The City is a back-up port for Anchorage in the event that circumstances prevent marine traffic from accessing the port there. The City is actively marketing its port facilities and anticipates that demand will increase as a result of economic conditions and the departure of a major port customer and tenant. Finally, the City is well positioned to serve as staging and trans-shipment port for the proposed Gold and Copper mine near Iliamna and for shipments to the Aleutian Chain and the Orient.

5.2 Projections for Future Operational Needs

The Port and Harbor Fund and the General Fund are faced with many of the same problems. One of the most prominent issues is the rising cost of goods and services. As noted earlier, the cost of insurance, including health insurance and workers compensation insurance is rising at an staggering rate. The new GASB 34 rules apply to the Port and Harbor Fund as well and this places further restrictions on the amount of revenue that is available for operations. Like General Fund Departments, the Port and Harbor Department is operating with the minimal crew necessary to provide for adequate and safe services and adhere to all State and Federal regulations. The Port and Harbor Director has consistently identified a need for another full time fish dock operator and another full time harbor officer. These positions have been deferred due to a lack of funds.

The Port and Harbor is also addressing ways to replace the revenue lost when a major tenant and user of the Deep Water Dock announced that it would cease operations in FY 04. The Port and Harbor Department is looking at a variety of ways to increase revenues at all three dock facilities. Harbor operations are basically self supporting.

5.3 Projections for Future Capital Needs

The Port and Harbor Department has an ambitious capital improvement program that is designed to improve the services provided and stimulate economic activity. The primary projects on the CIP list include:

• Expansion of Deep Water Dock: The goal of this project is to extend the face, add another trestle, and upgrade the load- bearing capacity. The City is currently updating the feasibility study and seeking Federal funding. The estimated cost is in excess of $20 million.
• New Commercial Harbor Basin: The Corps of Engineers is currently conducting a preliminary feasibility study for this project. The City will be required to provide matching funds (estimated to be around $150,000) if the feasibility study goes to the next level. Total estimated cost is $20 million. The City share of construction costs is 20 percent plus the cost of the floats and other inner harbor improvements. The purpose is to provide a new harbor basin for large commercial boats and reduce congestion in the boat harbor.
• Harbor Master’s Office: The current Harbor Master’s office is obsolete and needs to be replaced. The estimated cost of replacement is $500,000. The cost would be higher if the office is built as part of an overslope development as discussed.
• Extend water and electric to all harbor floats
• Replace concrete slabs are barge ramp ($30,000)
• Corrosion Protection at the Deep Water Dock ($450,000)

5.4 Revenue Sources

The Port and Harbor Fund receives revenues from a wide variety of sources. The reader can learn more about revenue sources by referring to the City’s adopted budget or annual audit. The Fund was project to receive $2,768,504 in revenues in FY 04. The most prominent revenue sources are rents and leases, transient berth rents, reserved berth rents, electric charges, fuel charges, ice sales, crane rentals, and wharfage fees.

5.5 The Projected Fiscal Gap

Appendices J & L provide a comparison of projected revenues versus projected expenditures through FY 09. Appendix K provides increased detail regarding expected expenditure increases. These projections contain a number of assumptions that basically amount to an educated guess. The projections also assume that fee rates will remain constant. As a practical matter, fees will likely increase, revenues will rise due to increased activity, and the Council will take steps to restrain escalating costs. Therefore, there is a reasonable chance that the deficit will not be as large as the one projected here. However, it is useful to note that the Finance Department has projected a possible deficit as high as $1.5 million by FY 09 and that alone is a good reason for fiscal planning and a proactive response.

5.6 Budget Reduction Options

The Council reviewed options for reducing the Port and Harbor budget and reached many of the same conclusions it reached with respect to the General Fund budget. Small efficiencies and savings can probably still be found within the existing budget. However, the Council found that by and large, there are very few places in which the budget can be reduced. The Operating Budget is already very lean and it has not kept up with inflation. Personnel decisions, equipment purchases, and some capital projects have been deferred due to a lack of funds. Depreciation and the Port and Harbor Reserve Fund have not been funded at desirable levels. All services and functions provided are absolutely necessary to the safe and efficient operation of a first class Port and Harbor. The Administration has discussed internally the potential for outsourcing some functions to private enterprise however, no serious analysis of that potential has been conducted and it was not discussed during the Council’s planning process.

5.7 Revenue Enhancement Options

The Council discussed a number of revenue options during its planning sessions and it received comments on the topic from the Port and Harbor Commission. The Council made it clear that it was not its intent to single out any particular industry or user group and that all groups must do their part to support Port and Harbor operations. The revenue options discussed include:

NOTE: It is important to note here that the following list of options is not prioritized. Further, this list is simply as description of options that are available to the City Council. The Council has not decided or made any commitment to implement any of these options and will not do so until after the final fiscal plan is approved.

• Fisheries Business / Export Tax: Homer is the number 1 halibut landing port in the State yet it receives little or no revenues from the State Fisheries Business / Export Tax. Legislation is needed to rectify this glaring problem.
• Marine Fuel Tax: Legislation is needed that would provide a greater share of the State Marine Fuel tax to the communities that provide port and harbor services.
• Economic Development / Port Marketing: The City should increase its efforts to enhance revenues and stimulate job creation and economic development by marketing and further developing the port and harbor
• Institute a Fisheries Landing Tax: This is a very common and accepted tax in many coastal communities that provide significant support services and infrastructure for the commercial fishing industry.
• Increase User Fees: The Council can increase existing user fees or implement new fees under the adopted rate schedule and approved tariff.
• Lease More Land: The City could lease more land (to include overslope) and stimulate other business activity that produces tax revenues. Under the City’s Lease Policies, the City should lease all properties for at lease fair market rent. The demand for land to lease is growing and it competes with other needs such as parking.
• Institute Revenue Parking: The parking situation is chaotic at best and needs to be better organized in order to make more efficient use of available space and promote business. Homer remains one of the only major communities with a harbor that has not instituted controlled and paid parking.
• Differential Fee Schedules: Institute higher fees for non-residents.
• Business License: Explore options for instituting a business license or permit fee for all commercial operators that use the port and harbor facilities as a base and staging point for conducting operations off-shore. (unless they have a business office located in Homer).

6. SUMMARY

The City of Homer is in very sound financial shape overall. It is operating with budgets that are balanced, it has adequate reserves, relatively low long-term debt, a good credit rating through the State of Alaska, sound financial management practices, a skilled and motivated workforce, and a stable and growing economy. It also has a variety of new revenue options available to it if and when they are needed.

Although the overall financial condition of the City can be described as good today, the City Council has recognized that there will be increased pressures upon the budget in future years due to escalating operating costs and increased demands for public facilities and services. In short, there are financial clouds gathering on the horizon. This document attempts to describe and quantify those clouds. It also attempts to provide a framework within which the Council can engage in a structured decision making process with respect to budget deliberations. The Council has engaged in a long term fiscal planning process and prepared this document in an effort to inform the public and prepare itself and the community to meet the fiscal challenges that lie ahead.

For more information about fiscal planning or the City’s finances generally, please contact the City Manager or the City Finance Director.

7. DATA SOURCES

In preparing this fiscal plan, the City relied upon the following sources of data and pertinent information.

• Alaska Department of Labor / Economic Trends
• KPB / Situations and Prospects
• KPB / Quarterly Reports of Key Economic Indicators
• KPB / Community and Economic Development Division
• University of Alaska / Institute of Social and Economic Research
• City of Homer / Planning Division
• City of Homer Finance Department
• City of Homer / Port and Harbor Department
• City of Homer adopted budgets and audits
• Borough Assessors Office
• Borough Finance / Property and Sales Tax Divisions
• Alaska Department of Community and Economic Development