The Kodiak Island Borough Assembly discussed the fiscal 2021 budget during a special meeting on Saturday.
While assembly members were wary about the prospect of raising taxes as Kodiak reels from the economic fallout of the COVID-19 pandemic, most said that a tax hike was inevitable due to a significant loss of state funding.
Assembly members discussed a goal of setting the mill rate at 12.75, an 18% increase from the current rate of 10.75, which has remained unchanged since 2012.
“This is the second year we face incredibly difficult times with our budget,” said Borough Manger Michael Powers. In both years, the budget difficulties arose from Gov. Mike Dunleavy’s vetoes of school bond debt reimbursement.
Last year, the governor vetoed half of state funding for the program, leaving the borough with a $2.6 million budget gap.
This year, Dunleavy vetoed all state funding for school bond debt reimbursement and the community assistance program, promising to replace the state money with federal dollars from the Coronavirus Aid, Relief, and Economic Security Act. The borough lost $6 million in state funding, and was promised nearly $5.8 million from the CARES Act.
But with CARES Act money restricted to uses directly related to COVID-19, the funding cannot be used to backfill state programs.
“It is not meant to replace existing sources of funding for local government,” Powers said about the CARES Act funds, which were approved by a Legislature committee on Monday. “There are a lot of provisions in there to help businesses, help people who do lose revenue, but that is not true for local governments.”
Sen. Dan Sullivan (R-Alaska) has introduced legislation that would allow local governments to use CARES Act funding to cover lost revenue, but the proposal must be approved by the House and Senate. The House is not in session, and may not reconvene until August, “which obviously does us absolutely no good,” Powers said.
“While we have had relatively minimal expenses on Kodiak Island related to COVID-19, the other factors of the local economy — school funding, state budget and impacts on citizens — remain,” he said.
With the loss of state funds and the inability to use CARES Act funds to replace them, Powers proposed raising the mill rate from 10.75 to 14.55 in the manager’s budget, submitted to the assembly last month for review. The increase would translate to hundreds of dollars in annual property tax for borough property owners.
“As a property owner, I have absolutely no desire to see the mill rate go up,” Powers said. “But we are faced with the second year of having the state pull the rug out from school bond debt reimbursement, which has a huge, enormous and awful impact upon local finances.”
Most assembly members acknowledged the need for a mill rate increase, but said that 14.55 would be too high, instead pushing for a 12.75 mill rate.
In order to reduce the mill rate from 14.55 to 12.75, the borough would have to dip into the General Fund balance and cut around $1 million in funding for the borough operating budget and school district funding.
“We’re not going to find that very easily, but I think it will get us to a good place to discuss a mill rate that at least doesn’t take our breath away,” said Borough Mayor Bill Roberts.
Assembly Member Scott Arndt was vehemently opposed to any increase in the mill rate, raising concern that it may lead to an exodus of families from the island. Kodiak has seen a steady decline in population in the last decade.
“With what’s been going on in the community for the last several years, let alone what’s going on right now, the community cannot afford a mill rate increase,” Arndt said, advocating for the use of CARES Act funding to backfill bond debt payment through “creative financial accounting.”
Assembly Member Rebecca Skinner voiced opposition to using the federal funding for purposes other than those expressly permitted.
“I’m not in favor of trying to push the boundaries or push the envelope of using CARES Act for things we know we’re not supposed to be using it for,” Skinner said. “What we really need is the freedom to use the CARES Act money for whatever we need to use it for, and not have it be directly related to COVID-19. Until that provision comes through, I think it would be irresponsible to incorporate that money into our budgeting when we don’t even know if that’s allowable.”
Over 80% of the borough budget goes to schools, both through direct funding and school bond debt. This year, the district requested $10.4 million in borough funding, an amount identical to last year’s request.
District Superintendent Larry LeDoux said the district already faces a $1.5 million budget deficit due to an increase in expenditures and loss of revenue.
“We were not going to request any more money from the borough than we did the previous year. Those who have been monitoring the assembly for a long time know that’s rather extraordinary,” LeDoux said.
“Normally, that $1.5 million would have translated to an increased request from the borough. But the school board indicated that they did not want an increase, so they directed me to use fund balance to try to address that.”
LeDoux said that dipping into the fund balance could lead to “a cascade effect” for the fiscal 2022 budget, when neither the district nor the borough will have a cushion to fall back on.
“We’re going to have increased expenses,” LeDoux said, adding that the COVID-19 pandemic has put a strain on the district, as they work to adapt to a new reality of social distancing, remote learning and intensified disinfecting protocols.
“Just to modify our urinals and our toilets and our sinks so kids don’t have to touch them is going to cost probably $100,000.”
Any cuts to education funding could translate to an impact on the district’s most vulnerable students, LeDoux said.
“We’re really operating in the unknown for next year,” he said. “We’re a working class community. If we make serious cuts to our budget during these tough times, the research tells us that it hits the kids of low income families a lot more than kids of families whose parents have the time and money to provide services on their own, so we’re very protective.”
Roberts said that of the $1 million in cuts needed to reduce the mill rate, more than $700,000 would have to be from the district budget, amounting to around 7% of the district’s requested funding amount. The remainder would be from the borough operating budget, which covers the community development department, the finance department, the facilities department, the borough attorney and other expenditures.
The manager’s requested operating budget for fiscal 2021 reflects thousands of dollars of cuts to non-profit funding, libraries, parks and recreation, the Finance Department and the Community Development Department. But the budget requested is still higher than the amount passed in the fiscal 2022 budget. Powers attributed the increase to labor costs that were out of his control.
In light of the governor’s vetoes, Powers said he already reduced every borough department’s travel and training budgets.
“I looked at all of the areas where we could make cuts to try to reduce our expenses,” he said.
Powers said there has been little new construction in the borough this year, which means the total assessed value of property in the borough has not gone up significantly, although the assessed value for existing properties did go up.
The net taxable assessed valuation of property in the borough is expected to go from $1.42 billion in fiscal 2020 to $1.44 billion in fiscal 2021, representing a 1.4% increase. The assessed value of senior citizen exemptions has been going up steadily, and is expected to continue increasing, Powers said, having gone from $66 million in 2014 to $82 million in 2018.
Arndt said it would be “inappropriate” to ask the school district to cut their budget. Instead, he advocated for cuts to other borough functions, including limiting all borough hiring for unfilled borough positions.
Powers cautioned against a borough-wide hiring freeze. The borough is in the midst of hiring a clerk and GIS analyst. In addition, the borough has not hired a code enforcement officer since passing an ordinance clarifying code enforcement earlier this year.
“I’m very concerned about staff turnover and some of our long-term staff potentially leaving,” Powers said. “Personnel is a fluid issue.”
The assembly is expected to continue budget discussions during a work session on Thursday. The assembly must make a decision on education funding by May 30. The fiscal 2021 budget takes effect July 1.