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By Charlie Pancerzewski
Former City Councilmember 

City finances need attention, public daylight | Guest View

Series: Coronavirus | Story 96

Last updated 5/13/2020 at 12:03pm

A month ago my letter to the editor described some areas of financial impact on Mukilteo from COVID-19 and urged the Mayor and Council to identify and analyze those impacts and formulate a plan to deal with them.

The Mayor and her Finance Director made limited presentation to Council in their electronic meeting call, guessing how much lost revenue they expect, assuming a 10% reduction for some taxes and fees. Their guestimates of 2020 General Fund revenue shortfall totaled $793,000.

They considered the number two revenue source – sales tax, and a few other taxes and fees like parking fees, Rosehill Community Center rentals for the now shutdown Center, and building permits.

They did not consider the largest source of tax revenue, property tax, budgeted to be $5.7 million. First half installment due by June 1. With thousands out of work and businesses shut down, this payment may be one that cash strapped property owners defer.

Financially stretched homeowners may find the 3% penalty and 1% monthly interest less than what they pay on their credit card debt. Delinquent payments could also happen with commercial real estate. When businesses are shut down for months, many tenants do not pay their rent. Landlords need rent to pay real estate taxes.

The City, County and State will not know how many have defaulted on their property tax installment until June. If, for example, 5% do not pay this installment it would reduce Mukilteo's tax revenue by about $145,000. A similar additional shortfall if the October installment is not paid.

What about hotel/motel tax shortfall? The Council was told it should not impact their $262,000 grant payments this year. They were also told there should be little impact on next year's grants.

Mukilteo hotels/motels collect most of their tax from business visitors, many visiting Boeing and other nearby businesses. Some tax is collected from tourists. Budgeted hotel tax of $245,000 is $30,000 greater than the $215,000 collected in 2019. Not likely to happen or even be close.

Unless that tax is at least $100,000 this year, added to the carryover balance from 2019, the 2020 grants cannot be fully paid and no carryover balance to 2021. Most hotels/motels are operating at less than 50% occupancy, some much less. Business visitors and vacationers will not come here to stay like they did in 2019, impacted by the virus and recent aerospace reductions.

Hotel/motel tax is required to be used to support tourism. Rosehill gets $50,000, Lighthouse Festival $84,000, Chamber of Commerce $65,000 and a few others. Will 2020 hotel tax be enough to pay these grants? If not, Council should notify those who expect to receive them.

There are other funds and taxes to consider. A big one is Real Estate Excise Tax (REIT) on sales of real estate. Budgeted to bring in $1.4 million in 2020, $150,000 more than $1,251,000 collected in 2019, a year with robust real estate sales. Council was told real estate sales are slow but they will pick up later this year from strong demand. Will there be strong demand?

Construction of homes and apartments may decline if moving here for employment slows down. REIT pays the annual $900,000 Community Center bond payment and funds a major part of annual street overlay preservation, sidewalks and other capital projects.

The Mayor and Finance Director recommended the Council not pay their Budgeted $620,000 to the Equipment and Facilities Replacement Funds, pushing this large expenditure forward. The General Fund has a balance of more than $3 million in excess of 2020 budgeted needs and an emergency fund of $1 million, plenty to fund equipment and facilities replacement. Why are they recommending not to fund it?

Council Policy requires the General Fund to have a minimum balance of 17% of annual expenditures on top of funding upcoming expenditures for a full year. Their 2020 Budget achieved that. Now, the Administration's guestimated revenue decline means their 17% surplus requirement would no longer be met.

Council also has a Policy called GAP, required to be activated when expected expenditures in any of the next three years will exceed revenues. The Finance Director needs to make a three-year projection. The Mayor is required to provide a plan, detailed suggestions for closing the GAP.

A starting point for Council. There are three levels of GAP severity. The Mayor and Finance Director have used the lowest GAP severity level. Their $793,000 estimates of revenue shortfall actually exceed the highest GAP level called Severe. The Severe category requires more urgent attention. It is not clear why they are not following the Severe GAP requirements.

Recommending not to make $620,000 budgeted payments to Equipment and Facility Replacement Funds is one suggestion to Council to reduce the GAP. Delaying these payments is saying we will balance our budget by not paying for these needs – expenditures they required when adopting Mukilteo's 2020 Budget a few months ago. Significant revenue shortfalls will not be recovered. Equipment wears out and has to be replaced.

What the Mayor and Finance Director propose is not a solution. It just masks the problem for a short time and delays reporting bad news. Recent articles report Snohomish County, Everett and other cities have financial problems like Mukilteo. Our Mayor and Council should provide a full and accurate public report about Mukilteo's finances and how they plan to solve the problems.

The Mayor has not mentioned City finances in any of her daily email reports to residents. Mayor and Council should keep constituents fully informed. Failure to publicly disclose important financial problems is deceptive.


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