Revenue-sharing comes with hefty price tag

It’s the beginning of budget-writing time again — you can tell by the reports of dire circumstances faced by cities within Kitsap County.

Revenues from sales taxes are down compared to last year at this time for the county and the cities of Bainbridge Island and Bremerton.

Sales tax receipts aren’t dropping quite the way they had been, but anyone who counted on a big bounce this year is probably in for a disappointment.

Port Orchard would be in tall cotton if not for the revenue-sharing agreement between the county and all the cities that requires a payment to the county for “lost revenue” resulting from the city’s annexations.

The city’s property tax levy is about $2.5 million — roughly $872,000 higher than last year.

Even with the recession still impacting sales tax revenues, the city’s sales tax receipts through May are about $224,000 higher than last year.

But it’s not all going to end up in the city’s coffers to pay for city services.

In this year’s budget, Port Orchard has estimated the payments due to the county for the McCormick Woods and Bethel Avenue annexations at a little more than a half million dollars.

The amount paid to the county will be less in 2011, since the agreement provides a “soft landing” over a period of three years.

In the first year, the county gets 75 percent of its “lost revenue,” then 50 percent the second year, and finally 25 percent the third year.

Having seen how this agreement works in reality, Port Orchard officials have indicated their intent to withdraw from it if its terms aren’t changed substantially.

Withdrawing won’t help in writing next year’s budget, since annexations that have already occurred would still require payments to the county.

But, with future annexations in mind, city officials figure the financial impact on the city makes it necessary to seek a change or simply cancelation of the agreement.

With a payment of about $505,000 coming out of the city’s revenues this year, one can see how withdrawing from the revenue sharing agreement would be an attractive option.

The city has to provide services in newly annexed areas, but not all the revenue from those areas is available to pay for the services.

Under the Growth Management Act, cities are expected to annex adjacent property that is designated as an “urban growth area.”

Since most of the urban growth areas include residential land that produces revenue mainly from property taxes, many cities have balked at taking on the service responsibility when the revenue doesn’t cover the cost.

The agreement entered into in 2001 with the county doesn’t make it any easier for a city to annex the urban growth area.

In addition to sales tax revenue from the newly annexed land, a city’s property tax revenue has to be shared with the county government, even though the county government hasn’t actually lost any property tax revenue.

When Port Orchard annexed the McCormick Woods residential area, for example, the county road levy no longer applied to that area — but the road levy revenue wasn’t reduced as a result of this annexation.

Instead, the county was able to levy its usual annual increase for the road fund, and residents in unincorporated areas experienced a slightly bigger increase than normal in their county tax bills.

In addition to its road fund revenue increase, the county will receive about $345,000 this year from Port Orchard for what is defined in the agreement as “lost” road levy revenue.

The city pays to the county part of what the county would have collected from the road levy if the road levy still applied to the property within McCormick Woods.

Sounds logical, except that the county road levy is nowhere close to its maximum allowable tax rate, so annexations by cities don’t reduce the county’s levy revenue.

Now that they’ve seen how it works, Port Orchard’s officials have to deal with the impact on the city’s budget in the next two years.

But if they stay with this or a similar agreement beyond this year, they will be the ones to blame for its effects during budget writing time.

Bob Meadows is a Port Orchard resident.