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KENT
°a.oM Kent City Council Special Meeting Minutes
October 14, 2014
The special meeting was called to order at 5:31 p.m. by Council President Ralph.
Councilmembers present: Ralph, Berrios, Boyce, and Fincher. Councilmember Higgins
arrived at 5:54 p.m.
Council President Ralph noted that Councilmembers Thomas and Ranniger would not
be attending the meeting. She added that Councilmember Higgins would be arriving
late.
Chief Administrative Officer Derek Matheson announced that the meeting would
consist of a discussion of the structural deficit and the Mayor's B&O proposal. He
communicated that the Department Directors from Police, Human Resources, Law,
Finance, and Court would be presenting their budgets during the workshop meeting
on October 21. He added that Public Works, Information Technology, Parks, Economic
and Community Development and Administration were presenting their budgets on
October 28. The Mayor would be discussing her proposal for a Kent FM radio station
on November 4. He also communicated that there needs to be an item on an
upcoming Council meeting agenda to discuss and adopt the 2015 Legislative agenda
and reviewed the 2015-2016 Preliminary Budget Questions/Requests handout.
B&O Tax — Aaron BeMiller, Finance Director opened the discussion concerning the
City's Business and Occupation (B&O) Tax and the Finance Department tax division
proposal. He reviewed the tax division objective to ensure that the City of Kent
administers B&O, business license, and other tax programs effectively, efficiently and
equitably among taxpayers. He reviewed the accomplishments thusfar, which were
the adoption of the B&O Tax, the collection of $5.2 million of B&O taxes in 2013, and
$2.8 million thusfar in 2014. He added that the current staff has created a guide to
the City's B&O tax, developed quarterly tax returns, audit policies and procedures,
and payment procedures for manual and online payments. Other accomplishments,
he said, include the creation of B&O workshops for taxpayers and developed the B&O
webpage. The team has also implemented the online filing option with 82 percent of
taxpayers doing so in 2013 and over 90 percent filing online this year. The final
accomplishment, he said, was the processing of over 10,500 quarterly tax returns in
2013. He highlighted the ongoing work of the team which included developing audit
policies and procedures and creating instructions for taxpayer filings. He noted that
there needs to be a process to test to see if a business needs to be paying B&O taxes
and isn't. Taxpayer account maintenance is another body of work that needs more
attention, he said. He communicated that cities use the Tandem system to obtain
limited statewide financial information related to taxpayers and prior to July 1, 2014
cities had direct access to all the B&O information about a taxpayer. However, after
July 1, 2014 access was discontinued and cities need to send a request through email
to get access to information.
Barbara Lopez, Senior Financial Analyst replied to Councilmember Boyce that the
information from the state is aggregate and the City wouldn't be able to review the
specific companies that were located in Kent. However, she stated that the sales tax
reporting does identify which organizations are located in Kent. She added that the
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Kent City Council Special Meeting Minutes October 14, 2014
state's system is never going to provide enough information to identify exactly how
much a company should be paying in B&O.
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Councilmember Boyce verified with Lopez that the City can only obtain information
from retail Kent organizations from the state.
Councilmember Berrios confirmed with Lopez that the additional staff would be used
for going out and conducting auditing. She added that there would need to be staff in
the office answering phones, too. She discussed business licensing and comparing
them to B&O. She stated that the auditing of the licensing is the first piece of this
puzzle.
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Councilmember Berrios verified that there was a seven month period that there was
only one auditor. BeMiller added that there isn't enough staff to go out and audit
businesses and ensure all of them are making the correct payments.
BeMiller said the desk audit has collected approximately $278,000 to date from 96
taxpayers. Most of the payments relate to the square footage tax, gross receipts tax
from manufacturing, wholesaling, retailing, and service industries. Lopez added that
most of these collections have come from research on the B&O returns.
BeMiller communicated the current constraints of doing the B&O tax process. He
noted that the data is being kept on three systems that don't talk to each other. The
systems are SQL Server, ID Edwards, and KIVA. He added that he is working with IT
to determine if ID Edwards can be enhanced and address all of the needs.
Matheson communicated that there have been discussions on whether it is best to
improve the system before hiring additional staff.
Councilmember Boyce noted that this problem has been known for a while and Lopez
communicated that time and money has been spent on enhancing the user
experience, instead of making the software system better.
Councilmember Berrios stated that the software issue needs to be addressed quickly
and Lopez added that technology won't erase the need for the staff in the future.
Councilmember Berrios also stated that the staffing need should be communicated to
the Council.
BeMiller continued and discussed staffing and organizational constraints and impacts.
He discussed the staffing proposal and that the new positions will be fully funded by j
an increase in the collection of tax revenue and support tax auditing.
Council President Ralph wanted to know how the staff calculations were done and
BeMiller highlighted the B&O staffing levels of comparable cities, to include Tacoma
and Bellevue. He noted that Tacoma took in $3.6 million in additional revenue based
on collections and compliance.
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Kent City Council Special Meeting Minutes October 14, 2014
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Lopez explained that if you take into account that Tacoma brought in $3.6 million and
Kent is roughly one-quarter of the size of Tacoma, Kent could likely expect $900,000
in collections per year.
Lopez responded to Council President Ralph and said that it is very likely that the City
underestimated the amount of B&O tax returns without the support from the state.
Councilmember Berrios confirmed that the City has been able to identify an additional
$278,000 with the current staff and that the additional staff should be able to secure
an additional $133,000.
Lopez added that the City staff wants the program to pay for itself and this is about
getting the staff in place to make this program equitable.
Councilmember Fincher verified that there are 5,000 registered taxpayers and 1,600
that meet the exemption level and owe the City something in B&O taxes. She verified
that the businesses that need to be brought to compliance and file for a business
license and register for the B&O tax will make up the amount needed to fund the
program.
Lopez replied to Councilmember Berrios that there was one taxpayer who filed on the
first and second quarter and didn't file for the third and fourth quarter. This, she said
made up for most of the $278,000 that was discovered. She added that the
remainder came from companies that didn't file in the City at all and didn't pay for
their square footage tax.
Councilmember Boyce verified that discovering entities that pay one quarter and not
the next is one way that a business can be identified as not paying B&O taxes.
Councilmember Berrios asked if one field audit can be done and Lopez replied that
both of the auditors are trying to get one program up and running. She added that
they are also busy writing returns and getting the end-of-year filing options running.
She said a field audit isn't physically possible because the foundational staff isn't in
place. The City has the auditors, but they aren't even doing what they have been
hired to do because they are doing customer service and desk audit work. She added
that she wants them to drive around the City and see what they can see, but that
can't be done at this time either. She stated she understands the Council wants a field
audit done, but there isn't enough staff available to conduct one at this time.
Auditor Laura Scheel added that refund requests also need to be processed and there
has been an increase in refund and waiver requests. Each refund and waiver request
needs to be audited, she said. She highlighted the process and why the additional
staff is needed. She communicated that working with businesses directly is critical to
the success of this program.
Councilmember Boyce stated that there have been a lot of lessons learned and that
more questions should have been asked in the beginning. He stated that it seems that
the City rushed to get this done and the foundation should have been put into place
before the B&O tax was started.
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Kent City Council Special Meeting Minutes October 14, 2014
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Structural Deficit - Aaron BeMiller, Finance Director handed out the General Fund
Baseline Expenditures Comparison sheet to the Council. He discussed the reasons why
there is a $2.3 million gap in 2015 and a $3.9 million in 2016. He communicated the
specific increases to the baseline budget in 2014 and 2015 and that costs in the
General Fund are going up by 5.9 percent and revenues are only going up 1.3
percent.
Councilmember Higgins inquired what it would take for cities to get the full amount of
streamlined sales tax and Matheson communicated that it would take a vote of the
legislature.
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Council President Ralph felt that it is critical for cities to inform the legislature that
taking SST funds away from jurisdictions causes severe financial hardships and what
it means if the funds are not received.
Matheson also added that based on the data some SST cities are being over-mitigated
SST funds and they aren't going to be happy about the City of Kent wanting more
funds.
Councilmember Higgins and Berrios suggested the City not be submissive on this and
go after what is right when it comes to SST allocations.
Councilmember Boyce discussed the Mayor's proposal to pay off the $2.6 million in
debt and wanted to know what the cost benefit would be to pay it off in the next two
years. BeMiller communicated that the debt is $1.6 million in 2015 and $1 million in
2016. He added that paying the debt sooner will allow for revenues in the Capital
Improvement Fund to be accrued and in 2017 the money can be used for what it was
intended to be used for. He stated that the combined $2.6 million is savings from the
Insurance Fund and the Workers Compensation Fund and because it is one-time
money we don't want to use it for ongoing operations. Lopez also added that paying
that debt would better the cities bond rating.
BeMiller explained to Councilmember Berrios that the public works allocations are
included in the 2016 base budget and the allocation is that the City modified how it
allocates the General Fund budgeted cost for public works to water, drainage, and
sewer utility projects. He noted that in the past the City allocated a larger amount to
these types of utility projects. He also noted that the engineering costs have been
moved from the General Fund to the Utilities Fund.
Councilmember Boyce inquired about 2017 and 2018 and Matheson replied that going
back 50 years inflation has averaged 3 percent. Expenses grow at a significantly
faster rate than revenues due to state tax limitation initiatives. The largest revenue
source, by law, has to grow at a rate slower than inflation and so does sales tax as a
result of the new economy as we try to recover from the recession. Therefore, every
year, he continued, that gap gets bigger and bigger until one-time things are done to
add revenues or reduce expenses in order to bring the two lines into alignment. This
isn't a Kent thing, it is an issue facing all local governments in the state, he said.
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Kent City Council Special Meeting Minutes October 14, 2014
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BeMiller responded to Councilmember Boyce that whatever the City does this year is a
short term solution and the major question is how does the City grow its revenues at
a faster rate or change its service delivery model to match the revenue structure that
exists in this state. He continued that cities are running into the legal limitations on
what they can impose on their citizens.
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Councilmember Higgins added that the legislature is going to have to modify that Tim
Eyeman initiative on property taxes and tie it to inflation. Councilmember Boyce
added that that discussion is already begun.
Councilmember Berrios communicated that as a business owner it isn't just what the
City is doing, it is the state and federal government, too. He stated that the B&O
taxes are off of gross receipts and sales taxes flow through and aren't that impactful
to businesses. He stated that the cost of doing business in Kent, to include the B&O
and utility costs, needs to be compared to that of local jurisdictions. That, he said,
concerns him from an economic development stand point. Every angle needs to be
researched and studied, we just can't keep attempting to get revenues from the same
sources every year, he said.
BeMiller added that one of the items included in the base budget is a status quo on
the state shared revenues. He highlighted that any changes in those revenues would
affect the City greatly in 2015 and 2016. He noted that the City receives about $12
million and $10 million goes to the General Fund.
Matheson verified that the locating of Amazon and Trader Joes in Kent means higher
property values, more employees working and living here, and more sales tax and
property tax revenues. He noted that there is more economic activity and hopefully in
future years the 1% sales tax increase will be higher than that. Matheson confirmed
for Council President Ralph that the sales from Amazon are wholesale and sales tax
doesn't apply. However, B&O and sales tax from the construction are derived into
one-time revenues.
Councilmember Berrios communicated that there are businesses around Amazon that
their employees visit for lunch and dinner. He verified that two of the four B&O tax
categories are maxed out councilmatically and they can be increased by a vote of the
citizens. BeMiller continued and highlighted the B&O tax rates of local municipalities in
Washington.
Councilmember Boyce verified that $4.7 million of the B&O returns are for roads and
the remaining $3 million derived from the proposed increase would go into the
General Fund.
Councilmember Berrios asked for an accounting of the Impact Fee collections for the
Council. Councilmember Higgins agreed and noted that the report was received in the
Public Works Committee and it will be provided to the Council.
Councilmember Fincher asked what the multiple activities tax credit was and Scheel
replied that a credit is given if you fall into either one of the two categories under the
B&O tax rules.
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Kent City Council Special Meeting Minutes October 14, 2014
Councilmember Higgins confirmed that whatever is going into the CIP Fund is going to
pay debt.
Matheson reviewed the Council 2015-2016 Preliminary Budget Questions/Requests
sheet and verified which questions were responded to by the City staff.
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Councilmember Berrios reviewed the business licensing numbers with Scheel and
concluded that there are about 2,200 with a Kent business license that haven't filed
for the B&O tax, which is why there are compliance issues.
Councilmember Higgins verified that having access to the Department of Revenue
(DOR) system won't assist with compliance because it gives statewide information,
not specific information for each business in Kent. Scheel added that a business like
Safeway has all of their locations listed into one entry and it isn't broken down into
each location in each city.
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Councilmember Higgins suggested legislatively working to get direct access back from
DOR because having that information to cross check with the City's information is
critical. He also noted that two years ago the City was told by DOR that it didn't have
any access to their licensing system, but the City did up until July 2014.
Councilmember Boyce asked if the 2,200 businesses that aren't filing can be sent a
letter and Lopez communicated that it is a manual process and it would require taking
all the addresses out of the system. Boyce noted that a consultant could be brought in
to generate the letters.
Scheel noted that letters have been sent out three times and some business owners
ignore the letters, have moved, or have new owners.
BeMiller replied to Councilmember Berrios that the staff needs to do some research
concerning if business licenses can be withheld to businesses that refuse to file B&O.
Lopez responded to Councilmember Fincher concerning how businesses that didn't
pay their B&O tax were discovered. She noted that businesses that filed or paid their
initial B&O taxes and didn't pay for additional quarters were sought out.
Councilmember Boyce clarified that there are 5,000 businesses that renew their City
business licenses every year and 2,800 who have filed in the B&O system.
The meeting adjourned at 7:24 p.m.
Ronald F, Moore MMC
City Clerk {
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Business & Occupation Tax Rates Proposal
_ Statutory
Rates effective January 2013 2015-16 Proposed Limit
Gross Receipts
Manufacturing 0.00046 0.00100 0.00200
Retail 0.00046 0.00100 0.00200
Services 0.00152 0.00200 0.00200
Wholesale 0.00152 0.00200 0.00200
Gross Receipts Exemption - Annual $250,000 $150,000 threshold
Gross Receipts Exemption - Quarterly $62,500 $37,500 threshold
Square Footage
Warehouses $0.03 $0.03
Others $0.01 $0.01
Estimated Annual Revenue Increase
Manufacturing 1,210,000
Retail 695,000
Services 235,000
Wholesale 435,000
2,575,000
Change to $150,000 Threshold 425,000
3,000,000
* per RCW 35.21.710
Council Workshop 10/14/2014 Response to Questions 4 and 18
Local Business (B&O) Tax Rates
Effective January 1, 2014
Manufacturing Wholesale Annual
City County Rate Retail Rate Services Rate Rate Threshold
Algona King 0.00045 0.00045 0.00045 0.00045 $40,000
Des Moines King 0.002 0.002 0.002 0.002 $50,000
Kent-Current King 0.00046 0.00046 0.00152 0.00152 $250,000
Pacific lKing 0.002 0.002 0.002 0.002 $20,000
South King County Average: 0.00123 0.00123 0.00149 0.00149
Bellevue King 0.001496 0.001496 0.001496 0.001496 $155,000
Burien King 0.0005 0.0005 0.0005 0.0005 $100,000
Issaquah King 0.0008 0.0008 0.001 0.0008 $20,000
Lake Forest Park King 0.002 0.002 0.002 0.002 $20,000
Mercer Island King 0.001 0.001 0.001 0.001 $150,000
North Bend King 0.002 0.002 0.002 0.002 $20,000
Seattle King 0.00215 v 0.00215 v 0.00415 v 0.00215 v $100,000
Snoqualmie King 0.0015 0.0015 0.0015 0.0015 $20,000
All King County Average: 0.00136 0.00136 0.00163 0.00145
Kelso Cowlitz 0.001 0.001 0.002 0.001 $20,000
Longview Cowlitz 0.001 0.001 0.002 0.001 $20,000
Aberdeen Grays Harbor 0.002 0.003 e 0.00375 e 0.003 e $20,000
Cosmopolis Grays Harbor 0.001487 0.001487 0.001487 0.001487 $500,000
Hoquiam Grays Harbor 0.002 0.002 0.002 0.002 $20,000
Ocean Shores Grays Harbor 0.002 0.002 0.002 0.002 $20,000
Westport Grays Harbor 0.0025 e 0.005 e 0.005 e 0.0025 e $20,000
Port Townsend Jefferson 0.002 0.002 0.002 0.002 $20,000
Bainbridge Island Kitsap 0.001 0.001 0.001 0.001 $150,000
Bremerton Kitsap 0.0016 0.00125 0.002 0.0016 $60,000
Shelton Mason 0.001 0.001 0.001 0.001 $20,000
Ilwaco Pacific 0.002 0.002 0.002 0.002 $20,000
Long Beach Pacific 0.002 0.002 0.002 0.002 $20,000
Raymond Pacific 0.002 0.002 0.002 0.002 $20,000
DuPont Pierce 0.001 0.001 0.001 0.001 $20,000
Roy Pierce 0.001 0.002 0.002 0.001 $20,000
Ruston Pierce 0.0011 0.00153 0.002 0.00102 $20,000
Tacoma Pierce 0.0011 0,00153 0.004 e 0.00102 $250,000
Darrington Snohomish 0.00075 0.00075 0.00075 0.00075 $20,000
Everett Snohomish 0.001 0.001 0.001 0.001 $20,000
Granite Falls Snohomish 0.002 0.002 $20,000
Lacey Thurston 0.001 0.002 $20,000
Olympia Thurston 0.001 0.001 0.002 0.001 $20,000
Rainier Thurston 0.002 0.002 0.002 0.002 $20,000
Tumwater Thurston 0.001 0.001 0.002 0.001 $20,000
Yelm Thurston 0.001 0.002 0.002 0.001 $20,000
Bellingham Whatcom 0.0017 0.0017 0.0044 e 0.0017 $20,000
Everson Whatcom 0.002 0.002 $20,000
Rest of State Average: 0.00149 0.00166 0.00213 0.00152
State Average: 0.00145 1 0.00157 0.00197 0.00150
Kent- Proposed: 0.00100 0.00100 0.00200 0.00200 $150,000
Statutory Limit: 0.00200 0.00200 0.00200 0.00200
(v) = voter approved increase above statutory limit
(e) = rate higher than statutory limit because rate was effective prior to January 1, 1982 (grandfathered)
* Annual exemption amount, only gross receipts in excess of the amount indicated are subject to B&O tax.
Council Workshop 10/14/2014 Source: www.awcnet.org Reponse to Question 5
B&O Tax Collections & Uses
as of September 30, 2104
B&O Tax Collections by Classification
2013 2014 thru Q2 Total
Manufacturing 1,016,321 628,084 1,644,405
Wholesaling 1,368,779 664,383 2,033,162
Retailing 590,960 301,994 892,954
Retail Service 743,451 414,549 1,158,000
Printing/Publishing 11,720 6,931 18,651
Extracting 1,067 611 1,678
Multiple Activities Tax Credit (89,351) (47,270) (136,621)
Square Footage 1,506,223 826,186 2,332,409
Penalty 23,484 59,286 82,770
Interest 2,558 2,910 5,468
5,175,212 2,857,664 8,032,876
B&O Tax Uses per Ordinance
2013 2014 thru Q2 Total
B&O Program Admin 300,000 300,000 600,000
Street/Transporation 4,700,000 2,557,664 7,257,664
CIP Fund 175,212 175,212
5,175,212 2,857,664 8,032,876
Council Workshop 10/14/2014 Response to Question 6
CITY OF KENT PROPERTY TAX SHARE ONLY
2015 KC Worksheet 2015 Kent Budget
$13,851,171,820 Valuation $13,851,171,820
$13,851,172 Valuation divided by 1,000 $13,851,172
$28,379,770 Assumed Revenue $20,808,100
2.04891 Maximum /Levy (millage) rate 1.50226
Kent Rate + $0.10 1.60226
Est. Collections $22,193,220
Increase $1,385,120
GF Share (@85%) $1,177,350
ESTIMATED PROPERTY TAX INCREASE - KENT SHARE ONLY
$300,000 Valuation $500,000
1.50226 Millage Rate 1.50226
$450 Est. Property Tax $750
1.60226 Millage Rate + $0.10 1.60226
$480 Est. Property Tax $800
1.70226 Millage Rate + $0.20 1.70226
$510 Est. Property Tax $850
1.80226 Millage Rate + $0.30 1.80226
$540 Est. Property Tax $900
Council Workshop 10/14/2014 Response to Question 17
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