2008/10/15 Council Agenda Packet

CITY OF EVERETT FISCAL ANNEXATION ANALYSIS: EXECUTIVE SUMMARY All cities across the State are different in terms of tax bases, mixes of commercial and residential land uses, and fiscal policies; however, many have been experiencing the trend where municipal service costs are growing at faster rates than revenues. Everett, despite the impact of 10/0 property tax growth limit, has built a solid foundation for fiscal balance through its current revenue and level of service policy framework. The projected surplus in 2025 for the City without annexation is 2% of the estimated core expenditures. Given the uncertainty involved in making long-term financial projections, it is useful to think of the estimated budget surplus or deficit in future years in terms of how it relates to estimated expenditures. City policy makers have the ability to reasonably manage the City's finances to address normal fluctuations in revenues and/or expenses. As a result, it is not uncommon for City's to be balancing budgets when expenditures and revenues are somewhat out of balance. Thus, a surplus or deficit that is within 2% or 3% of estimated expenditures can be considered to be balanced, since it is likely within a manageable range. More severe imbalances (5% or 10%) would be indicative of the likelihood that a City would be facing more significant financial challenges in the future that would require more fundamental policy solutions — either reducing levels-of-service or increasing taxes to balance the budget. Exhibit ES-2 shows projected results for scenarios 3 and 4, including the estimated costs and revenues for Everett, annexation areas, and total combined area every five years over the study period. The analysis suggests that on an operating basis annexation could be considered feasible, resulting in the City's overall costs and revenues being close to balanced (i.e. within the plus or minus 3% threshold). While the overall City operating budget is reasonably balanced, the annexation actually yields a small net negative fiscal impact on the operations of the City of Everett in both scenarios, as the City is projected to show a small surplus in the no annexation scenario. Scenario 3 Findings. Taken on its own, Scenario 3 is projected to be fairly balanced over the analysis time horizon. However, considering that the City will experience higher costs due to shared additional staff in Fire Department, the outcome is slightly worse off than the no-annexation projection (Exhibit 7). These shared costs are why the current City appears to be less balanced than the results in ES-1. A key factor in this result is the relatively low costs of extending fire services to this area, giving the City a significant economies-of-scale benefit. While this scenario is potentially feasible, there are some financial risks that need to also be considered, such as the potential magnitude of capital expenditures in the annexation area. Scenario 4 Findings. This scenario is projected to be negative immediately after the sales tax credit ceases in 2018. Similarly to Scenario 3, the City will experience higher costs due to shared additional staff in Fire Department, and the outcome is worse off than the no-annexation projection. Scenario 4 would likely present somewhat higher risks as well given that it is a significantly larger annexation. Iii Final Report:October 2008 Page ES-3