Memorandum

City of Lawrence

Finance Department

 

TO:

Thomas M. Markus, City Manager

CC:

Diane Stoddard, Assistant City Manager

Casey Toomay, Assistant City Manager

FROM:

Bryan Kidney, Finance Director

DATE:

March 22, 2016

RE:

Updates on Sales Tax Reserve Fund

 

Background

In 1994 Douglas County voters approved a one percent (1%) sales tax. Based on Kansas Statutes, the City receives a portion of that sales tax. The ballot question approved by voters included a section of what the City proposed to do with their portion:

 

Pursuant to an interlocal agreement Douglas County and the City of Lawrence have agreed that the sales tax revenue shall be used by the City of Lawrence for general governmental purposes, including but not limited to the following purposes:

 

1.    The development and operation of parks and recreation facilities and programs, including the acquisition of property, attendant improvements and related costs, pursuant to the City of Lawrence’s adopted comprehensive plan for parks and recreation;

 

2.    The acquisition, construction, and improvement of facilities for the Bert Nash Mental Health Center, the Douglas County Visiting Nurses Association, and the Lawrence-Douglas County Health Department, and attendant improvements and costs; and

 

3.    The reduction of ad valorem property tax levies as established and determined by the City of Lawrence.

 

In order to ensure the City is meeting the intent of the ballot language, the city allocates its share of the county wide sales tax into several funds. The City received $10,510,321 in the city share of the county wide tax. The allocation in 2015 was:

 

1.    A transfer into the “Recreation” special revenue fund in the amount of $2,230,157. Following adoption of the 1994 sales tax, the governing body intent was to reduce the property support and supplant it with the sales tax revenue. Over time the sales tax transfer increased. In 2014, the amount was increased to assist with the operations in the Sports Pavilion Lawrence for the current total of $2,230,157. This transfer is currently planned to increase by 4% annually.

2.    Expending $185,938 out of the general fund for 50% of the community health building maintenance costs. This amount is calculated annually based on actual expenditures. The current projection shows an increase of 2% per year.

3.    Expending $4,368,418 in general fund operations to represent a five (5) mills worth of property tax. This amount is calculated annually based on the assessed valuation of the city.

4.    Expending $361,880 in general fund operations to represent motor vehicle tax revenue loss due to the five mill reduction in property tax.

5.    The commission approved an additional two expenditures that impact this fund in 2016:

a.    $239,000 for the Emerald Ash Borer Program.

b.     $100,000 transfer to the affordable housing trust fund.

c.    These expenditures will be made from the general fund with a corresponding reduction of transfer into the sales tax reserve fund.

 

Once the above calculations are made, a transfer into the “Sales Tax Reserve” special revenue fund from the general fund is made. The 2015 transfer amount was $2,897,446. 

 

In 2015, the funds transferred into the Sales Tax Reserve fund 2015 were used for:

 

Parks and Recreation Building Maintenance

$540,800

Parks and Recreation CIP funding

$355,685

Community Health Facility debt payment

$906,475

Eagle Bend Golf Course debt payment

$287,450

Other park debt payments

$60,538

Sports Pavilion Lawrence debt payment

$1,495,304

 

The expenditures from the fund exceed the transfer in 2015 by $691,422. This reduced the balance for the fund at the end of 2015 to $3,782,038. It is planned that the balance in 2016 will be reduced an additional $1,128,366. However, 2016 is the last year of debt for the health facility, golf course and other parks. As a result, the fund balance is projected to grow $500,000-$600,000 a year after 2016.

 

Use of the Countywide Sales tax for Park and Recreation

Since the passage of the 1994 tax, sales taxes have been one of the primary funding sources for Parks and Recreation. The City made a choice after the 1994 sales tax to fund the Recreation fund only with the sales tax transfer and program revenues without a large dependency on property tax. Virtually all Parks and Maintenance capital improvements come from non-property tax resources.

 

City staff has been following the direction given to them from previous City Commissions that this fund is “primarily used for Park and Recreation uses”.  Funds have been designated each year in the sales tax reserve to be used by P&R in order to subsidize the needs and community desires within the system and preform general maintenance/projects within the scope of the intent of the tax.

 

There have been several times that the funding source was used for purposes other than parks and recreation. The governing body used countywide sales tax funds for street repairs until the infrastructure sales tax was adopted. 

 

Other major commitments of the sales tax to other uses would be put stress on the Parks and Recreation growth, operation and maintenance system. Many of the parks and facilities that are used daily have to be kept safe and functioning. The first round of major projects funded with this tax are now 20+ years old and in need of “second generation” funding for major renovations. Staff is currently in process of renewing the Parks and Recreation Master Plan that should be completed before the end of this year as recommended by Horizon 20/20.  Staff expects the community to weigh in on a number of improvements to existing parks and facilities plus new additions to our Parks system that will need a funding source. Staff feels the intent of the ballot language with no “sunset clause” allows for this type of second and third generation funding source for Park lands, facility renovations and on -going maintenance/operations of long term P&R needs of an ever growing community.  Sales Tax Resolution  Sales Tax Article Sales Tax Brochure 1  Sales Tax Brochure 2  Sales Tax Q&A

 

Items of consideration

Staff has received numerous comments regarding the status, name and use of the Sales Tax Reserve Fund. Specifically, they can be summarized in three distinct areas:

 

1.   Is the sales tax reserve fund a “reserve” fund or a “special revenue” fund?

a.    The name of a fund doesn’t dictate what “type” of fund it is. Special revenue funds are defined as “an account established by a governing to collect money that must be used for a specific project.” We currently classify the fund as a special revenue fund. Staff would welcome any desire to change the fund name as the governing body deems necessary.

 

2.   Why isn’t this fund budgeted, and how are the planned expenditures derived and approved?

a.    The history of this fund has been classified by administration as a non-budgeted fund. The originating budgetary authority for the city portion of the countywide sales tax has been included within the general fund as a budgeted transfer. 

b.   Historically, the uses of the fund have been presented to the Commission as a spending plan and not an adopted Budget. For example, this plan was shared with the city commission during the 2016 budget process. However, the long-term funding uses such as debt service and large maintenance expenditures have been authorized by the governing body before being placed on the funding plan.

c.    A major reason for having a special revenue fund is to provide an extra level of accountability and transparency to taxpayers that their tax dollars will go toward an intended purpose. In light of this reason, over the last year, the intent of staff has been to include this fund into the annual budgeting process. The 2017 recommended budget will include this fund in its operating budget.

 

3.   Shouldn’t the fund be used for other purposes besides Park and Recreation uses?

a.    From time to time the fund has been used for other governmental uses as allowed for in the ballot. However, as discussed above, staff has been given guidance by the governing body in the past to use this funding source primarily as it has been used. Staff feels that this was the intent of the ballot language and a result of the vote. If the governing body would like to make adjustments to the plan or budget staff would like the opportunity to consider adjustments in conjunction with consideration of the entire 2017 budget process.