County spending and taxation: winners, losers

I recently read Tim Bynum’s guest column in TGI (May 17, 2011), and subsequent articles about Kaua‘i’s property taxes and the intention to propose comprehensive reform. I have also read all TGI articles regarding the now approved 2012 budget. I am alarmed by the County’s ability to fund such significant increases in spending at the same time it is proposing to substantially reform Real Property Tax revenues (“RPT”). RPT is the most significant component used to fund the operating budget and therefore integral in paying for the expansion of government spending. We are in the midst of continuing uncertain economic times and if we have learned anything about our economy in the past few years, nothing is absolute or certain.

If we assume future funding of operating budgets follows the pattern of the 2012 budget, to what extent will restructuring RPT be required to fund this ever growing appetite? I believe the administration and our County Council is creating a financial hole that we won’t be able to easily dig out of, in particular if any other destabilizing factors impact our island economy. Certainly short-term, stop-gap proposals just won’t fix the underlying problems.

While some of the points Mr. Bynum makes are certainly valid, the systemic issues are complex and I believe his suggestions are inadequate. At the forefront, he says “There does not seem to be the political will to tackle comprehensive tax reform at this time”. We have however just witnessed the political will to past the largest ever budget. Another council member is quoted in TGI (May 19, 2011) as saying the council is looking forward to a commitment from the administration to “propose some real comprehensive tax reform for the County of Kaua‘i in all categories within the next 14-60 days”. How a Herculean task can be accomplished in such a narrow timeframe is fundamentally impossible. The due diligence required to enact meaningful change that is fair to all is not something that can or should be done quickly. It is incumbent upon our Council and the administration to take the proper approach to reach an equitable solution.

A key to success will be ensuring Kaua‘i remains a competitive and affordable place to live and do business. Reformation that is objective and fair should be developed through input from tax collectors and tax payers, not one party. Historically, a Mayor appointed, citizen task force in 2003 was met with opposition from the administration, the voter approved Ohana Amendment in 2004 was met with opposition from the County and the Courts, and 2008 task force proposals made by the administration were opposed by Kaua‘i citizens.

If the County and administration is to be successful and honest in their efforts for reform, they must engage a thorough review process with substantive financial analysis, consider the myriad factors of classes of RPT, tax rates, exemption programs, potential increases and decreases of future real estate values, public input must be gathered followed by negotiations and drafting of the details and then initiated through the proper process. Band-Aid measures such as adding a little to the homestead exemption, raising Hotel/Resort rates a little, etc. can not properly address the larger issues.

I combed through the www.kauai.gov website and culled annual financial reports and budget documents dating back to 2006, and gathered as much data as I was able from TGI. Here is a summary.

The 2012 supplemental operating budget just passed is $186M, an increase of $60M or 46 percent over 2006 (not including capital spending). The 2012 budget includes funding of a $24M reserve fund which was proposed as a “fiscally responsible thing to do”. However, the budget first uses $50M in surplus/equity funds (YES, you are reading this correctly), $79.5M in property taxes and $13.5M in TAT revenue, in addition to other sources. Not including the $24M reserve, the 2012 budget is still $36M or 46 percent greater than 2006. These numbers and growth rates are staggering!

In the interim years, the County enjoyed ballooning property tax revenues which grew from $69M in 2006 and reached a high of $96M in 2009, yet nothing was done to provide relief. 2012 is projected at $79M or a 15 percent increase from 2006 but a 13 percent decrease from 2011. Add to the revenue picture the second most material component of revenue, the transient accommodations tax (“TAT”) passed on from the State. Mr. Bynum would have us believe that the recent announced State cap in TAT revenue will significantly hurt its ability to pay for the cost of government (as visitor’s contributions for their use of County services will decline). Consider that 2006 TAT was $14.3M vs. $13.5M in 2012, a decrease of $800K or only 0.4 percent decrease. The real concern should be focused on how restructuring RPT revenue will be capable of meeting increased expenses.

We are all faced with the same challenge, how to make our incomes balance to our cost of living. The biggest problem is that personal income has not kept up and the economy has receded in a way most of us have never experienced. We have had to make cuts, become more efficient or just do without. Unfortunately it does not appear that our County government has figured this out and I am increasingly concerned over its inability to do what is necessary.

Here is the crux of the problem as I see it. Our Kaua‘i County cost of government only seems to trend upwards, whether property tax revenue is fat (2009) or falling (2012). Due to the material increase in spending, RPT and TAT revenue as a vehicle to fund government spending has gone from 65 percent in 2006 to 50 percent in 2012. Now we are saddled with the biggest budget in history. A small increase in the homeowner exemption passed its first Council reading as a last-minute amendment (see TGI, May 29, 2011). This appears to be nothing more than a politically expedient action and a way to appease homestead tax payers (the voting block).

How did we get here? We spent what we didn’t have or had not yet earned (or our assumptions didn’t prove true) but didn’t expect things to get worse. We are now spending at a level without a sustainable plan in place to pay for future years. Citizens of Kaua‘i must wake up, pay attention and get engaged, or we may find ourselves with a modified RPT system that looks good for the moment and turns out to be a nightmare in disguise.