Federal Way officials are looking at ways to increase revenue as the city faces a potential $850,000 shortfall.

City Finance Director Adé Ariwoola told the City Council at a study session on Tuesday night, the anticipated shortfall for 2018 is due to the 2017-18 biennial budget being approved without fully funding the city’s equipment replacement reserve, as well increased inmate costs at SCORE Jail and increases in minimum wage affecting temporary employees in the parks and public works departments.

Ariwoola presented the council with nine recommendations to address the budget shortfall, including removing the cap on the city’s entertainment admission tax, levying a 7.75-percent utility tax on Lakehaven Water and Sewer District bills and delaying the hiring of police officers and Performing Arts and Event Center staff.

Increased expenses

Ariwoola said budget adjustments for 2018 were initially $4.86 million, resulting in a $3 million deficit, but after working with department directors and the mayor, the figure was reduced to $850,000.

One of the largest adjustments to the budget was a $650,000 increase in inmate costs at South Correctional Entity Jail in Des Moines. Federal Way is one of seven member entities of SCORE. Higher costs in operating the jail resulted in the increase for member cities, Ariwoola said. The city pays about $7 million a year to SCORE.

“That number will derail our budget if we keep getting that kind of increase,” Mayor Jim Ferrell said.

The city is looking at ways to address the city’s average daily population at the jail to help keep costs down.

“They are trying hard to manage the ADP on their side, but they also have to keep the city safe,” Deputy Mayor Susan Honda said of the municipal court staff.

Other increases include $250,000 for the parks department and $160,000 for public works to cover hikes in minimum wage and supply costs. There is also $360,000 in unfunded equipment reserves for the police department.

Finding savings

To address the increases and resulting shortfall, the mayor has authorized delaying hiring five new police officers until July, which will save about $155,000. Last fall, the city received a Community Oriented Policing Services Hiring Program grant for $625,000 over a three-year period to bring the department’s number of officers from 131 to 136. The grant covers about 40 percent of the officers’ salaries and benefits, Ariwoola said.

Ferrell has also authorized extending the useful life of police patrol cars from five to seven years, which will save $104,000, and suspending the hire of one staff position at the Performing Arts and Event Center until business increases at the newly opened facility, for a savings of $71,000.

Removing the cap on the city’s admission tax, which is assessed on entertainment tickets sold in the city, would generate about $218,000 a year. The 5-percent tax is currently capped at 60 cents, meaning that any ticket costing more than $12 is missing out on additional revenue, Ariwoola said.

The City Council is expected to consider removing the cap on the admissions tax at its March 6 meeting. If the cap is removed, the tax on a $15 ticket would be 75 cents, and the fee on a $50 ticket would cost $2.50.

Ariwoola said the city will need to use $300,000 from its reserves to cover the remaining expenses in the 2018 budget.

Utility tax

To pay back the reserves and prepare the city for future increases, the council will also consider assessing a 7.75-percent utility tax on Lakehaven Water and Sewer District customers at its March 6 meeting.

The city currently levies a 7.75-percent utility tax on gas, electric, cable, phone and other utilities, Ariwoola said. Under the current utility tax ordinance, Lakehaven is exempt.

“What we are saying is make it uniform for all the providers of utility services,” he said.

Assessing the tax on Lakehaven customers would generate about $980,000 a year, Ariwoola said. On a $60 water and sewer bill, the 7.75-percent tax would cost $4.65.

In 2016, Ferrell proposed levying the utility tax on Lakehaven to cover the cost of hiring additional police officers but found other revenue instead. The city collects a 3.6 percent franchise fee from Lakehaven, but officials have said it costs the city more to assess it than it receives in return.

Tim McClain, a Lakehaven commissioner, said during public comment at Tuesday’s study session that he is opposed to the utility tax.

“While the mayor and his staff feel that you guys, if you implement this, are on solid legal ground for this tax, I personally disagree, and I will do my best to protect the interest of my rate payers,” he told the council.

Ferrell said the city maintains that it can assess the tax.

“This is just an issue of law that our two bodies of government have a difference of opinion on whether we can levy it,” Ferrell said in response to McClain’s comments at Tuesday’s meeting. “We believe we are in firm legal footing, and there is case law that supports this opinion. But, that is what the courts are for if Lakehaven wants to proceed in that direction.”

McClain said Lakehaven is willing to work with the city to find alternative revenue sources.

“We had some ideas of our own that might be able to help you out without going to a utility tax,” McClain told council. “We offered some of these ideas. We offered to come back later for a different meeting with different ideas if the ideas we offered weren’t acceptable to the city.”

The Lakehaven Board of Commissioners was scheduled on Thursday night to discuss the issues.

Additional revenue sources

Ariwoola also proposed assessing a business registration fee on nonprofit organizations with more than 10 employees, but after receiving feedback from the council, he said it might not move forward. Nonprofits are exempt from paying the business registration fees.

Councilman Mark Koppang said he was not comfortable charging nonprofits the fee.

“It is not our recommendation,” Koppang said. “I want the community to understand that it is an idea. We didn’t come up with this though, and we will look at other options, certainly. I have a lot of challenges with us looking at taxing nonprofits.”

Koppang suggested the city look into assessing a fee on self-storage units, something Ariwoola said he is researching.

Ariwoola also recommended the city look at increasing its property tax in the future. The city’s property tax rate of $1.13 per $1,000 of assessed valuation is the lowest of surrounding cities and has been for the past 11 out of 12 years, he said.

“Because it requires a vote of the citizens, I think we need to be able to get the word out and actually do a lot of education sessions for the citizens in order for this to pass,” he said.

Council member Dini Duclos said finding ways to increase the city’s revenue stream is overdue.

“We have to do something as a city,” Duclos said. “We haven’t raised taxes. Our costs are going up. We are losing good staff members to other cities because we can’t pay as much on, I want to say, a very lean budget, and we can’t afford it anymore. If we want to continue to be a city, and if we want to protect our citizens and provide the other services they want, sometimes you have to bite the bullet and do something that might not be too popular. But, that is what we are elected to do, and we have to put the city first and the well-being of the city first.”