MRSC has joined with Tracey Dunlap, Director of Finance & Administration at the City of Kirkland, Mike Bailey, Finance Director, City of Redmond, and Glenn Olson, Deputy County Administrator, Clark County, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*

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Some Financial Food for Thought Regarding Annexations

September 2009

By Tracey Dunlap, City of Kirkland Director of Finance and Administration and Sri Krishnan, Senior Financial Analyst

The City of Kirkland has been intensively studying whether to annex its remaining Potential Annexation Area (PAA) for at least the past four years. Why so long? The PAA will add over 33,000 residents to the existing city population of about 49,000 and will increase the city's area to 18 square miles from 11 square miles - a huge change for any organization.

Annexation has been a hot topic in the last year or two, in part due to a financial incentive for large annexations put in place by the state legislature, which is discussed further below. The purpose of this article is not to advocate for or against annexation (in general or in Kirkland), but rather to provide some food for thought for those that might consider annexation in the future. In fact, the Washington Public Disclosure Commission (PDC) prohibits the use of city resources to advocate for either side of a ballot proposition. (See the PDC's Guidelines for Local Government Agencies in Election Campaigns.

From a financial standpoint, it is important to try to understand what annexation could mean. A few things to consider include:

Longer-term outlook - Kirkland had evaluated annexation in the past as more of a budget exercise, looking at what resources would be available and needed in the next budget period to support an annexation. For this annexation, we worked with a consultant to develop a long-range projection (20 years) for a variety of reasons, including:

• The development patterns in the PAA are significantly different than the existing city and will likely have different development/re-development potential looking into the future, and
• The state sales tax credit (described below) is available for ten years, so we wanted to look at what the situation would be once the credit runs out.

Sensitivity analysis to key variables - The longer-term projection allowed us to explore a variety of options based on the sensitivity of the analysis to key variables, such as growth, development/re-development, and a variety of policy choices. Some of these choices related to service levels (how many police patrol districts would be put in place) and others dealt with more politically-charged issues (such as allowing existing social card rooms in the PAA, which are not allowed in the city, to continue operation). While the ability to generate lots of scenarios can lead to "analysis paralysis," it was useful in assisting elected officials and the public to understand the policy implications of annexation.

State sales tax credit - As mentioned earlier, a financial incentive for large annexations was put in place by the state legislature in 2006 and modified in 2009. The adoption of SSB 6686 (RCW 82.14.415), by the 2006 legislature allowed for a credit of sales tax up to 0.2% of the total 6.5% state portion of sales tax revenues for qualifying large annexations that commenced prior to January 1, 2010. The 2009 legislature's adoption of ESSB 5321 extended the sales tax credit to January 1, 2015. ESSB 5321 also amended RCW 9.46.295 to allow a city or town with a prohibition on card room businesses to allow them to continue operating, if the business is located in a newly annexed area and it can be demonstrated that the business will reduce the state sales tax credit for annexations. While the credit will help bridge the gap between revenues and expenditures in the proposed annexation area (PAA), it is only available up to the amount needed to offset shortfalls due to annexation and is limited to ten years from the date the tax is first imposed. So, it is important for any city planning to annex to evaluate the long-term (post sales tax credit period) impact of annexation on the city's finances.

Special purpose districts - There are many considerations regarding special purpose districts that provide services in potential annexations areas, which include pertinent legislative requirements and practical impacts. For example, there are several specific pieces of legislation dealing with fire districts, one of which was modified in the last legislative session dealing with revenues, staffing, transition, etc. (ESSB 5808). To provide some context as to why addressing this issue can be a huge undertaking, Kirkland identified three fire districts, two water/sewer districts, two school districts, and one park district operating in the PAA, each with a variety of issues. MRSC's Annexation Guide (see link below), updated in July 2009, provides a wealth of information on this topic.

During our annexation journey, we have identified a variety of commonly asked financial questions, both from the public in the existing city and in the PAA. Below is a sampling of questions you may want to be prepared to answer (you can also read the city's responses to these questions):

• Why annex?
• Can the city afford to annex now?
• Would the amount of my property taxes change upon annexation?How will annexation affect police, fire, and emergency medical services?
• Will annexation affect my zoning?
• What will happen to building or land uses that do not conform to current city zoning standards should annexation occur?

These are by no means intended to be exhaustive lists of the consideration related to annexation. MRSC's comprehensive Annexation Guide provides detailed information on a full range of things to consider. In addition, a number of cities have been actively pursuing annexation and there are lots of materials available on their websites to give you some ideas.

So after four years of study, the Kirkland annexation question is on the November 2009 ballot. Will it pass and if so, what then? Perhaps, that will be the subject of a future Finance Advisor column!

Mike Bailey is currently the Finance Director for the city of Redmond. Previously he worked as Administrator of Finance and Information Services for the city of Renton and as the Director of Finance for the city of Lynnwood. Mr. Bailey also served as president of the Washington Finance Officers Association and is the Vice Chair of the GFOA Budget Committee. An experienced CPA and GFOA budget reviewer, Mr. Bailey co-founded the annual Budget and Fiscal Management Workshops held each summer. Mr. Bailey conducts numerous workshops and has authored various articles on local government finance, including Effective Budgeting in Washington State Cities published by the Association of Washington Cities.

Tracey Dunlap, P.E. is the Director of Finance & Administration at the City of Kirkland. Prior to joining Kirkland in 2006, she was a principal and shareholder in FCS Group, a regional financial and management consulting firm (14 years). An industrial engineer registered in the state of Washington, she has worked with jurisdictions throughout the Northwest to develop and implement cost recovery and fee strategies, set utility rates, and improve organizational efficiency and effectiveness. Tracey's experience also includes working for a large defense contractor (5 years) and a major financial institution (3 years). She has presented on a wide array of topics for organizations including WFOA, APWA, APA, WABO, and AWC.

Glenn Olson is the Deputy County Administrator for Clark County. He has been in Clark County since 1997, serving in various leadership positions during his tenure there. Previously Mr. Olson served 15 years in the Governors Office of Financial Management overseeing budget forecasts. Mr. Olson chaired the Washington State Public Works Board for Governor Locke. Currently he is the gubernatorial appointee representing local governments on the Select Committee for Pension Policy and on the Law Enforcement Officers and Fire Fighters Plan 2 (LEOFF2) Board, and he is the president of the Washington County Administrators Association.

*The Articles appearing in the "Finance Advisor" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research & Services Center.