Speaking of New Library Taxes

It seems the Kitsap Regional Library Board faces a steep climb if it does indeed ask voters to approve a library levy id lift in November.

Comments on a story I wrote for today’s Kitsap Sun sounded a lot like this one from jetvilleres:
“With the internet available just about everywhere these days, who needs a library anyway. And for all you parents with kids, books are cheap at the Goodwill and Value Village.”

Comments like that outnumbered comments like this from Robin_in_Manette:
“We have an excellent library system. Good luck with the levy!”

The board will make a decision on whether to run the levy in the next few months. In the meantime, they’re keeping their eyes on the economy, voters’ moods, other possible measures that could run at the same time and “political” factors, including the possibility that Port Orchard’s library could join the KRL system.

Finance committee chairman Rob Putaansuu, says annexing into the library district would give Port Orchard residents a say in any library levy lid lift. Putaansuu and other council members have said it would not amount to a tax increase, and that’s true … in one respect. Port Orchard property owners would not see an increase in their library tax, but, according to Kitsap County Assessor Jim Avery, the city could raise its levy rate as a direct result of the library annexation.

To give credit where credit is due, I got the heads up about this from a piece by South Kitsap columnist Bob Meadows, who gave a detailed explanation. I’ll try to give the Cliff Notes version.

Port Orchard residents have access to the same books, CDs and other materials available to KRL patrons. They can check out and return those materials at any KRL branch. And they pay the same library property tax rate as KRL patrons, but they pay it in the form of a Port Orchard library tax as opposed to the regional library district tax. The city forwards revenue from its library tax to KRL, essentially acting as a pass through agency.

As Meadows points out, Port Orchard’s annexation into the library district would create a gap or void between its highest allowable tax rate and the amount it actually collects, presenting the council with the opportunity to raise taxes. Avery calls it bonus taxing capacity. Significantly, the council would not be required to act on the option immediately, but they could “bank” the increase for future use.

I’ll let Avery explain the details:

“This is the same thing we saw play out when the fire district annexed all of Port Orchard (and Poulsbo) several years ago.

The City of Port Orchard and other regular taxing districts are limited by two things when it comes to how much they can levy in property taxes each year. They cannot levy above a statutory maximum levy rate (dollars per thousand of assessed value). And as long as they do not exceed that rate they can levy 1% above their “highest allowable” levy amount, exclusive of new construction.

The “highest allowable” amount is usually their prior year’s levy. Because our assessed value increased dramatically from 2002-2007 levy rates were driven down to a point where they generally are not a factor unless voters have recently approved a levy rate increase.

The problem creating all the confusion here is that while annexing districts (e.g. fire, library and cities) who are increasing the size of their district get to add an appropriate amount above the 1% to their “highest allowable” levy amount, there is no corresponding reduction to the “highest allowable” levy amount from the district that is losing property (emphasis mine, CTH). Logic would suggest that there should be a required reduction to the levy amount when a service area is reduced.

In this case with the proposed annexation of the City Port Orchard to the regional library district, even if the city chooses not to take the bonus levy capacity of about $370,000 in the year following annexation, the money is still banked and available for future use.

It seems to me it is going to take a very strong resolution on the part of the city council to convince the voters in the city that they will not see higher taxes as a result of annexation to the library. And then of course any resolution made by this council can be undone by future councils.
Jim Avery
Kitsap County Assessor

6 thoughts on “Speaking of New Library Taxes

  1. Not true–again. Somebody needs to follow through on this and check the law carefully, including Avery. Three cities have already annexed to the library district: Poulsbo, Bremerton, and Bainbridge Island. Not one citizen of those three cities saw an increase in taxes as a result. Not one. Check the records on this if you will.

    In a ‘pure’ scenario, cities are allowed to collect $3.60 per thousand. Libraries are allowed to collect $.50–fifty cents. In practice, because of the tax limitation laws, both collect less. If the residents of Port Orchard annex to the library district, the library, in effect, ‘gets’ $.50 of the $3.60 that cities can collect without annexation. That means the city’s allowance drops from $3.60 to $3.10. This does not suddenly result in a windfall for the city to soak up money that is no longer going directly to the library district.

    If this were the case, annexation would never have passed in the three cities mentioned above.

  2. Michael–Please read my above comments in Chris’s blog again. You would be correct if the City of PO were currently at or near their levy rate maximum, in which case reducing the maximum levy rate by the library levy rate would be a significant constraining limitation to their levy in 2011. The maximum levy rate for Port Orchard would $3.60 minus the fire district regular levy rate and minus the library rate, if annexed. Since we don’t yet know what the assessed values will be for the 2011 tax year, we can’t know the exact rates for 2011. But for 2010 the maximum rate for Port Orchard was $2.44 ($3.60-$1.16 SKFR levy rate). To achieve their “highest allowable rate this year the City of PO levy rate was only $2.14. I don’t expect the assessed value to change much compared to what it is for this year. Therefore when we compute the new maximum levy IF Port Orchard annexes to the Library District it will be something very close to the same rate being used to collect the City Levy this year ($3.60-$1.16-$.32 Library levy rate). That means that the City will be able to collect just about the same amount of money as collected this year but won’t have to reimburse the library because the library will be getting taxes directly from the new library taxpayers, if annexation is successful.

    I know this can be confusing. You are certainly welcome to give me a call. I’d be happy to discuss it with you further.

    Jim Avery
    Kitsap County Assessor

  3. Michael, I see you didn’t come back to finish the “conversation” at the POI web site; and you are still saying the same wrong things.

    You mistakenly believe that the cities of Poulsbo and Bremerton annexed into the rural library district without increasing the taxes city residents paid.

    Your mistake is that you believe cities can collect at a maximum $3.60 per thousand when they aren’t annexed into a library (or fire) district.

    As I pointed out to you over at the POI (even giving you links to the state laws), the maximum tax rate for the cities you mention prior to their annexation into the library district was $3.375 per $1000.

    You can see that $3.375 is not $3.60, can’t you?

    When Poulsbo and Bremerton annexed into the library district, they were not already annexed into a fire district, so their maximum tax rate was $3.375. (I don’t know the order of annexation for Bainbridge Island.)

    Assume (as you indicate was the case) that both cities had already entered into agreements with the library district by which the cities transferred funds in an amount equal to the product of applying the library district’s rate to the cities’ tax bases.

    Assume the library district was at or near its maximum tax rate of $0.50 per $1000, and both cities were at or near their maximum rate of $3.375 at the time they annexed into the library district, here’s how the arithmetic works:

    Before annexation, the city is collecting at $3.375 and transferring a portion equal to $.50, so the city’s property tax revenue for nonlibrary purposes is represented by the revenue collected by only $2.875 of its $3.375 rate.

    After annexation, the city’s tax rate is $3.60 minus the library’s actual rate. Again assuming that both are at their maximum rates, the city’s tax rate becomes $3.10.

    Notice that prior to annexation, the city’s revenue for nonlibrary purposes was represented by the taxes collected by a rate $2.875, and after annexation the city’s revenue for nonlibrary purposes is collected by a rate of $3.10.

    You can see that $3.10 after annexation is more than $2.875 before annexation, can’t you?

    While the total valuation of assessed property in the city would probably change from one year to the next, the city’s tax rate after annexation allows it to collect enough that annexing into the library district gives the city a net gain.

    City residents who had been paying at a rate of $3.375 only to the city would pay at $3.60 after annexation into the library district–the sum of their city and newly owed library tax rates.

    Once again, you can see that $3.60 after annexation is bigger than $3.375 before annexation, can’t you?

    The same thing will occur with Port Orchard–not because Port Orchard’s rate would change from $3.375 to $3.60 minus the library rate. It would occur because Port Orchard’s actual rate now is $2.14, and its maximum rate after annexation would be about $2.11. Port Orchard’s levy amount would go down about $31,000 because its allowable tax rate would go down by about 3 cents–and the city would stop sending $373,000 to the library district. The net gain for the city would be about $373,000 minus $31,000 which is $342,000.

    Port Orchard residents now pay at $2.14 to the city only. After annexation they would pay at about $2.11 to the city and about $0.32 to the library district for a total of about $2.43. You can see that $2.43 is bigger than $2.14, can’t you?

  4. Chris Henry,

    Port Orchard is already in the Kitsap Regional Library system. The regional library system is not the same thing as the rural library district. The KRL system is a combination of the rural library district and the cities who participate by contract with the rural library district.

    Port Orchard, Poulsbo, Bremerton and (perhaps) Bainbridge Island are cities that participate in the KRL system. (BI doesn’t own the island’s library building, and doesn’t seem to have ever had a city-owned and run library; so I don’t know if the city has any contract with the library district now.)

    Even though Poulsbo and Bremerton have previously been annexed into the rural library district, the cities still have contracts with the rural library district stating their respective obligations. The cities own and maintain the buildings housing the branch libraries, and pay the cost of utilities.

    Port Orchard has not yet been annexed into the rural library district, but it has a contractual agreement with the district just like the cities of Poulsbo and Bremerton. Port Orchard owns and maintains the building–and in addition, because city residents aren’t paying taxes to the library district, Port Orchard pays the library district from the city’s general fund for library services.

    If you will please trust your own eyes and read this statute, you might realize why we have something called the Kitsap “Regional” Library, so that we hardly ever hear anyone mention the Kitsap County “Rural” Library District:
    Here is the first sentence, which tells you all you need to know about how the Kitsap County Rural Library District and the cities of Poulsbo, Port Orchard, Bremerton, and (perhaps) Bainbridge Island formed the Kitsap *Regional* Library:
    “Two or more counties, or other governmental units, by action of their legislative bodies, may join in establishing and maintaining a *regional* library under the terms of a contract to which all will agree.” [Emphasis added with ** so you can hardly fail to see the word “regional” in that sentence.]

    See? The Regional system exists by contract. The contracts are between the Rural district and each of the participating cities.

    When you wrote above that there are “factors, including the possibility that Port Orchard’s library could join the KRL system,” you indicated that Port Orchard isn’t part of KRL.

    Port Orchard is part of KRL. The branch library in Port Orchard is part of KRL.

    If Port Orchard is annexed into the *rural* library district, the city will *still* be part of KRL. The branch library in Port Orchard will *still* be part of KRL. That doesn’t change with annexation.

  5. Also, Chris–

    This part of your blog entry indicates you still don’t understand how the taxes work:
    “Putaansuu and other council members have said it would not amount to a tax increase, and that’s true … in one respect. Port Orchard property owners would not see an increase in their library tax, but, according to Kitsap County Assessor Jim Avery, the city could raise its levy rate as a direct result of the library annexation.”

    Just as I stated in my column last week, it *will* amount to a tax increase.

    Take any tax statement at random for any resident of McCormick Woods and look at it. Look at your own, if you live there.

    It shows last year’s taxes before annexation into the city of Port Orchard and this year’s taxes after annexation into the city.

    You can see with your own eyes that there was a library tax being paid by the taxpayers in that area last year, but there is no such library tax this year. This year, they live in the city limits, so they pay no County Rural Library District tax.

    There is no part of the city’s levy authority that is “earmarked” solely for use in funding a library. The city is obligated by its agreement with the rural library district to pay from its general fund revenues (which come from all non-earmarked revenue sources). The amount is calculated by multiplying the rural library district’s actual tax rate by the city’s property tax base.

    You apparently think that this contractual method of calculating the city’s payment means that the city’s levy authority vanishes upon the elimination of that payment.

    The city’s payment would be eliminated upon annexation of the city into the rural library district, but the city’s levy authority would not vanish.

    When the city formed its city library long ago, it probably followed this statute:
    If you will read that statute and trust your own eyes, you will see no hint that the formation of a city library gives the city any levy authority.

    Instead, the city’s levy authority comes from this statute, which has no reference to the uses of the levy authority at all:
    “…and (d) the levy by any city or town shall not exceed three dollars and thirty-seven and one-half cents per thousand dollars of assessed value.”

    In other words, cities with libraries have the same levy authority as cities that have never established a city library. Deciding to form a city library simply means that the city will have to find the funds needed to maintain and operate the city library.

    Rather than continue operating a separate city library, cities often join with rural library districts to form *regional* library systems. Then, the city, by contract, pays the rural library district for services.

    Cities have also gone one step farther and annexed into the rural library district, so that no further payments from the city’s general fund have to be made to the rural library district. The city taxpayers begin paying the rural library district’s tax, and the city stops transferring funds to the library district.

    I hope you can see from my response to Michael the effect on the city’s tax rate. For Port Orchard, the city’s maximum tax rate right now is $3.60 minus the fire district’s actual tax rate. After annexation into the library district, the city’s maximum tax rate would be $3.60 minus the fire district’s rate and minus the library district’s rate.

    Since right now the city’s maximum rate is only $2.43, and the city’s allowable levy amount only results in a current rate of about $2.14, there is a “space” between the maximum rate and the actual rate. This “space” equals about 29 cents.

    Now look at this year’s library district rate for illustration of the effect of annexation into the library district. Next year’s library district rate will be similar–maybe a little higher with declining property values. (Of course, with a lid lift it would be much higher.)

    After annexation, the city’s maximum allowable tax rate would be lower than its current rate–about 3 cents lower. The library district’s current rate is about 32 cents. $3.60 minus the fire district’s $1.17 minus the library district’s $0.32 is about $2.11.

    Can you see that the city would have its allowable tax rate pushed down by a few cents below what its current rate now is, if it is annexed into the library district? Essentially, 29 cents of the library’s tax rate fills in that “space” that now exists between the city’s actual rate and its allowable rate. This means the city’s actual rate is pushed down by only 3 cents, not 32 cents.

    That is the effect on the city’s levy authority–the city’s maximum allowable tax rate in any year will be determined by the actual tax rates of the fire and library districts. Right now it is determined by the fire district’s rate.

    Using this year’s figures for illustration, the city residents would pay an additional $342,000 in property taxes, because they would be paying the additional library district tax.

    The only way to avoid this result is for the city council to levy an even smaller levy amount after annexation–something they are not required to do. If they decide to levy an amount that is less than the law permits, the amount they choose not to levy becomes “banked” levy capacity which they can impose in some later year.

    That’s the situation in the immediate future.

    Now look at the effect of a library district lid lift–again using the tax rates to illustrate.

    The city right now has the revenue from part of its levy for purposes other than the library. $2.14 minus $0.32 means the city has the revenue collected by a rate of about $1.82. (The tax rates aren’t split up like this by any law or other requirement, so please don’t keep saying that there is a library tax now being paid by the city residents–they pay the city and only the city tax, and the city has one and only one levy.)

    If the library lid lift is approved, the city under its contract would pay more, and would have an amount left over for other purposes that is represented by a tax rate of about $1.69. (I’m assuming the library board is thinking of putting a tax rate of 45 cents per $1000 on the ballot.)

    If the city is annexed into the library district, the effect of the same lid lift to 45 cents for the library gives this result:
    $3.60 minus the fire district’s $1.17 minus the library’s $0.45 equals $1.98.

    Instead of having to pay the library district from the city’s general fund so that the city’s leftover property tax revenue comes from $1.69 of its rate, the city has the revenue from a rate of $1.98.

    That is a gain to the city from annexation, and it results from the fact that the city is not at its maximum tax rate already.

    There is another way the city gains. It’s not an immediate gain. It happens over a period of years.

    When the city’s tax rate is pushed down like this from $2.14 to $2.11 or $1.98 because of annexing into the library district (not because of rising property values) the city’s highest prior levy amount remains as its levy lid.

    The city can levy the smaller of two amounts in any one year–the amount that can be collected by its maximum tax rate, or the highest prior levy amount adjusted upward by 1 percent plus the amount generated by new construction.

    The city’s levy would be forced down by about $31,000 by annexing into the library district using this year’s figures to illustrate.

    Its highest prior levy would be the amount collected in 2010–and the city could go back to that highest prior levy as soon as its maximum tax rate allows. (This is what happened with Poulsbo and Port Orchard when they annexed into their respective fire districts. Over the four years following the first year of annexation, both those cities raised their levy amounts by so much that their annual average increase exceeded 12 percent. Four years after their annexation, they were both back to their highest prior levy amounts, and neither was paying anything to the fire district.)

    Am I explaining this in a way you can understand? Two different effects are involved–the immediate effect from the allowable tax rate, and the subsequent effect from going back up to the highest prior levy.

  6. Kitsap Regional Library spokesman Jeff Brody contacted me concerned with the suggestion made in this post that comments on Kitsap Sun online stories accurately reflect public opinion.

    Jeff said, “I’m not suggesting that the library levy will pass easily, but I am suggesting that you avoid thinking that comments on the stories and blogs represent the equivalent of a valid poll of public opinion.”

    Jeff noted that comments on stories about recent school levies also tended toward the negative, “and yet all passed with more than 60 percent of the vote.”

    Jeff has a point, in that stories and blog posts tend to attract comments from those who object to or disagree with an issue.

    In retrospect, the introductory paragraph of my post does seems to imply that comments on the stories accurately reflect public opinion. I agree that may not be true, but I think my point is valid, in that there are people who feel negatively toward the library levy (in some cases any levy), and they’re vocal.

    Even Board President Teresa McDermott said the board needs to do a better job of addressing concerns of naysayers than it did in 2007.

    “We were just lulled into thinking everyone loved the library,” said Board President Teresa McDermott of Central Kitsap. “We’ve learned a lot and we’re coming back more prepared.”

    Read more: http://www.kitsapsun.com/news/2010/mar/23/kitsap-library-board-leaning-toward-a-levy/#ixzz0jb6pIOiG

    Chris Henry, reporter

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