City and Borough of Juneau
Assembly Finance Committee Meeting
Wednesday, September 22, 2010 - 5:30 p.m.
Assembly Chambers

I. Call to Order

II. Roll Call

III. Approval of Minutes
August 4, 2010

IV. Port Development Fee Sunset
On May 15, 2002, the CBJ implemented a Port Development Fee charged to cruise ships on a per passenger basis similar to the Marine Passenger Fee. The original fee included a sunset date. This sunset date and the original fee structure have both been modified since the original adoption. The current $3.00 per passenger Port Development Fee is scheduled to sunset on January 7, 2011.

In 2010, the State modified the application of the State’s Marine Passenger Fees. This new law allows for an offset of cruise ship passenger fee payments made to local governments on a dollar for dollar basis against the State’s Marine Passenger Fees. This change will take effect starting in 2011. The section of the newly enacted statutes applicable to the offset reads as follows –

Sec. 43.52.255. Tax reduction for local levies. The tax imposed on a passenger by AS 43.52.200 - 43.52.295 shall be reduced by the total amount of a tax on the passenger traveling on a commercial passenger vessel that is imposed and collected by a home rule or general law municipality under a law enacted before December 17, 2007.

The CBJ Law Department was asked if extending or removing the sunset date on the current resolution, 2423(b)am, would preclude the cruise ships from being allowed to offset the $3.00 CBJ fee from the State’s fee under section 43.52.255. The Law Department has indicated that they believe that the removal of the sunset date would not and the cruise ships would be allowed to offset the fees. However, the Law Department has indicated that State could always disagree with this position. The Law Department’s opinion is included in the packet.

V. Using Property Taxes to Offset Property Development User Fees
A proposal was brought forth by Assembly Member Anderson to consider eliminating or reducing CBJ development fees and replacing the lost revenues with a mill levy increase. Mr. Anderson feels this shift would result in no material change in CBJ revenues, improve community development and allow the taxpayers the opportunity to deduct the additional property tax against their federal income taxes (less regressive). A memo from Mr. Anderson is included in the packet.

The CBJ Assembly has approved policies regarding the setting of taxes and fees (“Revenues”). The policy, shown on page 22 and 23 of the budget document, includes the following provisions for revenues.

Revenue. A fair balance between the imposition of property tax mill levy, sales tax and user fee structures will be achieved to fund services and maintain the quality of life Juneau residents expect. A broad tax base will equitably distribute the tax burdens across the greatest populations. Mill levies, sales tax rates, sales tax exemptions, and user fee structures will be reviewed annually. Request for tax exemptions and fee waivers will be considered annually by the assembly as part of the budget process.

VI. Sales Tax Single Item Cap – Jewelry
It has been requested that the Committee consider modifying the Sales Tax Code to remove the exemption CAP on the sale of jewelry (luxury items). The CBJ has adopted a sales tax exemption, 69.05.040(21) for the sale of single item that reads as follows –

That part of a selling price of a single item that exceeds $7,500. For the purpose of this subsection, a single item is:
(a) An item sold in a single sale consisting of integrated and interdependent component parts affixed of fitted to one another in such a manner as to produce a functional whole; or
(b) A single delivery of fuel oil in excess of 50,000 gallons delivered by marine transportation to a single customer.

This current exemption is very broad and applies to all tangible single items above $7,500. This would include the sale of jewelry. The CBJ has exempted, on average per year, for the past 4 years just over $2 million in jewelry gross sales. In 2009, we exempted $114,659 in sales taxes. The vast majority of these sales occur in the 2nd and 3rd quarters, 99.58%. The following is the average sales by quarter for the calendar years 2006 through 2009

1st quarter

$6,926

0.34%

2nd quarter

413,573

20.37%

3rd quarter

1,608,126

79.21

4th quarter

1,525

0.08%

It is interesting to note that the sale of single items (all) over the $7,500 cap dropped in calendar year 2009 from 2008, by 33.9% while the sale of jewelry during this same period increased by 6.3%.

It has been recommended that the AFC and Assembly consider modifying the sales tax exemption single item cap to exclude jewelry sales. If the AFC and Assembly wish to narrow the $7,500 single item cap exemption to excluded jewelry the Sales Tax Administrator has suggested adding exemption limitation wording such as -

“except for any article commonly or commercially known as jewelry, whether real or imitation, sold by the manufacturer, producer, or importer thereof.”

A memo from the Sales Tax Administrator, Joan Roomsburg, is included in the packet.

VII. FY11 Financial Audit
Our 5-year audit contract with Elgee Rehfeld Mertz (ERM) will expire with the FY10 audit. Prior to our FY11 year end, we will need to make arrangements for a new contract or extending the current agreement. Charter Section 9.18, places the responsibility for designating an auditor with the Assembly. This can be done through a specific selection or a competitive solicitation. A general recommendation is that audit firms be changed every few years and a selection made through a competitive process. Changing auditors brings in fresh views and ideas. Procuring this service through a competitive process helps insure audit costs are kept to appropriate amounts. For Juneau the down side of a competitive solicitation process is the availability of firms. I am not aware of any other firms in Juneau besides ERM with the staffing or expertise to audit the CBJ's records. In the lower 48 or even in Anchorage, it is common to have multiple firms available. As such, a change in audit firms for CBJ would almost certainly result in having to hire a firm from outside of Juneau.

Another issue to consider for the current year is the data system development (PRISM). We will be bringing on the new core systems in the next few months and will continue subsystem development well into next calendar year. With this workload, it is not practical to conduct a solicitation and change auditors during the system development period. If the Assembly decides to move forward with a competitive solicitation, I recommend we extend the current contract with ERM for one year and do the solicitation in 2011.

I have discussed with Max Mertz, Partner, ERM's interest in continuing as CBJ's general financial auditor. Max indicated that they have a strong interest in maintaining this contract. He also indicated that they would –

Continue the current level of auditing services plus some additional testing of the new data systems,
Request a 5 year contract,
Propose a contract fee starting at the current rate plus CPI inflation adjustments, and
Continue to provide an extra 80 free hours of non-audit services per year.

The proposal as presented by Mr. Mertz will address our auditing needs. Our contractual experience with ERM has been good. ERM has been responsive in addressing accounting and auditing needs as well as effectively working with staff. The five-year contract request is a fairly standard term for audit contracts.

Overall we have been satisfied with ERM performance. Their staff has been competent, helpful, responsive and available. The overall benefits of renewing the contract seem to outweigh the potential benefits of a fresh view. Charter Section 9.18 places the responsibility for designating an independent auditor with the Assembly.

VIII. Information Item - Senior Citizen/Disabled Veterans Hardship Exemption
The City and Borough has opted to provide a Senior Citizen/Disabled Veterans Hardship Exemption allowed under State Statute, 29.45.030(3). This is an optional exemption and governing bodies for taxing jurisdictions may opt by ordinance to provide this exemption. Not all communities in the state have opted for this exemption (for example, Anchorage and Fairbanks have not). The current regulations require us (all governments opting for this exemption) to exempt the property taxes in excess of 2% of the taxpayer’s gross household income of qualifying residential property. For senior citizens and disabled veterans with more expensive homes, the 2% threshold results in hardship gross household income levels being quite high. This has raised a question about the effectiveness of this exemption and how well it targets hardship situations. The effectiveness of the exemption has become a larger question over the past couple of years as the number of individuals taking advantage of the exemption has grown.


A summary of the exemption activity for the past seven years is presented below.

Year
# of Exemptions Given
Average Property Value
Highest Property Value
Average Household Income
Highest
Household
Income
Average Tax Exemption

2004

10
$ 355,780
$ 507,900
$ 27,908
$ 59,567
$ 1,911
2005
31
$ 336,248
$ 561,300
$ 34,156
$ 73,847
$ 1,361
2006
33
$ 406,242
$ 624,200
$ 44,092
$ 114,836
$ 1,732
2007
39
$ 411,895
$ 658,600
$ 49,630
$ 132,511
$ 1,721
2008
51
$ 423,053
$ 838,600
$ 60,743
$ 184,356
$ 1,598
2009
84
$ 440,414
$ 908,500
$ 70,823
$ 205,549
$ 1,661
2010
185
$ 463,892
$ 1,476,800
$ 78,403
$ 252,467
$ 1,746

The 2010 hardship exemption by individual parcel been included in the packet.

Presented below is a chart showing the 2% gross earnings threshold in relationship to property assessed values.

Hardship Exemption – Gross Household Earnings Threshold

The State Assessor, Steve Van Sant, has indicated that the current regulations would allow the CBJ to adopt limits to the application of 2% and not modify the 2% rate itself. Our Law Department disagrees with this position and feels the State’s regulations do not allow this flexibility. However, the State Assessor has indicated that there could be some changes in the regulations in the next few months that would allow exemption flexibility. These changes, if they occur, could allow local governments to adopt hardship limitation and/or different hardship application rate(s). For example, in the future, we might be able to adopt a progressive hardship exemption rate (1.5% for this gross income range and 2% for this and 2.5%, etc). A graduated exemption would allow the exemption to be phase out on income rather than just a single qualifying threshold.

In trying to target this exemption the Mat-Su Borough has adopted code provisions that limit the application of the hardship exemption. The Kenai Peninsula Borough is also looking at options to better target their senior citizen/disabled veterans’ hardship exemption. The Mat-Su Borough has adopted the following limitations;

• “The applicant’s gross family income, from all sources in the prior year, must not exceed 135 percent of the poverty guidelines as established by the United States Department of Health and Human Services for a similar sized household in the state of Alaska for the year requested.” and
• The new worth of the applicant on the date of application may not exceed $250,000 including the first $150,000 of the market value of the principle residence of the applicant for which the hardship tax exemption is requested.

For reference, the Mat-Su’s code has been included in the packet.

As noted above, our Law Department feels that the State’s regulations as adopted do not allow the flexibility to adopt hardship application limitations. Without regulation changes our options would be limited to leaving the exemption as is or fully removing this optional exemption. Another option is for the Assembly to request that the state consider amending the hardship regulations to allow local flexibility. The Law Department has indicated there is a specific procedure to make this request.

Federal Department of Health and Human Services Proverty Guidelines

IX. Adjournment