Bynum: County in sound financial position

LIHU‘E — Kaua‘i County Council Finance Chair Tim Bynum says “we’re in a sound financial position” thanks to years of conservative tax-and-spend policies.

During a council meeting on Wednesday, he said the county can afford new police cars, new staff positions and even create progressive tax breaks for homesteaders.

Apparently, while Hawai‘i’s other counties were lowing property taxes during the housing bubble, Kaua‘i County kept their tax rate the same, thereby creating large surpluses, he said.

As a percentage of Kaua‘i County revenues, taxes for the Homestead Class, meaning homes occupied by owners, rose from 7 percent in 2007 to 10 percent in 2010, though the exemption level and tax rate of $3.44 has remained the same.

As a way to employ underutilized surpluses, Bynum suggested raising the homeowner exemption level by $20,000. Currently, the exemption is $48,000 for those under the age of 60, $96,000 for people between ages 60 and 69, and $120,000 for those 70 and older.

The adjustment would cost an estimated $1.5 million, he said.

Further adding to the surplus were overestimations in the county’s financing needs for departments like police, a big-ticket item. The county has continuously and deliberately bloated its annual budget, anticipating that remaining unused funds would be applied to the following year’s “surplus.”

Unlike other counties, Kaua‘i does not have a designated “reserve” that it funds annually as a line item on its budget. Instead, it relies on its surplus account, which is where all the extra money goes, to fund additional expenses and money bills throughout the course of the year.

During the current fiscal year, Kaua‘i County Council has approved $9.7 million for special requests, $2.4 million to end furloughs and $2.8 million to expand bus services for six months, all of which came from uncommitted surplus funds of $43 million, according to Council Chair Jay Furfaro.

The surplus is made up of both committed and uncommitted monies. Each year, a portion of the uncommitted funds is also used to balance the budget of the upcoming fiscal year. But with rare exception, these funds are not spent, Bynum showed. 

For example, at the end of June 2010, Kaua‘i had $58.6 million in uncommitted funds, of which approximately $15.5 million was applied to this current fiscal year, leaving $43 million in the surplus account.

Bynum argues that any remaining uncommitted funds should be returned to the uncommitted surplus balance at the end of the fiscal year in order to obtain a truer picture of the county’s fiscal position.

In the near future, the county plans to create a reserve, which would designate these unused funds and potentially tighten departmental budgets.

All council members and Finance Director Wallace Rezentes Jr. seemed amenable to the idea of a 25 percent reserve fund level; however, a point of contention was raised as to whether the 25 percent should be based on the previous year’s revenues, the previous year’s expenditures or the upcoming year’s operating budget.

It is not a fine point to be made either. For example, 25 percent of fiscal year 2010 expenditures would be approximately $22.5 million, whereas 25 percent of next year’s operating budget would be $42 million.

The Government Finance Officers Association recommends using either the revenues or expenditures, Rezentes said. “It varies and is based on industry best practices. It’s a guide. If you have a larger budget, the reserve can be closer to the line. With places that are smaller with a less diversified economy, like Kaua‘i, you have to budget larger.”

Rezentes said he is confident the surplus at the end of FY 2011 will be at least 50 percent less than what is was at the end of FY 2010. He said property taxes, which are the county’s biggest source of revenue, have been falling annually as the values of real property across the county continue their decline.

Furthermore, Rezentes confirmed that there is a lag between property values and property taxes, meaning tax revenues from real property may decline in the coming years. Some analysts estimate the lag may be two to three years.

But Bynum said any shortfalls in the future could be readily made up elsewhere.

“Timeshares have a sweetheart deal and need to pay their fair share,” he said. “Vacation rentals are getting away with paying the same as homesteaders.” He said he plans to introduce two bills soon that would put an end to such practices.

Of next year’s estimated $165 million operating budget, approximately $116 million is for the General Fund, though the numbers are still up in the air until the mayor presents his supplemental budget report anticipated for May 5.

Meanwhile, the state Legislature is in the process of determining whether counties will continue to keep their current allotted share of transient accommodations taxes, as the state tries to meet its budget shortfall.

TAT is the second highest revenue generator for the county, contributing approximately $13 million to the budget last year.