BUSINESS OF THE CITY COUNCIL CITY OF MERCER ISLAND, WA

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1 BUSINESS OF THE CITY COUNCIL CITY OF MERCER ISLAND, WA November 2, 2009 Regular Business FUNDING FIRE PROTECTION COSTS IN WATER UTILITY (1 ST READING) Proposed Council Action: Conduct first reading of proposed Ordinance No. 09C-13 and set for second reading. DEPARTMENT OF COUNCIL LIAISON Finance (Chip Corder) n/a EXHIBITS 1. Proposed Ordinance No. 09C-13 APPROVED BY CITY MANAGER AMOUNT OF EXPENDITURE $ n/a AMOUNT BUDGETED $ n/a APPROPRIATION REQUIRED $ n/a SUMMARY In October 2008, the Washington State Supreme Court ruled in Lane vs. City of Seattle that providing fire hydrants is a government responsibility for which the general government of the area must pay and that Seattle Public Utilities cannot charge ratepayers for hydrants which are a general government responsibility. More simply put, all fire hydrant and suppression related costs should be funded by taxpayers in the General Fund rather than by ratepayers in the Water Utility Fund. This ruling impacts all municipal water utilities in the state and reverses a practice that has existed for decades. In response to this ruling, the City of Seattle increased its water utility tax, which is a General Fund revenue source, from 15.54% to 19.87% to pay for its fire hydrant and suppression related costs that were previously funded by water utility rates. In May 2009, the City of Mercer Island contracted with FCS Group, the City s utility rate consultant, to conduct a cost of service study to identify the fire hydrant and suppression related costs contained in the City s Water Utility Fund. FCS Group s analysis encompassed the water utility s storage, pumping, transmission and distribution, and hydrant systems, resulting in a total cost estimate of $70,295. While a specific compliance deadline has not been established by the State Auditor s Office with respect to this ruling, the Finance Director recommends an implementation date of January 1, 2010 for the City of Mercer Island. The City has two funding options: 1) Use existing tax revenues in the General Fund, which would require a corresponding expenditure reduction of $70,295; or 2) Institute a 1.7% water utility tax that would generate $70,295 in revenue and that would be applied only to the water utility portion of the City s bi-monthly utility bill to customers. Page 1

2 In light of the projected $850,000 General Fund revenue shortfall in 2010 relative to budget, option #1 would be a challenge. Option #2, which follows the City of Seattle s approach, would have a net impact of $0 on the average residential utility customer. In other words, there would be a 1.7% water rate decrease on the 2010 bi-monthly utility bill that would be offset by a 1.7% water utility tax. Further, the water utility tax would not generate additional revenue for the City as a whole. From an accounting perspective, the water utility tax would generate $70,295 in new revenue to the General Fund, which would be transferred to the Water Utility Fund to replace the $70,295 reduction in water rates. Because the fire hydrant and suppression related costs are interwoven throughout the water utility, they cannot be easily extracted and moved from the Water Utility Fund to the General Fund. Consequently, these costs would remain in the Water Utility Fund. There would simply be a change in funding sources. Given all of the above, staff recommends option #2, which requires that Chapter 4.12 (Utilities Tax) of the Mercer Island Municipal Code be amended to include water utilities. Currently, the City collects a utility tax from only electricity (6%), natural gas (6%), telephone/cellular (6%), cable (7%), and garbage (7%) utilities. The amended ordinance is attached as. If approved, a revised utilities tax rate resolution, reflecting a 1.7% tax rate on water utilities effective January 1, 2010, will be presented to the Council as part of the mid-biennial budget review agenda bill on November 16, RECOMMENDATION Finance Director MOVE TO: Conduct first reading of proposed Ordinance No. 09C-13 and set it to November 16, 2009 for second reading and adoption. Page 2

3 CITY OF MERCER ISLAND ORDINANCE NO. 09C-13 AN ORDINANCE OF THE CITY OF MERCER ISLAND, WASHINGTON, AMENDING MERCER ISLAND CITY CODE CHAPTER 4.12, UTILITIES TAX TO EXTEND THE TAX TO WATER UTILITIES. WHEREAS, all fire hydrant and suppression related costs should be funded by taxpayers in the General Fund rather than by ratepayers in the Water Utility Fund, per the ruling in Lane v. City of Seattle; and WHEREAS, the City of Mercer Island contracted with the FCS Group, the City s utility rate consultant, to conduct a cost of service study to identify the fire hydrant and suppression related costs contained in the City s Water Utility Fund; and WHEREAS, such analysis encompassed the water utility s storage, pumping, transmission and distribution, and hydrant systems; and WHEREAS, the Finance Director recommends an implementation date of January 1, 2010 for the City to be in compliance with the ruling; and WHEREAS, instituting a tax on water utilities would generate funds to the General Fund that would replace the corresponding decrease in utility rates, resulting in a net impact of $0 on the average residential utility customer; NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF MERCER ISLAND, WASHINGTON DOES HEREBY ORDAIN AS FOLLOWS: Section 1: MICC Chapter 4.12 Utilities Tax. MICC Chapter 4.12 Utilities Tax is hereby amended, as follows: Exercise of power to license and tax for revenue. The provisions of this chapter shall be deemed to be an exercise of the power of the city to license and tax for revenue Occupation license requirements. No person, firm, corporation, or legally recognized entity shall engage in or carry on any business, occupation, act or privilege for which a tax is imposed by MICC without first having obtained, and being the holder of, a license so to do, to be known as a business license. Each such person, firm or corporation shall promptly apply to the city clerk for such license upon such forms as the clerk shall prepare and provide, giving such information as the clerk shall deem reasonably necessary to enable him or her to administer and enforce this chapter; and, upon acceptance of such application by the clerk, he or she shall thereupon issue such license to the applicant. Such occupation license shall be personal and nontransferable and shall be valid as Page 1

4 long as the licensee continues in said business, and complies with this chapter, and renews it in accordance with other applicable ordinances Tax levied. A tax is levied, in such amount as shall be determined by the city council from time to time by ordinance, said tax to be imposed upon and collected from every person, firm, corporation or other entity engaged in carrying on the following types of businesses within or partly within the corporate limits of the city, said tax being for the privilege of being allowed to do business as defined in this section: A. Upon every one engaged in or carrying on a telephone business, a tax based on the total gross income from such business in the city. Gross income for this purpose shall not include charges which are passed on to the subscribers by a telephone company pursuant to tariffs required by regulatory order to compensate for the cost to the company of tax imposed by this chapter. The term telephone business means the business of providing access to a local telephone network, local telephone network switching service, toll service, or coin telephone service, communication or transmission for hire via a local telephone network, toll line or channel, or similar communication or transmission system. It includes cooperative or farmer line telephone companies or associations operating an exchange. Telephone business does not include the providing of competitive telephone service, nor the providing of cable television service. In determining gross income from such telephone business, including intrastate toll telephone service, the taxpayer shall include 100 percent of the gross income derived from such business in the city. The term competitive telephone service means the providing by any person of telecommunications equipment or apparatus, or service related to that equipment or apparatus such as repair or maintenance service if the equipment or apparatus is of a type which can be provided by persons that are not subject to regulation as telephone companies under RCW Title 80 and for which a separate charge is made; B. A tax on the sale, delivery or distribution of electricity and electrical energy and for the privilege of carrying on said business, said tax to be based on the total gross income from such business in the city; provided, however, that there shall not be any tax levied for installation charges of electrical units; C. A tax on the sale, delivery, distribution or furnishing of natural gas for domestic, business or industrial consumption and for the privilege of carrying on said business such tax to be based on the total gross income from such business in the city; provided, however, that there shall not be any tax levied for installation charges of gas energy units; D. A tax based on the total gross income derived from the business of furnishing community antenna television (cable television) services in the city; E. A tax based on the total gross income derived from the business of collecting, handling or transporting garbage and refuse within the city; F. Upon everyone engaged in or carrying on a cellular telephone business or service, a tax based on the total gross income from such business. Cellular telephone business or service means a two-way voice and data telephone/telecommunications system based in whole or substantially in part on wireless radio communications and which is not subject to regulation by the Washington Utilities and Transportation Commission (WUTC). This includes cellular mobile service. The definition of cellular mobile service includes other wireless radio communications services such as specialized mobile radio (SMR), personal communications services (PCS), and Page 2

5 any other evolving wireless radio communications technology which accomplishes a purpose similar to cellular mobile service. Cellular telephone business or service does not mean telephone business or competitive telephone service as previously defined; 1. There shall be excluded from the total gross income upon which the tax is computed the following: a. That portion of the gross income derived from charges to another telecommunications company, as defined in RCW , for connecting fees, switching charges, or carrier access charges relating to intrastate toll telephone services, or for access to, or charges for, interstate services; b. Charges by a taxpayer engaging in a telephone business to a telecommunications company, as defined in RCW , for telephone service that the purchaser buys for the purpose of resale; c. Adjustments made to a billing or to a customer account or to a telecommunications company accrual account in order to reverse a billing or charge that had been made as a result of third-party fraud or other crime and was not properly a debt of a customer; d. Charges to cellular telephone service subscribers passed on to compensate for the cost to the company of the tax imposed by this chapter; 2. Service Address. Payments by a customer for the telephone service from telephones without a fixed location shall be allocated among taxing jurisdictions to the location of the customer s principal service address during the period for which the tax applies. There is a presumption that the service address a customer supplies to the taxpayer is current and accurate, unless the taxpayer has actual knowledge to the contrary; 3. Roaming Phones. When the service is provided while a subscriber is roaming outside the subscriber s normal cellular network area, the gross income shall be assigned consistent with the taxpayer s accounting system to the location of the originating cell site of the call, or to the location of the main cellular switching office that switched the call; 4. Dispute Resolution. If there is a dispute between or among the city and another city or cities as to the service address of a customer who is receiving cellular telephone services and the dispute is not resolved by negotiation among the parties, then the dispute shall be resolved by the city and the other city or cities by submitting the issue for settlement to the Association of Washington Cities (AWC). Once taxes on the disputed revenues have been paid to one of the contesting cities, the cellular telephone service company shall have no further liability with respect to additional taxes, penalties, or interest on the disputed revenues so long as it promptly changes its billing records for future revenues to comport with the settlement facilitated by AWC; 5. The city manager or his/her appointed designee is authorized to represent the city in negotiations with other cities for the proper allocation of taxes due under this subsection F; 6. No change in the rate of tax upon persons engaging in providing cellular telephone service shall apply to business activities occurring before the effective date of the change and, except for a change in the tax rate authorized by RCW , no change in the rate of the tax may take effect sooner than 60 days following the enactment of the ordinance establishing the change. The city manager or his/her designee shall send to each cellular telephone service company, at the address on its license, a copy of any ordinance changing the rate of tax upon cellular telephone service promptly upon its enactment. Page 3

6 G. A tax on the sale, delivery, distribution, furnishing or maintenance of water services for residential, commercial, or public consumption and for the privilege of carrying on said business, such tax to be based on the total gross income from such business in the city; provided, however, that there shall not be any tax levied for water service installation charges; Gross income of the business defined. Gross income of the business means the value proceeding or accruing by reason of the transaction of the business engaged in and includes gross proceeds of sales, compensation for the rendition of services, gains realized from trading in stocks, bonds, or other evidences of indebtedness, interest, discount, rents, royalties, fees, commissions, dividends, and other emoluments however designated, all without any deduction on account of the cost of tangible property sold, the cost of materials used, labor costs, interest, discount, delivery costs, taxes, or any other expense whatsoever paid or accrued and without any deduction on account of losses, except as otherwise authorized in this chapter Deductions. In computing said annual tax, there shall be deducted from the gross income the following items: A. The amount of credit losses and uncollectibles actually sustained by the taxpayer; B. Amounts derived from transactions in interstate or foreign commerce or from any business which the city is prohibited from taxing under the Constitutions of the United States or the state Tax rate. The tax rate imposed on the gross income from conducting an electrical energy, natural gas, telephone, cellular phone business/services shall be six percent. Other tax rates shall be fixed by ordinance or resolution of the city council from time to time Due and payable when Collection on tax applicable to cable television service, garbage refuse service, and cellular telephone business/service. The tax imposed by MICC (D), (E) and (F) on gross income derived from cable television service, garbage and refuse service, and cellular telephone business/service shall be due and payable quarterly on the fifteenth day of April, July, October and January of each year. On or before such due date, the taxpayer shall file with the city clerk a written return, upon such form and setting forth such information as the clerk shall reasonably require, together with payment of the amount of the tax Due and payable when Collection of tax applicable to telephone service, sale of electricity, and sale of natural gas. The tax imposed by MICC (A), (B) and (C) on gross income derived from telephone business, electricity and electrical energy and natural gas shall be collected by the city on a monthly basis and shall be due and payable on the fifteenth day of the month following the month in which the revenue is received. On or before said due date, the taxpayer shall file with the city clerk a written return upon such form and setting forth such information as the clerk shall reasonably require, together with the payment of the amount of the tax. Page 4

7 Due and payable when Collection of tax applicable to water service. The tax imposed by MICC (G) on gross income derived from water service shall be collected by the city on bi-monthly basis and shall be due and payable on the fifteenth day of the month following the month in which the revenue is received. On or before said due date, the taxpayer shall file with the city clerk a written return upon such form and setting forth such information as the clerk shall reasonably require, together with the payment of the amount of the tax Record of income. Each taxpayer shall keep records reflecting the amount of his/her gross operating income, and such records shall be open at all reasonable times to the inspection of the city clerk, or his/her duly authorized subordinates, for verification of said tax returns or for the fixing of the tax of a taxpayer who fails to make such returns Failure to pay. If any person, firm or corporation subject to this chapter fails to pay any tax required by this chapter within 30 days after the due date thereof, there shall be added to such tax a penalty of 10 percent of the amount of such tax, and any tax due under this chapter and unpaid, and all penalties thereon, shall constitute a debt to the city and may be collected by court proceedings, which remedy shall be in addition to all other remedies Overpayment. Any money paid to the city through error or otherwise not in payment of the tax imposed in this chapter or in excess of such tax shall, upon request of the taxpayer, be credited against any tax due or to become due from such taxpayer under this chapter or, upon the taxpayer s ceasing to do business in the city, be refunded to the taxpayer Administration and enforcement. The city clerk is authorized to adopt, publish and enforce, from time to time, such rules and regulations for the proper administration of this chapter as shall be necessary, and it shall be a violation of this chapter to violate or to fail to comply with any such rule or regulation lawfully promulgated under this chapter Violation Penalty. Any person, firm, or corporation subject to this chapter who fails or refuses to apply for an occupation license or to make said tax returns or to pay said tax when due, or who makes any false statement or representation in or in connection with any such application for an occupation license or such tax return, or otherwise violates or refuses or fails to comply with this chapter, shall be guilty or a misdemeanor. Section 2: Severability/Validity. The provisions of this ordinance are declared separate and severable. If any section, paragraph, subsection, clause or phrase of this ordinance is for any reason held to be unconstitutional or invalid, such decision shall not affect the validity of the remaining portion of this ordinance. The City Council hereby declares that they would have passed this ordinance and each Page 5

8 section, paragraph, subsection, clause or phrase thereof irrespective of the fact that any one or more sections, paragraphs, clauses or phrases were unconstitutional or invalid. Section 3: Ratification. Any act consistent with the authority and prior to the effective date of this ordinance is hereby ratified and affirmed. Section 4: Effective Date. This Ordinance shall take effect and be in force on 30 days after its passage and publication. PASSED by the City Council of the City of Mercer Island, Washington at its regular meeting on the 16th day of November, 2009 and signed in authentication of its passage. CITY OF MERCER ISLAND Jim Pearman, Mayor ATTEST: Allison Spietz, City Clerk Approved as to Form: Katie Knight, City Attorney Date of Publication: Page 6