Interim Finance Director Mike Bailey recommends 12% utility tax to help close Everett's $15M budget gap

Interim Finance Director Mike Bailey told the Everett City Council on March 18 that the city is facing a structural shortfall and that staff will recommend replacing the long-standing payment-in-lieu-of-tax (PILOT) on city utilities with a municipal utility tax.

Bailey said the council's retreat identified the issue and that "next year's deficit [is] forecasted currently at somewhat over 15 million dollars." He said administration will propose increasing the current 6% charge to 12% and that "if the council approved such an increase that would generate about $7.5 million to the city's general fund." Bailey said those funds would be permissible for any general governmental purpose at the council's discretion.

Bailey said the PILOT approach used historically by Everett (in place since 1983) is less defensible under state law than a straightforward utility tax and that legal research and consultation with outside counsel support transitioning to a utility-tax ordinance. "There's clear legal authority in the statutes and case law for the city to use a utility tax approach," he said.

On customer impacts, Bailey said the city's rate model shows the change would be passed through to ratepayers and that the administration anticipates "a rate increase of $10.74 on the average for a typical residential user." He said that increase would also be embedded in the wholesale prices Everett charges neighboring jurisdictions that buy Everett water; those jurisdictions could then apply their own local utility taxes on top when they bill their residents.

Ryan Sass of Public Works explained how the tax would appear on customer bills: "Typically that is built into the rate but on the bill there would be a line stating that there is a 12% utility tax included in in their rate," he said. Bailey and staff said they will provide more detail to council on how neighboring comparables (for example, Tacoma, Marysville and Mill Creek) operate and will follow up with specific data requested by council members.

Bailey told the council the administration plans to present the change as an ordinance to amend the municipal code; the ordinance would require three readings. Staff said they would seek to bring the proposal to council in April or by early May with a target to implement it midyear if approved.

Recognizing the burden on low-income residents, Bailey said staff will revisit and seek to expand existing assistance programs and improve outreach so eligible customers can access help. "We would want to ... revisit the programs we have in place to help those that have a difficult time paying for these basic necessities," he said.

The presentation also noted that staff will continue developing other revenue options identified at the retreat and will study the budgetary effects of recent state legislation on fire-service delivery (municipal fire authority discussion). No formal council action or vote occurred at the March 18 meeting; staff answered council questions and closed with an agreement to bring follow-up information to future committee and council meetings.

Next steps: staff will return with a draft ordinance, additional comparables and a detailed customer-impact analysis in April or early May, and the council will consider the ordinance in a standard three-reading process.