Despite million-dollar discrepancy, city still saw better-than-budgeted sales tax growth for 2017; local retail sales better than in most area cities
Multiple city-produced sales tax reports last year had more than $1.1 million in discrepancies, the Journal-World has found. The discrepancies didn’t result in any missing money for the city, but they did mask a more than $550,000 windfall in sales tax money the city received in 2017.
Each month the city’s finance department compiles a report for city commissioners and the public measuring the amount of sales and use tax dollars the city has collected thus far in the year. The report compares the year-to-date collections to the amount the city budgeted to collect. However, for all of 2017, the city listed the wrong budgeted amount on the reports.
For the first five months of the year, the city listed a budget figure that was about $1.1 million higher than the actual budgeted amount. For the final seven months of the year, the city listed a budget figure that was about $560,000 higher than the actual budgeted amount.
The end result is the monthly reports delivered to city commissioners failed to report that the city’s sales and use tax collections in 2017 came in about $550,000 above what the city originally budgeted to collect for the year. Instead, the key chart in the year-end report showed sales tax collections came in about $380,000 less than budgeted.
Bryan Kidney, the city’s finance director, said this week the report was mislabeled. He said the amounts listed under the “city budget” category should have been described as projected sales tax numbers.
Kidney said the purpose of the report was to show city officials how sales tax collections were coming in compared with the latest projections. But the discrepancy has raised the question of whether the city is doing enough to track surplus tax collections.
The Journal-World never found a city document that listed the amount of surplus sales tax collections. Rather, the newspaper spent several hours gathering figures from city budget documents and state treasurer’s documents, and did calculations to determine the city collected $552,087 more in sales taxes than it budgeted for in 2017. The Journal-World then confirmed that number with the city. Kidney said he does plan for 2018 reports to list both the projected amount and the originally budgeted amount.
Sales tax collections have outsized importance in the city’s budget. At about $39 million, sales taxes are the second-largest revenue source in the city’s budget — trailing only water and sewer fees — and they are the largest revenue source in the city’s general operating fund.
The city approved its 2017 budget in August of 2016, meaning the city had to project in the summer of 2016 what it thought sales tax collections would be in 2017. Because of the difficulty in projecting sales tax revenues that far in advance, it is common for governments to offer updated sales tax projections as the year progresses.
However, those updated sales tax numbers play a different role from the original sales tax numbers that are included in the approved budget. That’s because city governments only get once chance per year to set their property tax rates. That’s done during the summer budget-making process.
The amount of money the city budgets to receive in sales tax dollars can have an impact in how the city sets its property tax rates. If the city is projecting a significant increase in sales tax collections, it can lessen pressures to raise the property tax rate. A projected decline in sales tax revenues can have the opposite impact.
Since at least 2012 the city has consistently had sales tax revenues that have exceeded the city budget. In fact, the period between 2011 and 2016 produced the largest growth in retail sales in recent memory, surpassing even the booming period of the late 1990s and early 2000s, according to city figures compiled by the Journal-World. During that time, sales tax collections grew by about 23 percent. However, city taxpayers haven’t seen a reduction in their property tax rates. From 2012 to 2017, the city’s mill levy has increased from 29.5 mills to 33.2 mills. Given that home values have been rising at a significant pace, the true amount of property tax increase most homeowners have seen is even greater.
The last several years have created a question for some: Is there a flaw in the sales tax system? When the city has the rare year that it collects less sales taxes than it budgets, there is pressure to either cut services and/or raise the property tax rates. However, as the last several years have shown, when the city collects more in sales taxes than budgeted, there isn’t much pressure to use the surpluses to lower property tax rates.
As someone who has watched city budgets for more than 20 years, I should note this isn’t something new. Surpluses haven’t received a lot of attention over the years, and in some key ways the budget process under City Manager Tom Markus is more transparent and easier to understand than past processes.
In the past, though, the expenditure portion of city budgets did come in pretty much at or under what the city approved as part of its budget process. Surpluses often would end up by default increasing the city’s rainy day funds, also known as fund balances. Now, however, what happens to the surpluses is a little harder to follow. In recent years, the city has exceeded its budgeted spending amount in some areas, following the idea that addressing an issue now will be cheaper than letting it wait until the next budget year.
It is not for me to say what is the correct process, but I can report that as property taxes took a big spike recently, there are more taxpayers wondering if growing sales tax revenues can help offset those property tax increases.
Having a better idea of how large our sales tax surpluses are may help answer that question.
For those of you who follow my monthly report of sales tax activity, here’s a look at how the year ended: Lawrence sales tax collections grew in 2017, but not as fast as they had in past years. Compared with other major retail centers in the state, though, Lawrence still had above-average growth.
Lawrence sales tax collections grew by 2.2 percent in 2017. That’s down from past growth rates. In 2016, the city posted a 5.5 percent growth rate. It also is worth noting that sales were slower in the second half of 2017 than the first half. So, that may be a trend to keep an eye on for 2018.
Compared with other large retail centers in Kansas, Lawrence fared a bit above average. Here’s a look:
— Lenexa: up 6.6 percent
— Shawnee: up 3.9 percent
— Olathe: up 2.7 percent
— Lawrence: up 2.2 percent
— Topeka: up 0.7 percent
— Overland Park: up 0.4 percent
— Saline County (Salina): up 0.2 percent
— Kansas City, Kan.: down 0.7 percent
— Sedgwick County (Wichita): down 1.4 percent
— Riley County (Manhattan): down 2 percent