The city of Federal Way is one step closer to charging water and sewer customers a 7.75-percent utility tax.

The City Council on Tuesday night voted 5-2 to approve the first reading of an ordinance that would levy the tax on Lakehaven Water and Sewer customers. Deputy Mayor Susan Honda and Councilman Jesse Johnson voted against the tax, which would generate about $980,000 a year.

The council is expected to vote on whether to enact the tax at its March 20 meeting, which begins at 7 p.m. at City Hall, 33325 Eighth Ave. S.

The proposed tax is one of several measures suggested to help cover an $850,000 budget deficit.

“This is being thoughtfully considered and is not an easy decision to make,” Councilman Mark Koppang said. “I believe, though, looking at the evidence we have, it becomes much easier from a logic standpoint.”

City Finance Director Adé Ariwoola told the City Council at a study session on Feb. 20, the anticipated 2018 shortfall is due to the 2017-18 biennial budget being approved without fully funding the city’s equipment replacement reserve, as well as increased inmate costs at SCORE Jail and increases in minimum wage for temporary employees in the parks and public works departments.

To address the increases and resulting shortfall, Mayor Jim Ferrell authorized delaying the hire of five new police officers until July, which will save about $155,000. Last fall, the city received a Community Oriented Policing Services Hiring Program grant for $625,000 over a three-year period to raise the department’s number of officers from 131 to 136.

Ferrell also authorized extending the useful life of police patrol cars from five to seven years, which will save $104,000. Filling one staff position at the Performing Arts and Event Center will be suspended until business increases at the newly opened facility, as well, which will save $71,000.

The City Council also unanimously passed the first reading of an ordinance removing the cap on an admission tax charged on tickets sold at venues including the Performing Arts and Event Center, Wild Waves and movie theaters. Currently, the city caps the admissions tax at 60 cents per ticket. Removing the cap could generate an additional $218,000 a year. The council will vote on the second reading of that measure at the March 20 meeting.

The city will need to use $300,000 from its reserves to cover the remaining expenses in the 2018 budget, Ariwoola said, and the utility tax is needed to repay the reserves and build revenue for future expenses.

“The only way we can move forward with the $300,000 interfund loan is if the council approves the utility tax,” Ferrell told the council.

The city currently levies a 7.75-percent utility tax on gas, electric, cable, phone and other utilities, Ariwoola said. Water and sewer is not included under the current utility tax ordinance.

On a $60 water and sewer bill, the 7.75-percent tax would cost $4.65.

In 2016, Ferrell proposed levying the utility tax on Lakehaven to cover the cost of hiring additional police officers but found other revenue instead. The city collects a 3.6 percent franchise fee from Lakehaven, but officials have said it costs the city more to assess it than it receives in return. If implemented, the utility tax would replace the franchise fee.

While running for election last summer, council members Johnson and Hoang Tran and incumbent Martin Moore, as well as Honda, who was challenging Ferrell, said they opposed a utility tax. Ferrell also said he opposed the tax.

Honda said during Tuesday’s council meeting, the decision was difficult.

“If I vote no tonight that doesn’t mean I might not vote yes in two weeks,” she said before Tuesday’s vote. “I have a lot more things I need to be looking at in the next two weeks to make this work for me.”

Moore agreed that the decision was hard.

“The easier thing to do … is to do what is politically right and certainly vote no on this just to save my seat, but, at the end of the day … we have a big decision to make,” he said.

Moore said he would like the city to host a town hall meeting as the council discusses the 2019-20 budget in coming months.

“I want to be able to have an environment where the public can ask questions to us and have their needs met,” he said.

Tran said, in the two months since joining the council, he has learned a lot about the city, which led him to change his stance on the utility tax.

“Sitting in here knowing that city staff are underpaid [and] overworked, I cannot possibly ask them to work more with less,” he said. “I am going to vote yes. If that only earns me one term on this council, so be it, but I need to make the right decision.”

In the two weeks following the Feb. 20 study session, Ariwoola said he received a number of questions from council members regarding other possible solutions to the deficit, including reducing staff or finding efficiencies in the way city business is conducted.

During Tuesday’s meeting, several department heads – including public works, community development, parks, police and information technology – addressed the council about their staffing situations, stating they are doing more with fewer employees than before the recession.

“The challenge is you could cut staff,” Public Works Director Marwan Salloum said. “You could cut the budget, but you are losing services, and that is what you need to evaluate: Are we able to lose services? You could shift priorities and tell us what you want done, and we will do it. You are not going to get everything done for the budget that you have today.”

Concerns over utility tax

Tim McClain, president of the Lakehaven Board of Commissioners, told the council, if Lakehaven and the city worked together in good faith, another option may be presented other than imposing a utility tax.

“If our efforts and corroboration are successful, we would avoid all the expense and unnecessary antagonism that can be the natural by-products of conflict,” he said. “I think the citizens of this city are owed the efforts to make the most of an opportunity to find a cooperative solution.”

Johnson suggested the city schedule a meeting with Lakehaven before the March 20 council meeting.

Lakehaven General Manager John Bowman said Wednesday morning that the district questions the legality of the proposed utility tax and has been considering its options and consulting legal counsel.

“We have always been operating that they could not do that,” he said of the city imposing the tax. “We really have to look closely at that. They seem to feel they can at this point.”

Deputy City Attorney Mark Orthmann told the council Tuesday, the proposed utility tax was “statutorily authorized.”

He said more than 150 cities in the state have taxes on water and sewer utilities.

“This is a very robust source of revenue that many cities throughout the state already take advantage of,” he said.

There are some water and sewer customers in the city served by Tacoma Public Utilities who currently pay a utility tax, Ariwoola said. If Federal Way approves its utility tax, the fees collected by Tacoma Public Utilities will go to Federal Way, he said.