Services to the Kirkland annexation area may need to be phased in slower than first anticipated, but the overall outlook of the preliminary budget is better than expected, according to a report given to the Kirkland City Council on July 20.

But in the end, timing will be everything.

“We were really pleased that (over the two-year period) it came out this close,” said Tracey Dunlap, director of finance.

The cost of annexation during the first year will be $1.2 million more than revenues generated, but the second year of annexation revenues will cut the total loss for the city down to $7,804 for the two-year period. The preliminary budget includes all information currently available, but the city is still working to get a more accurate projection.

The annexation area, which includes the neighborhoods of Kingsgate, Finn Hill and North Juanita, will generate more than $10 million in 2011 and $20 million in 2012. The disparity is in part from the annexation date being applied on June 1, 2011 and not Jan. 1.

New Kirkland City Manager Kurt Triplett emphasized two points: “First, that the services in the annexation area are supported by revenues generated in that area, and second, that while we will be phasing these services in over time, we are trying to maximize the services that we can provide the annexation area based on the existing revenue projections.”

City staff began the budget process by asking all departments for a preliminary service package and budget for the annexation area. The recommendations were based on a revenue-based approach.

Dunlap said city staff was pleasantly surprised by some of the numbers, as staff had been very conservative in their projections.

“These are some pretty big numbers,” said Dunlap of the overall budget. “It gets pretty intimidating at times.”

The city has received information from the county on revenues generated to give city staff a better idea of what they are dealing with. But not all revenues are created equal.

“Some of this will change as we are able to get new data … this is just kind of a preview,” said Dunlap. “Some of the things we can’t get information on. For example, the county does not have a utility tax, so we can’t get utility tax information. We can only use assumptions based on our own experience.”

One of the biggest issues from the start has been the sales tax credit in a depressed economic environment, which the state offered cities that annex county areas. The state turned down the city’s request to get the state sales tax credit prior to June 2011.

The city is projected to get nearly $370,000 from the credit in 2011 and a little over $1 million in 2012.

The sales tax projections in the preliminary budget are different from when the city began the process of looking into annexation more than a year ago.

“When we started, our sales tax revenue (for Kirkland) was about $16 million and now it is $12 million,” said Dunlap.

The sales tax credit is .02 percent of the sales tax collected by the state and then returned to Kirkland after annexation. With the drop in sales tax revenue in Kirkland and the state, the projected amount received back in credit will be less.

“If sales tax recovers, that number will go back up,” Dunlap noted.

The county is stepping in to offer some additional revenue.

“… The city will receive the county road levy that is collected after June 1 and a pro-rated share of the fire district levies collected after the effective date,” said Dunlap.

When the city actually receives that money is still to be determined though.

The county, as a general practice does not transfer the second half funds until the beginning of the next year. The city, however, is attempting to get the funds as they are generated.

“This money is so large to our cash flow that it is important we get it (in a) timely (manner),” said Dunlap.

That tax money is the most substantial revenue-generating income from the annexation area in 2011, estimated at $3.2 million.

The next closest revenue source in 2011 will be the city’s franchise fee with the Northshore Utility District, estimated at nearly $900,000.

In 2012, with an entire calendar year of revenues, the income outlook will change with eight different sources generating over $1 million, including property tax revenue. Those eight sources are in stark contrast to the single source, county road levy of over $1 million in 2011.

Property taxes become the dominant revenue source for the city at $5.6 million, one-quarter of the total revenues for 2012.

But one revenue source could be drastically changed this November. The $445,000 in revenue from the Liquor Control Board and Excise tax receipts in 2012 could change dramatically, as there are two ballot initiatives set for November to privatize the sale of liquor.

“That is a significant revenue source for both the annexation area and the City of Kirkland,” said Dunlap. “It is amazing what a large number it is.”

The biggest one-time cost for any city department is in the police department in 2011 as they take over the entire annexation area from the the King County Sheriff’s office. The KPD has set its one-time expenditure for the transition at $1.1 million, with $432,000 going towards the purchase of new patrol vehicles and $226,000 going towards investigators. In contrast, the Fire Department expenditures are a fraction of the police expenditures, as the department already serves the majority of the annexation area.

The next highest department request of a one-time cost in 2011 is Surface Water Management Fund at $318,000.

In 2012, the outlook is different with the Information Technology Fund dominating one-time expenditures, totaling nearly $623,000.