The state’s budget woes have had far-reaching effects for everything from the state ferry system to health insurance. But the effects may also hit Kirkland and the annexation of the Kingsgate, Finn Hill and Juanita neighborhoods.

The city is preparing for the possibility of receiving less or none of the promised state sales tax credit that will help pay for the transition. The potential impacts range from diminished services to the city, to deferring the annexation date. However, city officials feel it is highly unlikely.

“It would be worse if we did not prepare for the possibility,” said Kirkland Mayor Joan McBride. “There is no indication that the funds are in danger.”

Nevertheless, the city will discuss the issue on Tuesday at the City Council meeting.

“It strongly concerns us enough to make it a top priority,” said Kirkland City Manager Kurt Tripplet. “But what could happen is really unknown at this time because it depends on what is passed. But it would be a real challenge without the sales tax credit.”

The end result could be anything from receiving the entire sales tax credit that was promised to just a reduction, to a deferral, to shortening the time span the city receives the funds, which is set at 10 years, to the elimination of the funds altogether. City staff is not recommending to the council a deferral of the annexation date.

All of the financial planning scenarios for annexation assumed annual revenue of approximately $3.4 million. Gov. Chris Gregoire’s initial budget, which addresses the state shortfall, does not include a reduction of the sales tax credit, according to city documents.

“We are pleased that she has left it in the budget,” said Triplett, who has testified in front of the Local Governments Committee on the issue. “The reason for the sales tax credit is that these areas don’t pay for themselves. It is a worthwhile investment.”

Triplett said that it is in the state’s best interest to continue with the sales tax credit because it would be worse for the state if King County has to continue servicing the annexation area.

The $3.4 million would put a 13 percent hole in the annexation budget. If the city did not defer annexation, it could choose to drastically reduce services to the annexation area and in turn the current Kirkland area.

“It would be hard to not have some spill over effect,” said Triplett.

He gave an example of the Kirkland Police Department trying to cover the entire area with less than needed resources.

Another issue for the city is that it has already bonded for the new public safety building to be built in the Totem Lake neighborhood.

“That money would come out of the service to the annexation area,” said Triplett.

McBride said that her and fellow council members Dave Asher and Doreen Marchione, who serve on the legislative committee, have been aware of the situation.

“In a recent presentation made by the Association of Washington Cities staff, their assessment was that the cuts proposed in the governor’s budget seem to indicate a policy of not ‘pushing down’ the state’s budget problems to the local level,” said city documents.

“It has been one of our priorities,” said McBride. “We have really put pressure on the state for these funds. We have been proactive.”

Triplett noted that Kirkland is not alone in the fight as the Association of Washington Cities and King County oppose the loss of the funds, along with other cities that have recently annexed such as Kent.

Other possible outcomes listed in the documents include:

• Debt service – About half of the projected revenue is dedicated to debt service including a smaller debt issue that was planned for 2012 or 2013 for City Hall improvements. The council could opt to not issue the second portion of debt, estimated at $500,000 to $600,000 per year and defer remodel of City Hall.

• The annexation budget assumes that the state sales tax credit would be used to pay back the General Fund for pre-annexation expenses incurred in 2010 and 2011. This amount could be as much as $3 million depending on the timing of Police Department hiring and a possible grant to fund new firefighters to serve the area. The city could also forego all or a portion of the remaining pay back.

• Revenue estimates for the annexation area were developed conservatively given the lack of actual data available for the area. It is possible that actual revenue will be in excess in the amount estimated, requiring a smaller amount of state sales tax credit funding.

• Many of the Full Time Employees (FTE) approved for annexation have not been hired and 19 of the FTE are not scheduled to be hired until 2012. The city manager recommends that only selected annexation positions be hired until the city knows more about the state’s budget. All new annexation recruitments (i.e. any position that is not already filled by a city employee or that has a pending job offer) will be reviewed and approved by the city manager’s office. There are enough unfilled annexation positions to compensate for the loss of the state sales tax revenue. Staff will develop a revised service level plan once the state’s revenue impact, if any, is known.