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MRSC PUBLICATIONS › The New City Guide (February 2002)
 
The New City Guide

The New City Guide

February 2002 - Report No. 54

Table of Contents

Introduction

The voters have approved the creation of a new city, and it is now time to begin putting the voters' choice into effect. A new city, a municipal corporation, must be organized, staffed, and funded to begin official operation between 180 and 360 days after voter approval of the incorporation. The members of the governing body must be nominated and elected before any official action may be taken. Obviously, there is now much to learn and much to do. This guide is intended to help in this process of learning and doing, a process that should also be informed by the knowledge and experience of others, including local and state officials, professional consultants, volunteers, and organizations such as the Municipal Research & Services Center of Washington (MRSC) and the Association of Washington Cities (AWC).1

The 1991 legislature made the process of creating a new city somewhat easier and less confusing by extensively amending and adding to the governing statutes to clarify and enhance the authority and power of the interim city council.2 But the statutes can only tell a new city what its powers are; it cannot tell a new city how to best exercise them. A basic purpose of this guide is to both inform new city officials of their statutory powers and limitations and to set out and discuss the myriad issues and decisions that the new city will confront. In doing so, we hope to provide general guidance to help new officials better focus their efforts on ensuring the continuation of governmental services and setting the course for the new city.3

Statutory Framework for Interim/Transition Period

Although a code city4 has broad powers of home rule authority, it does not possess those powers until it officially becomes a city. During the interim period until the official date of incorporation, the powers of a "city" and its governing body (council) are generally limited to those set out in chapter 35.02 RCW5 for the purpose of establishing the basic framework and initial functioning of city government.

Powers of Interim City Council

The basic powers of the city-to-be during the interim period are, for the most part, set out or referred to in RCW 35.02.130. These powers are outlined as follows:

Adoption of Ordinances and Resolutions
The newly elected council is authorized to adopt ordinances and resolutions to become effective on or after the official date of incorporation. Ordinances and resolutions are, of course, the basic means of establishing the laws that govern the city and the rules that govern its administration.6

RCW 35.02.130 addresses, with respect to the interim period, the statutorily imposed delays in the effective dates of ordinances. An ordinance is generally not effective until five days after its publication in the city's official newspaper. RCW 35A.12.130. Some ordinances, such as those imposing a business and occupation tax, are subject to a referendum period (and possibly a referendum) before they become effective. See RCW 35.21.706. These statutory delays are, under RCW 35.02.130, not delayed further during the interim period. Specifically, these delay periods "shall commence upon the date of such enactment [of the ordinance] as though the city or town were officially incorporated." Thus, ordinances can be enacted so as to be truly effective, without delay, upon the official incorporation date.7

Adoption of Contracts and Agreements
The interim council may "enter into contracts and agreements to facilitate the transition to becoming a city or town and to ensure the continuation of governmental services after the official date of incorporation." In addition, RCW 35.02.225 authorizes counties to contract with newly incorporated cities "for the continuation of essential services until the newly incorporated city or town has attained the ability to provide such services at least at the levels provided by the county before the incorporation."

Most, if not all, new cities will find the need to contract with other governmental agencies, such as counties and special purpose districts (e.g., fire protection district, water-sewer district, library district), to continue their provision of services, at least temporarily. An interim council will also likely need to contract for consultant services, for an interim city manager or administrator, and for legal services.

Adoption of SEPA Policies and Procedures
The interim council may adopt, to be in effect during the interim period, State Environmental Policy Act (SEPA) policies and procedures to implement the requirements of that legislation. The issuance of development permits and approvals that require processing under SEPA, if they are not subject to an interim council-imposed moratorium under RCW 35.02.137, will be handled by the county during the interim period. However, the interim council may adopt during the interim period a comprehensive plan and zoning and land use regulations (to go into effect on or after the date of incorporation), legislation that must be reviewed under SEPA. WAC 197-11-704(2)(b)(ii).8 As a practical matter, however, it is highly unlikely that the interim council will have time to do anything more than adopt county plans and regulations, as a temporary measure.

Borrowing Power
RCW 35.02.130 authorizes the interim council to borrow funds to finance operations during the interim period in either of two basic ways:

N Issuance of tax anticipation or revenue anticipation notes or warrants or other short-term obligations and borrowing of funds on the security of these instruments, as provided in chapter 39.50 RCW. As their names imply, these instruments create indebtedness that is payable from tax and other city revenues in anticipation of which the notes, warrants, or other form of indebtedness were issued. This indebtedness is subject to the statutory limit on nonvoted general indebtedness contained in RCW 39.36.020.

N Borrowing from federal, state, and other governmental entities, in the same manner as if the city were officially incorporated.

An interim council may borrow staff and equipment and use technical and financial assistance from other cities, from counties, from other local government agencies, and from state agencies. Such loans may be made without compensation. RCW 35.02.270

Adoption of Property Tax Levy
The interim council may adopt the property tax levy for its first full calendar year following the interim period. See discussion of property taxes at page 26. The timing of the adoption of the property tax levy can be an important consideration in selecting the official date of incorporation. See pages 65-68.

Acquisition of Needed City Facilities, Supplies, Equipment, and Insurance
The interim council has the same authority to acquire such as if it were officially incorporated.

Hiring of Staff
Again, the city has the authority it would have if it were officially incorporated. The staff the city may hire includes an interim city manager or administrator. The council may limit the powers and duties of an interim manager as it desires.9 The appointment of an interim manager may be extended up to 90 days after the date of incorporation. Thereafter, a council-manager city council must heed the statutory requirements with respect to the powers and duties of a "permanent" city manager.

Ballot Propositions to Authorize Taxes
The interim council may submit ballot propositions to city voters to authorize collection of taxes on or after the official date of incorporation. An example of a tax that requires voter approval is the additional .25 percent real estate excise tax authorized by RCW 82.46.035(1) in counties that choose (but are not required) to plan under the Growth Management Act (ch. 36.70A RCW).

Fire Protection and/or Library District Annexation
The council may authorize annexation of the city by a library district10 (in lieu of providing a city library), to become effective upon the date of incorporation. If it is located in one or more fire protection districts, a new city is deemed to be annexed to the district or districts, unless the interim council adopts a resolution precluding annexation. See RCW 52.04.161 and discussion of this issue at page 44.

Adoption of Development Moratoria
Although the county retains jurisdiction during the interim period over zoning and other land use matters within the boundaries of the city-to-be, the interim council is authorized by RCW 35.02.137 to adopt moratoria on the filing of applications with the county for development permits or approvals, such as subdivision approvals and building permits.11

Adoption of Budgets
This is a mandatory duty of the interim council. The council must adopt an interim budget for the interim period or until January 1, whichever occurs first. If the interim period extends after January 1, a second interim budget must be adopted for the period between January 1 and the official incorporation date. The interim budget or budgets are to be adopted in consultation with the state auditor's office. See RCW 35.02.132.

The interim council must also adopt a "first year" budget for the period between the incorporation date and January 1 of the following year. See pages 34-37 for discussion of budget preparation.

Laws Applicable to City During Interim Period

Under RCW 35.02.130, a city during the interim period is subject to the following laws:

Immunity for Discretionary Decisions
RCW 4.24.470 provides that an appointed or elected city official is immune from civil liability for damages "for any discretionary decision or failure to make a discretionary decision within his or her official capacity." A discretionary decision is one that involves basic policy evaluation and judgement; it does not involve the implementation of policy.12 However, the city remains, pursuant to this statute, potentially liable for damages resulting from torts committed by its officials.

Public Disclosure Law
Chapter 42.17 RCW requires financial disclosure by elected officials, regulates campaign financing, prohibits the use of public office or public facilities in election campaigns, and requires, with some exceptions, disclosure of public records upon request.

Records Preservation and Disposition
Cities and other governmental agencies are required to preserve and retain public records for certain periods of time, and records may be destroyed only by following approved procedures.13 RCW 40.14.070. The Archives and Records Management Division of the Office of Secretary of State adopts records retention schedules for local governments, including the Local Government General Records Retention Schedule & Records Management Manual, which can be viewed on the MRSC Web site at http://www.mrsc.org/recordsmanual/reclist.htm.

Ethics and Conflicts of Interest
Chapters 42.20 and 42.23 RCW establish ethical and conflict of interest rules that apply to public officers.14

Open Public Meetings and Minutes
Chapter 42.30 RCW is the state open public meetings law that requires, in brief, that all meetings of a governing body must, with some exceptions, be open to the public. A governing body includes such city bodies as the city council, planning commission, board of adjustment, and civil service commission. The definition of a meeting to which this law applies is broad enough to include special meetings such as workshops, study sessions, and retreats, as well as regular council meetings. Even some council committee meetings may be required to be open to the public under this law. Executive, or closed, sessions may be held only in certain specified situations.

Since the newly elected councilmembers will need to meet shortly after they are elected in order to begin the process of establishing a city government, it is important to understand the requirements of this law when they do meet.15 Municipal officials who knowingly violate its provisions are subject to a $100 penalty. RCW 42.30.120.

Publication of Ordinances and Notices/Official Newspaper
A city is required to publish in its official newspaper the content or a summary of the content of each ordinance that it enacts. RCW 35A.12.160, 35A.65.020. Further, these statutes require that cities establish a procedure for notifying the public of upcoming hearings and of the preliminary agenda of council meetings.

Every city must designate an official newspaper. RCW 35A.21.230. Code cities under 20,000 population must select an official newspaper annually pursuant to a bid procedure.16 RCW 35.23.352(7).

Liability Insurance for Officers and Employees
Cities are authorized to, in their discretion, purchase insurance to protect officers and employees from claims arising out of the good faith performance of their duties and to hold them harmless from expenses connected with such claims. RCW 36.16.138. However, since cities are required, upon request, to pay for the defense of and for any monetary penalties resulting from such claims (RCW 4.96.041), purchasing such insurance is a practical necessity.

Public Contracts and Bidding
State law imposes certain requirements upon the procurement of public works contracts, requiring bidding procedures for certain contracts, as well as for certain purchases of supplies, materials, and equipment, that vary with the size of the code city involved.17 RCW 35A.40.210; 35.22.620; 35.23.352.

RCW 35.02.130, which sets out the laws applicable to an interim city council, does not specifically refer to chapter 39.80 RCW, which establishes requirements for the procurement of contracts for architectural and engineering services. However, based on the language of chapter 39.80 RCW, it is advisable that the interim council follow its requirements in procuring any such contracts.

Interlocal Contracting
Chapter 39.34 RCW authorizes "local governmental units," including cities, to enter into agreements with other such governmental units, including the state, for the performance of any power or authority that may be exercised singly by the governmental units involved. Typical interlocal agreements involving cities include contracts for law enforcement services, building code enforcement, animal control, planning services, fire protection, and purchasing.

Organizing City Government During Interim Period

The interim council will have many issues to consider, much information to gather, and many decisions to make. There is no definite chronology that the council must follow, although there are clearly some matters that should be addressed more immediately than others. For example, the council will immediately need to hire or borrow staff to help it organize and establish the framework of city government. Also, many things will need to be done simultaneously. The interim council may find it helpful to divide into various ad hoc committees of two or three members to better deal with the many issues the entire council will have to address.18 Regardless of how the council approaches the interim period, it will be critical for the council to recognize that: (1) the highest and most immediate priority is to ensure the effective continuation of local public services; and (2) it will be prudent to defer critical long-term decisions until competent, professional legal and administrative advice is obtained.

The following discussion presents a generic and flexible chronology that the interim council may wish to consider. Reference should also be made to the "Suggested Schedule of Activities During Interim Period" in Appendix C. (See also the list of tasks developed by the interim Shoreline City Council, a council-manager code city, in Appendix D.) Attention to some items can begin even before the interim council is elected.

Transition Process

The "city" need not wait until its councilmembers (and mayor in a mayor-council city) are elected to begin the transition process. It is recommended that some sort of informal group begin the process of planning the transition to cityhood before there exists an interim council that can take official action. In all recent incorporations, transition groups were formed even before council candidates were nominated at the primary election after the successful incorporation vote.

Such a transition group, however, has no legal authority to take any action on behalf of the yet-to-be-incorporated city. Nevertheless, the danger exists that this group may begin charting a course that does not adequately represent the diverse interests of the residents of the new city. But a course can be shifted, and the benefits of an early start may outweigh the possibility of an errant one.

Transition groups commonly plan meetings with the nominated council candidates to discuss transition issues, roles, and responsibilities. They essentially recognize the group of nominated council candidates as a body capable of making some initial decisions to guide the transition process. A well-organized and representative transition group can provide much of the groundwork, such as information gathering, for many of the decisions to be made by the interim council.

After the deadline for filing for nomination to elective city office has passed, it may be helpful to hold candidates' forums to inform voters. "Workshops" may also be helpful in which candidates and others who may likely be involved in city government can begin discussing the course that the interim council could take and gathering information to assist it in charting that course.

In addition to the volunteers who will be needed to organize and coordinate these pre-officer election activities, MRSC, AWC, state officials, local officials from neighboring jurisdictions, and private consultants can provide information and assistance. Recent incorporations have established a tradition of neighboring cities helping new ones get started.

Swearing-In Ceremony

The councilmembers and the mayor of a code city must take an oath of office. It is not required that the oath be taken at a public meeting; it may be done in private. However, for a new city, the swearing-in provides a ceremonial beginning. It is, after all, an historical occasion, and it should ideally be done in the context of a well-publicized community event, with appropriate fanfare.

Council Organization

The interim council will need to schedule a meeting, in compliance with the requirements of the Open Public Meetings Act, chapter 42.30 RCW, as soon as possible after the council election results are certified.19 One of the purposes of that initial meeting should be to establish the procedural framework for the council, including addressing the following:

Selection of presiding officer (council-manager city).
 Although one of the mayor's functions is to preside at council meetings, there is no explicit statutory authority for someone to exercise the powers of this office during the interim period. However, the authority can be implied for the council to choose a presiding officer in order for the council to function according to accepted rules of procedure.

    In a mayor-council city, the elected mayor functions as the presiding officer at council meetings. The council should, however, appoint one of its members to be the mayor pro tem who would exercise the powers of the mayor, including presiding at council meetings, in case of the absence or temporary disability of the mayor.

The day, time, and place of regular council meetings.
These should be established by ordinance.20 A city council is required to meet regularly, at least once a month. Special meetings, those not held on a regular schedule, may be held at other times, subject to at least 24 hours' notice. See RCW 42.30.080.

    The initial meeting place (or city hall) for the council will undoubtedly be temporary. The meeting room selected must be large enough to accommodate attendance by members of the public. As a practical matter, the site of the first formal meeting may need to be chosen by the transition group, which should include council candidates. Selection of a permanent meeting place and city hall would, of course, be one of the matters to address during the interim period.21

    The council must also establish the hours in which the city hall will be open to the public. RCW 35A.21.070. This must be done by ordinance (to be effective on the official incorporation date) and can be applied, by motion or resolution, to the interim period. Under RCW 42.17.210 (which applies to the interim council), the city must have office hours of at least 30 hours a week.

Council rules of procedure.
The council will need to adopt rules of procedure to govern the conduct of council meetings. These rules should include rules of parliamentary procedure, which could be in the form of standard rules, such as Roberts' Rules of Order, adopted by reference,22 or in the form of more simplified and tailored rules.23 The rules can also address such other matters as the order of business, agendas, committees, absences, public hearing rules, specific procedures for adoption of ordinances and resolutions, rules governing participation by the public at meetings, filling vacancies, executive sessions, and adjournment of meetings. The rules may, of course, be expanded and refined in the future as the council uses them and decides what works well and what does not.

Selection of official newspaper.
Except for code cities over 20,000 population, selection of an official newspaper must be pursuant to a call for bids. RCW 35.23.352(7).24 The contract for the official newspaper must be awarded to the lowest responsible bidder. Id. Since the bid process is time consuming, it is important that the councils for such cities direct interim city staff to begin it as soon as possible. For code cities over 20,000 population, the council may simply select the newspaper from among those with the proper legal qualifications for an official newspaper.25

Notice procedures.
The council must adopt procedures for notifying the public of the agendas for upcoming council meetings and of any upcoming public hearings.26 The procedures could, but are not required to, include written notification to the official newspaper, publication of a notice in the official newspaper, posting of the preliminary agenda (in places such as the city hall and post office), and/or "such other processes as the city determines will satisfy the intent of this requirement [of notification]." RCW 35A.12.160.

Council meeting minutes.
The city must provide for the taking of minutes at council meetings. Usually, this is done by the city clerk or his or her deputy; it may be necessary for there to be a temporary clerk, at least for the first meeting.

Hiring of staff.
As noted above, the interim city has the authority to hire staff as if it were officially in existence. The city may wish, at first, to create certain interim staff positions, and may decide to contract with other local governments for the loan of staff. Loaned staff may be especially useful while searching for interim or permanent staff. The city may also find it advantageous to contract with professional consultants, such as in the area of financial affairs. Although it perhaps goes without saying, it is critical to an effective start-up of city government that experienced and capable staff are contracted for or hired.

When hiring permanent (non-interim) staff, it is advised that organized recruitment, evaluation, and hiring procedures and schedules first be in place. It may also be helpful to develop an initial organizational chart of the city administration that outlines the departments and positions integral to the initial operation of the city.

It is strongly recommended the job descriptions be drafted for each position, not only to help ensure that qualified individuals fill those positions but also to help ensure compliance with the federal Americans with Disabilities Act (ADA). This law prohibits discrimination in employment against a "qualified individual with a disability," who is defined as someone who is able to perform the "essential job functions" of a position, with or without a "reasonable accommodation." To determine whether a person is qualified to perform a particular job, the employer (city) must identify, in advance, the "essential" and "nonessential" functions of the job. It is therefore necessary, as a practical matter, that the new city create formal job descriptions for each position, defining, among other things, the essential and nonessential functions of the particular position. Ideally, this should be done in consultation with legal counsel. MRSC and the Local Government Personnel Institute (LGPI) at AWC can also provide information on complying with this legislation's mandate.

There are also numerous other personnel-related decisions that will confront the interim council, such as salaries, benefits, and policies. These matters will be discussed later, at pages18-21.

Among the necessary and/or required staff are the following:

  • City manager (council-manager city). In a mayor-council city, the mayor has the hiring and firing authority.27 In a council-manager city, the manager, who is chosen by the council, has the hiring and firing authority.28 Thus, in a council-manager city, it may be advisable for the council to select as soon as possible either an interim or "permanent" city manager who would then hire staff.29 It does not appear, however, that the statutory scheme regarding an interim council dictates that an interim manager have hiring authority. (The interim manager "shall have such administrative powers and duties as are delegated by the governing body." RCW35.02.130. The council should thus expressly define the role of the manager during the interim period.) The interim council could therefore retain some or all of the hiring authority. However, whether it is practical or advantageous for the council to become directly involved in hiring interim staff other than the interim manager is questionable. In any event, since the interim manager has only the powers and duties specifically delegated by the interim council, it is essential that the interim council specifically define those duties and powers.

    Since it is a pivotal position in city government, the city manager position should be filled only after a careful selection process.30 If the council is not hiring an interim manager, the interim council should establish the process for hiring a "permanent" manager as one of its first orders of business. If the council is hiring an interim manager, it will nevertheless need to establish a selection process for and arrange for the hiring of the "permanent" manager, because the interim manager is authorized by statute to serve only to the official date of incorporation. RCW 35.02.130. The council may, however, extend the appointment of the interim manager for up to 90 days after incorporation. Id.

  • City administrator (mayor-council city). The interim council of a mayor-council city may wish to consider whether to establish a city administrator position that would function much like a city manager but subject to control by the mayor, rather than by the council. If the interim council establishes such a position, it may wish, initially, to establish an interim position (to be filled by the mayor). In establishing a city administrator position, it would be important for the council to specifically and clearly define the duties and responsibilities of the position.

  • Clerk. Another essential, and required, office is that of city clerk. Certain clerk duties are prescribed by statute and others are established by the council by ordinance. In general, the clerk takes council meeting minutes, attests ordinances, authenticates and records ordinances and resolutions, draws warrants (or checks), provides voter registration assistance to the county auditor, and is in charge of city records.31

    The council may also establish a deputy clerk position. The deputy clerk would assist the clerk in his or her duties, and would perform, with some possible exceptions, the duties of the clerk when the clerk is absent.

    The clerk must furnish an official bond conditioned on the faithful performance of his or her duties. The city's insurance agent or broker can advise the city on bonding and provide the necessary bond for the clerk and other officials who may require one. The city should pay the premium for the bond.

  • Treasurer or financial officer. A code city is not required to have a treasurer position. Even if a code city does not create a treasurer position, it will most likely need the services of a finance officer who would function, in essence, as the treasurer in all but name. In smaller cities, a treasurer position is often created and combined with the office of clerk. However this position is established, it generally includes such duties as keeping the monies of the city, paying out city monies on warrants or checks appropriately authorized and signed, keeping required receipts, and depositing and investing of municipal funds. The treasurer must also furnish an official bond.

  • Auditing officer. A city must have an auditing officer to audit all claims (contractual) presented against a city. RCW 42.24.080. This officer, whose position is created by ordinance, must authenticate and certify, with respect to such claims, that "the materials have been furnished, the services rendered or the labor performed as described, and that the claim is a just, due and unpaid obligation . . ." Id. In smaller cities, this position is usually held by another city officer such as the clerk or treasurer. In some cities, the council or a committee of the council acts as the auditing "officer." (Whether that arrangement strictly complies with the statutory requirement of an auditing officer is uncertain.)

  • City attorney. A city must have a city attorney on a full-time or part-time basis, either as in-house legal counsel or "by any reasonable contractual arrangement for such professional services." RCW 35A.12.020. If the interim code city council decides that, instead of creating a city attorney position, it will contract for legal services, then it, rather than the mayor, would decide on the attorney or firm to provide those services.32

    It is particularly important that the city during the interim period have access to legal counsel to help ensure that legal requirements are being followed in establishing and operating city government.

  • Police chief. Although a city is required to have a police chief or chief law enforcement officer, it is not a position that need be filled immediately as the city may not for a while, if ever, provide its own law enforcement services. Under RCW 35.02.220, the county is required to provide law enforcement services at the pre-incorporation level up to 60 days after the official date of incorporation or until the city "is receiving or could have begun receiving" sales tax distributions, whichever is the shorter time period.33 After that period expires, the city may contract with the county for continuation of law enforcement services for whatever time period they can agree on.

  • Department heads. The need for such positions will vary, of course, depending upon local circumstances. Common department head positions include a fire chief, public works director, planning director, building official, and parks director.

Personnel Issues

Salary schedule.
A salary schedule for city officials and employees should be adopted as soon as possible.34 This must be done by ordinance (often as part of the budget ordinance), to take effect on the official date of incorporation. During the interim period, however, the salary for interim staff can be set by resolution. A salary schedule for the interim period should be a part of the interim budget for the city.

For elected officials, the relevant statutes35 provide that, until a salary ordinance can be passed and become effective as to elective officers of a newly incorporated code city, such officers are entitled to compensation as follows:

City with less than 5,000 population:

Mayor (mayor/council city) - $150/month
Mayor (council-manager city) - councilmember salary plus 25% ($25/meeting)
Councilmembers - $20/meeting (for not more than two meetings per month)

City with between 5,000 and 15,000 population:

Mayor (mayor/council city) - $350/month
Mayor (council-manager city) - councilmember salary plus 25% ($187.50/month)
Councilmembers - $150/month

City with greater than 15,000 population:

Mayor (mayor-council city) - $1250/month
Mayor (council-manager city) - councilmember salary plus 25% ($500)
Councilmembers - $400/month

A salary ordinance governing mayoral and council salaries cannot be effective except for a new term, which in the case of an initial city council (that follows the interim council) will begin on January 1 following the next general municipal election after the official incorporation date, or following the municipal general election after that if the next general municipal election is less than 12months after the date the councilmembers are first elected. RCW 35.02.130. This is because article 11, section 8, and article 30, section 1 of the state constitution prohibit increasing the salary of an elected municipal official who fixes his or her own compensation (i.e., the members of the city council) after election and during the term of that office. Sometime during the initial term and before the next council election, the initial council should adopt a salary schedule to apply to its members who take office after that election. (If the council does not do so before the next election, then it appears that the next council may not be entitled to a salary.)

Also, because article 11, section 8 of the state constitution prohibits decreasing the salary of an elected municipal officer after his or her election and during his or her term of office, it does not appear that the council of a new code city may provide for a lesser salary to be paid to its members or the mayor during their initial term of office than that established in the above schedule.

The 2001 legislature provided a new option for setting local elected official36 salaries. Under RCW 35.21.105, cities may by ordinance establish an appointive salary commission with the authority to increase councilmember and mayoral salaries during their terms of office or decrease them for the following terms of office, subject to potential voter referendum. An interim council may establish a salary commission, but it could not begin operation until the official incorporation date or later, when the ordinance establishing it can be effective.

Personnel policy.
Development of a personnel policy is a necessary feature of an effective city government system. In Personnel Policies for Small Cities (prepared for the Local Government Personnel Institute, April 1991),37 authors Gil Sparks and Scott Snyder note the importance of clear, written personnel policies:

Well-developed personnel policies serve a variety of purposes for municipal employers. First, they promote consistency in the operation of city business and in the conduct and treatment of city employees by providing one source of reference for the city's personnel practices. Second, well-written policies can be an effective communications tool for municipal employers to make certain that employees understand the benefits available to them from city employment, and the expectations of the city regarding their behavior as employees. Comprehensive and understandable policies are an invaluable resource for supervisors in helping them to explain city policies to their employees and to apply them in a fair, consistent, and nondiscriminatory manner.

Carefully drafted policies can assist municipal employers in both avoiding and defending against the increasing number of discrimination charges and lawsuits brought by employees or former employees. In short, clear and concise personnel policies can be a significant component of an effective employee relations program.

Personnel policies do have legal effect. In Thompson v. St. Regis Paper Co., 102 Wn.2d 219, 230, 685 P.2d 1081 (1984), the Washington State Supreme Court held that written provisions of personnel policy and procedure manuals as well as employee handbooks can be enforced as if they comprise a contract between employer and employee:38

we hold that if an employer, for whatever reasons, creates an atmosphere of job security and fair treatment with promises of specific treatment in specific situations, and an employer is induced thereby to remain on the job and not actively seek other employment. Those promises are enforceable components of the employment relationship.

Personnel policies commonly deal with such issues as working hours, overtime and compensatory time, breaks and meal periods, recruiting and hiring practices, probationary periods, promotions, compensation, benefits, expense reimbursement, training, performance evaluation, leaves, employee conduct and responsibilities, and discipline and termination.

Because of the legal and practical consequences of personnel policies, such policies should be tailored to the city's own particular circumstances. In addition, legal counsel should review all policies before adoption to ensure compliance with state and federal law and to ensure that they do not have legal effect beyond that intended by the council.

Also, because of the necessary complexity of a well-developed personnel policy, it may be difficult to implement a "final" version during the interim period. Thus, it is recommended that a preliminary policy be adopted to be effective until the more permanent version is adopted. A personnel policy may be adopted by ordinance or resolution.

Employee benefit plan.
In addition to providing such fringe benefits as paid sick leave, holidays, and vacation, municipal employers commonly provide additional benefits such as health, life, and disability insurance programs, and retirement plans, to the extent they can be afforded. Some city officers and employees are subject to mandatory retirement programs established by statute and administered by the state.

Full-time city police and firefighters are, pursuant to statute, members of the Law Enforcement Officers' and Firefighters' Retirement System (LEOFF). Ch. 41.26 RCW. This mandatory system, funded by both employee and employer contributions, provides sickness, disability, death, and retirement benefits. It is administered by the state Department of Retirement Systems, as well as by local disability boards. Volunteer fire fighters are covered by the state volunteer fire fighters' relief and pension system. Ch. 41.24 RCW.

All city employees not covered by a qualifying retirement program, such as LEOFF, must be covered by Social Security.39 The council may elect to have city employees covered by the state Public Employees' Retirement System (PERS), which is considered a qualifying retirement program, or by an alternative program which provides a benefit comparable to Social Security benefits. The city's elected officials and its appointed manager or chief administrative officer, if any, may choose to be covered by PERS.

With respect to health benefits, there is a statutory requirement that if a municipal employer offers its employees group hospitalization and medical aid policies or plans, it must provide its employees with "a choice of policies or plans through contracts with not less than two regularly constituted insurance carriers or health care service contractors or other health care plans." RCW 41.04.180. This requirement might be satisfied if the city initially offers a choice of two plans and then, depending upon the preference of city employees as a whole, selects the preferred plan. Another requirement that applies when a city offers a health benefits plan is that the city provide the option of enrollment in a health maintenance organization (HMO). RCW 48.46.180(1). However, this requirement does not apply if there is no HMO in the geographic area. RCW 48.46.180(3).

Insurance

Since a municipality and its officers and employees will certainly be subject to liability claims, it is crucial that liability insurance be procured.

Insurance should be procured to protect the city against the myriad damage claims that can result from operation of the city, whether, for example, they are claims arising from damages due to potholes or from claims of inverse condemnation. The exposure to liability can be immense, and, even if successful, defense against claims can be expensive.

Cities are required, upon request, to defend and pay the expenses to defend officers, employees, and volunteers against damage claims or actions resulting from acts or omissions that the city council determines to be within the scope of that individual's official duties. Cities may also be liable for nonpunitive damages (and, at its option, punitive damages) with respect to such damage actions. RCW 4.96.041.

There are four basic avenues for insurance for cities: purchase of a conventional insurance policy; self-insurance; pooling (joint self-insurance); and joint purchasing (of conventional insurance, but at group rates). Obviously, a new city needs to scrutinize these options to ensure effective coverage at the lowest possible rate. Because the city will legally exist as of its official date of incorporation, it is critical that some form of insurance coverage be procured by that date. It is nevertheless strongly recommended that some insurance be provided for the interim period, because there will also be liability exposure during this period.

Insurance should also be procured to protect a city's officers and employees. Although, in view of the law at this time in the state, personal liability exposure for officers and employees appears minimal, the risk may justify purchase of such coverage.

As an adjunct to insurance coverage, it may be advisable for a new city, particularly a larger one, to establish a risk management program. By definition, risk management is a program of attempting to minimize the adverse consequences of loss through pre-planning. The basic idea of such a program is to identify and reduce risks. Although not the priority that purchasing insurance is, developing a risk management program, where appropriate, should be considered as an important adjunct to the establishment of city government.

Financial Management

One of the first organizational measures that must be undertaken is establishment of an accounting system for the city. The state auditor's office has created the Budgeting, Accounting, and Reporting Systems Manual for Cities and Counties and Other Local Governments (BARS), which establishes a uniform system of accounting applicable to all local governments. There is a BARS manual for cities with a population of greater than 25,000, requiring a double entry accounting system, and a separate BARS manual for cities under 25,000, allowing a single entry system.

Funds.
This governmental accounting system is organized and operated on a fund basis. A fund is defined by the BARS manual as "a fiscal and accounting entity with a self-balancing set of accounts . . . segregated for the purpose of carrying on specific activities or attaining certain objectives . . ." It is important to establish certain funds, required by law, as soon as possible. These include:

  • General fund (current expense fund). This fund is used to pay the current expenses of the city and to account for the financial transactions of the general operating functions of city departments, and those transactions not properly accounted for in another fund. Separate accounts must be established for each city department or division.

  • City street fund. All funds distributed to cities from the state motor vehicle fund must be placed in a fund designated as the "city street fund." RCW 47.24.040. The moneys from this fund are to be used for:

    salaries and wages, materials, supplies, equipment, purchase or condemnation of right of way, engineering or any other proper highway or street purpose in connection with the construction, alteration, repair, improvement or maintenance of any city street or bridge, or viaduct or underpassage along, upon or across such streets.

  • Other funds as may be required. Other types of funds that should be established as needed include special revenue funds, debt service funds, capital projects funds, enterprise funds, internal service funds, and fiduciary funds such as trust and agency funds.

    New cities with a population of 15,000 or more must establish an arterial street fund. Although RCW 46.68.110 does not specifically mention "arterial street fund," it requires that such cities spend the gas tax moneys received under RCW 46.68.090(1) exclusively for "[t]he construction, improvement, chip sealing, seal-coating, and repair for arterial highways and city streets . . ." (Emphasis added.) Thus, a separate fund is required.

A financial officer well-versed in municipal accounting procedures can be essential in creating this fund-based financial management structure. However, as a practical matter, it may be necessary to contract with a local or state governmental unit for interim accounting services.

It is recommended that the interim council and appropriate interim staff meet with the auditors from the regional offices who will be auditing the city in the future. The purpose of this meeting would be to help ensure that the city is setting up its financial accounting system in a manner consistent with the state auditor guidelines.

Establishing state and federal accounts.
It is advisable to, as soon possible, apply for federal and state identification numbers.40

Designation of depository bank.
The city council must designate one or more financial institutions as the depository or depositories for city funds and for general banking services. Some councils and treasurers designate the depository after requesting and receiving proposals for such services, although the relevant statutes do not specify the procedure to be followed.

Miscellaneous policies.
The interim council should establish interim or permanent policies regarding petty cash use, travel advances and reimbursement, voucher approval, use of city credit card (if any), and the like. With respect to reimbursement for official travel, RCW 42.24.090 provides, in part, as follows:

the legislative body of any municipal corporation . . . may prescribe by ordinance or resolution the amounts to be paid officers or employees thereof as reimbursement for the use of their personal automobiles or other transportation equipment in connection with officially assigned duties and other travel for approved public purposes, or as reimbursement . . . in lieu of actual expenses incurred for lodging, meals, or other purposes. The rates for such reimbursement may be computed on a mileage, hourly, per diem, or other basis as the respective legislative bodies shall determine to be proper in each instance.

If the council desires to establish a policy allowing for travel advances, it must establish a revolving fund to be used solely for that purpose. RCW 42.24.140; see also RCW 42.24.150 - .160 for other statutory requirements relating to travel advances.

A city may establish credit card accounts and issue credit cards to officers and employees for official travel expenses and for governmental purchases. RCW 42.24.115; 43.09.2855.

The city council must, by ordinance, establish regulations governing the presentation, auditing, and approval of "demands" against the city. Such "demands" against a city include bills for purchases by city officers or employees for city purposes and payments for the performance of contractual obligations. Although the general statutory scheme requires auditing of such demands by an auditing officer followed by council approval before the demand can be paid, RCW 42.42.180 allows a city to authorize issuance of warrants or checks to satisfy demands or claims prior to council approval, if certain statutory conditions are met.

Commonly, the council at its regular meeting is presented with a voucher list that it will usually summarily approve, since most claims or demands against a city involve routine expenditures. (The claims on the voucher list should have been previously audited as required by RCW 42.24.080.) A voucher list will typically contain a warrant or check number, a brief description of the expenditure, the name of the payee, and the amount. The council may, however, remove individual items from the list for particular scrutiny (while the remainder of the list gets summary approval). A majority of the entire council (not just of the quorum) is necessary to pass a "resolution for the payment of money" (e.g., voucher approval). RCW 35A.12.120.

Borrowing of Money

To finance the costs of operating the city during the interim period and beyond, pending the receipt of tax and other revenues, the interim council should identify and tap as soon as possible sources of funds that may be borrowed. As noted above, the statutes governing the interim council authorize two basic methods of borrowing: tax or revenue anticipation notes or other short term obligations; and borrowing from other governmental entities.41

Short term obligations.
These must be issued pursuant to an ordinance passed by the interim council, and may bear whatever interest rate the council deems to be "in the best interests" of the city. The maximum repayment period possible for these obligations is 18months (six months from the end of the fiscal year in which they are issued), although this long a period may not be possible, depending on the earliest date on which the interim council may take such action. The amount of these short-term obligations, which are considered nonvoted general indebtedness, is subject to the statutory maximum amount of nonvoted indebtedness (1 ½ percent of the assessed valuation of taxable property in the city) which is allowed by RCW 39.36.020(2).

Borrowing from other governmental entities.
This can also be an important source of funds to finance the city during the interim period. Recently incorporating cities have borrowed from either the state, a county, or another city.

When the city officially incorporates, it may have a significant source of funds to borrow in its own street fund. County road taxes will be diverted into this fund as of the official incorporation date, and state-shared gas tax revenues will also be deposited in this fund. The city may borrow from this fund for deposit in another fund so that the moneys borrowed may be used for other purposes. The borrowed funds must be repaid, with interest, into the street fund.

Revenues

Retail sales tax.
This is a major revenue source that is the easiest to tap and should be implemented as a matter of course. RCW 82.14.030 authorizes a city to impose a retail sales and use tax of up to 1.0 percent, comprised of two separate .5 percent options. (The second .5 percent tax is subject to a referendum, if one is initiated within seven days of the passage of the ordinance imposing the additional tax. RCW 82.14.036.) However, since the county receives 15 percent of each .5 percent tax option imposed by a city, the effective rate is .85 percent. It is important to note that the imposition of this tax by the city will not, except in a few counties, result in increased taxes for city residents, because this tax is already imposed by the county; only the recipient of the tax revenues is changed.43

    There are important timing issues with respect to this tax. Under RCW 82.14.055, enacted in 2000, a sales tax rate change, such as occurs when an interim city council first adopts a local tax, can take effect only on January 1, April 1, July 1, or October 1. Also, a local government must notify the Department of Revenue at least 75 days before the change can take place. This law may have an effect on the timing of a new city's incorporation date. See the discussion on pages 65-68 on "Choosing the Official Incorporation Date."

    Of course, the new city will not begin receiving sales tax revenue on one of the dates identified in RCW 82.14.055, but it will receive the taxes that the Department of Revenue will collect beginning that month. Although the department now distributes local sales tax revenues on a monthly basis, there is a lag in the distribution of local tax revenues of at least two months while tax returns are submitted and processed.

Property tax. 44
This is also a major source of revenue available to a city. Consequently, the timing of the official incorporation date with respect to the levying of this tax may be critical to an effective start-up of city government if, as explained below, that date is likely to fall somewhere in the second half of the calendar year.

Property taxes are levied by action of the council, up to the statutory maximum rate and subject to the 101 percent lid on property tax increases.45 Increases beyond the statutory maximum and the 101 percent lid (special levies) require voter approval. (Special levy ballot propositions may be submitted to the voters during the interim period, although collection could not occur until after the official incorporation date. However, it is unlikely for political and practical reasons that an interim council would submit an excess levy to the voters during the interim period.)

Since the property tax is collected at the county level and the property assessment function is the responsibility of the county assessor, state law imposes certain notification requirements and timetables upon cities with respect to city-levied property taxes. The city must set its property tax levy and certify it to the county by November 15 (RCW 35A.33.135; 84.52.020). Where the incorporation date is likely to fall in the second half of the calendar year (because of the timing of the incorporation election), that date should be selected so as to allow sufficient time to meet these deadlines.

At least one-half of the property tax is due from taxpayers on April 30 and the remainder is due on October 31. RCW 84.56.020. Thus, a city will receive the bulk of its property tax distributions in May and June and in November and December. The county treasurer must, on or before the 10th of the month, transfer to cities their respective shares of taxes collected the previous month. RCW 84.56.230. Some counties, however, transfer to cities their shares on a daily basis rather than pay the interest charges they are obligated to pay cities for the time the revenues are held prior to distribution. Cities in these counties receive most of their revenues in April and May and in October and November.

County road tax.
This tax is a part of the county property tax that is distributed to newly incorporated cities based on the amount of tax collected from within the area incorporated from the date of incorporation to the end of the calendar year.46 RCW 35.02.140. This is an important initial source of revenue and its receipt may be a very significant factor in choosing the official incorporation date.

Counties are required by statute to levy a property tax for county road purposes, in addition to a property tax for general county purposes. RCW 36.82.040. It is assessed only in unincorporated areas of the county and is based on the assessed value of taxable property and is governed by the provisions of Title 84 RCW. As with all property taxes, the road taxes become due on April 30 and October 31. The road taxes received by a new city are required to be deposited in the city street fund, and the use of this tax revenue is accordingly restricted. RCW 35.02.140. However, the new city can access these revenues for other municipal purposes by means of an interfund loan from the street fund to the general fund. The loan must be paid back with interest. According to the BARS manual, a loan that is not paid back in three years will be scrutinized to see if there has been a "permanent diversion" of funds.

Since these taxes are "diverted" to newly incorporated cities on a tax-received basis, it would be advisable for the interim council to choose an incorporation date that takes advantage of the prime time for receiving these road taxes: before April if the incorporation date is in the first half of the calendar year, and before October if the date is in the second half. See "Choosing the Official Incorporation Date," at pages 65-68.

Nevertheless, although the road taxes may be "diverted" to the newly incorporated city on a tax-received basis, the actual transfer of these revenues to a new city may not necessarily occur as they are received by the county. A county may not have the resources and facilities to first identify which properties are within the new city and then to process and distribute these road taxes to the new city as soon as they are received by the county. Also, a daily distribution may be too costly for a particular county. The interim council (or, earlier in the process, the incorporation initiators) should contact the county to determine how the county will be distributing these diverted road taxes. Advance notice is helpful because a county may have never before had to consider this procedure.

Despite the beginning of this diversion as of the incorporation date, road maintenance by a county must continue in the new city for a period not to exceed 60 days from the official date of incorporation or until 40 percent of the anticipated annual tax distribution from the road tax levy is made to the city, whichever occurs first.47 RCW 35.02.220(2).

Real estate excise tax.
This tax is levied on all sales of real estate, based on the full selling price. The state levies this tax, and a locally-imposed tax is authorized. RCW 82.45.035; ch. 82.46 RCW. The local tax may be imposed in two .25 percent increments, the second increment available only to cities within counties that are planning under the Growth Management Act (GMA). The tax is collected by the county and is remitted monthly to cities that have levied the tax.

Cities that are not planning under the GMA and cities under 5,000 population that are planning under the GMA must spend the first .25 percent "for any capital purpose identified in a capital improvements plan and local capital improvements, including those listed in RCW 35.43.040." RCW 82.46.010(2). RCW 35.43.040 lists improvements that can be funded through a local improvement district (LID), such as streets, parks, sewers, water mains, etc.

Cities with a population of 5,000 or more that are planning under the GMA must spend the first .25 percent of this tax solely on capital projects48 that are listed in the capital facilities plan element of their comprehensive plan. Obviously, a new city must have in place an adopted comprehensive plan that complies with GMA, including the requirement of having a capital facilities plan element, before it may spend the revenues this tax will generate. Nevertheless, the new city may impose this tax before compliance with the GMA planning requirements is achieved.

The second .25 percent real estate excise tax, which may be imposed only by cities planning under the GMA, may be spent only on capital projects as defined in RCW 82.46.035(6). In those cities located in counties that are voluntarily planning under the GMA, the second .25 percent may be imposed only if approved by a majority of the voters at a general or special election. RCW 82.46.035(1). A proposition to impose this second .25 percent tax may be submitted to the voters during the interim period. RCW 35.02.130. In other cities planning under the GMA, the second .25 percent tax may be imposed by council vote, without reference to the voters.

Leasehold excise tax.
This tax should be authorized by a new city because it will result in the city receiving a share of this tax that is already imposed and collected by the state. Those who may be subject to this tax will not incur any additional burden. This tax applies to most leases of publicly-owned real and personal property, in lieu of a property tax that may not be imposed upon such exempt property. Of the state rate of 12.84 percent (of the rent), a city may levy and receive a 4 percent tax. RCW 82.29A.040. The tax is collected by the state and is remitted bi-monthly in even numbered months.

Gross receipts business and occupation tax.
This is an often unpopular type of tax, but it is a major revenue option.49 This tax is levied at a percentage rate on the gross receipts (not profits) of a business that does business within the city. The imposition of this tax by a new city is, however, subject to a referendum procedure. RCW 35.21.706. A city may levy this tax at a rate not to exceed .2 percent, although a higher rate may be imposed if approved by the voters. RCW 35.21.710, .711.

Business licenses.
Cities impose business license requirements primarily as a means of regulating businesses but sometimes also as a means of raising revenue. A regulatory business license program requires businesses to register with and obtain a license from the city, subject to a flat fee designed to cover the costs of implementing the program. A revenue-raising business license scheme generally involves different fees for different classes of businesses. Such fees may be based, for example, on the type of business, on the number of employees, or on the square footage of the business facility.

Utility business and occupation taxes.
Utility taxes are levied on the gross operating revenues that public and private utilities earn from operations within a city. Utilities on which these taxes may be levied include electric, water, sewer, solid waste, stormwater, gas, telephone, cable TV, and steam. Taxes on some of these types of utilities are subject to a statutory maximum 6 percent rate, unless a higher rate is approved by the voters. Taxes on electric, gas, and telephone utilities cannot take effect until at least 60 days after the ordinance is passed. The imposition of this tax for the first time may be subject to a referendum procedure.

Lodging (hotel-motel) tax.
Most cities may impose a "basic" 2 percent tax on all charges for furnishing lodging at hotels, motels, and similar establishments for a continuous period of less than one month. RCW 67.28.180(1). When this tax is imposed, the state sales tax decreases by a like amount, so tourists and other lodgers experience no increase as a result of this tax. Most cities may also impose an additional 2 percent for a total of 4 percent, though this additional tax is not credited against the state sales tax. RCW 67.28.181(1).

Before a city with a population over 5,000 may impose a lodging tax, it must establish a "lodging tax advisory committee." RCW 67.28.1817. A proposal to impose a new lodging tax must be submitted to the lodging tax advisory committee for review and comment at least 45 days before it is to become effective. Presumably, an interim council may establish a committee prior to the official incorporation date, so that the tax can be made to go into effect upon the official incorporation date.

Revenues from this tax may be used only to pay for tourist promotion and the acquisition and/or operation of "tourism-related facilities." RCW 67.28.1815. See A Revenue Guide for Washington Cities and Towns, MRSC Report No. 45 (August 1999), at pages 18-22, for a detailed discussion of the lodging tax, the lodging tax advisory committee, and the permissible uses for the revenues from this tax.

This tax is remitted to the city by the state on a monthly basis. The Department of Revenue needs at least 45 days to notify taxpayers of a new tax, rate change, or change in recipient of the tax, and such a change must be effective the first day of a month. Therefore, if the council passes an ordinance effective the first of the month after incorporation, the first revenue will be received five months later. For example, if a city incorporates on August 31 and passes a lodging tax ordinance effective September 1, the DOR will begin collecting on November 1. Taxes collected during November are remitted to DOR on December 25 and paid to cities at the end of January.

Gambling tax.
A city that decides to allow gambling activities within its borders may impose a tax on gambling revenues. The maximum tax for amusement games is 2 percent of gross receipts less the amount awarded as prizes. For bingo and raffles, it is 5 percent less the amount awarded as cash or merchandise prizes. For punch boards and pull-tabs, the maximum rate is, if based on gross receipts less the amount awarded as prizes, 10 percent, and, if based only on gross receipts, 5 percent. A tax of 20 percent may be levied on gross receipts from card games. There are different tax rules that apply to gambling activities conducted by bona fide charitable or nonprofit organizations. RCW 9.46.110.

Gambling tax revenues must be spent primarily for gambling law enforcement purposes. RCW 9.46.113. Funds remaining after necessary expenditures for such enforcement purposes may be used for any general government purpose.50

Admission tax.
All cities may levy an admission tax in an amount no greater than 5 percent of admission charges to theaters, stadiums, dance clubs, private clubs, swimming pools, amusement parks, rides, and any other activity in which an admission charge is collected at the door. RCW 35.21.280. This tax also applies to season tickets, cover charges, and to the rental of facilities and equipment for recreational purposes. Revenues from this tax will, for most cities, be minimal.

Other taxes.
Other taxes that a city may impose include an additional property tax to support emergency medical services, ambulance taxes, and a use tax on brokered natural gas.

State-shared revenues.
State-collected revenues that are shared with all cites and towns are derived from two main sources: liquor receipts and gasoline taxes.51 Cities and towns as a group receive a fixed percentage of each of these sources, and the funds are allocated to individual jurisdictions on a per capita basis. Groups contemplating incorporation should note that as more cities incorporate, the per capita distributions will grow more slowly than they have in the past, or actually decline, depending on the relation between the growth in the funding source and the growth in population in incorporated areas.

Since the distributions to cities of these state-shared revenues are based on population, state agencies that make the distributions must have population figures for a new city before they can make the distributions authorized. RCW 43.62.030 provides that the state Office of Financial Management (OFM) shall determine annually, as of April 1, the populations of all cities and towns. This statute also provides that when a city becomes incorporated after this annual determination, the population "as shown in the records of incorporation filed with the secretary of state" are to be used in determining the per capita distributions.

Unfortunately, there is no statutory or other requirement that anything be filed with the secretary of state that shows the population of a newly incorporated city. The only required filing with the secretary of state is made by the county in which the new city or a majority of the new city is located. RCW 35.02.130 provides that the interim council, after specifying the official incorporation date in a resolution, must file a copy of the resolution with the county legislative authority. The county legislative authority must "file a notice with the secretary of state that the city or town is incorporated as of the official date of incorporation." Because there is no requirement that any population information be filed with the secretary of state, OFM recommends that the city ensure that the county file with the secretary of state the necessary population information, along with the required notice. A copy of the incorporation petition, which must contain a population estimate, should suffice for this purpose.

State-shared revenues are distributed on a quarterly basis, although not all revenues are distributed in the same month of the quarter. A new city can "join" the state-shared revenue "pool" only on the first day of the months of either January, April, July, or October. In order to allow sufficient time to process and transmit population figures to state agencies, OFM requires that the incorporation be effective (that the incorporation date occur) more than 30 days in advance of a particular quarterly period in order to participate in the revenue-sharing distributions for that period.52 Thus, for example, it will be necessary for a new city to incorporate by February28 to receive state-shared revenues for the period beginning on April1 and ending on June30. A new city should therefore notify OFM of its chosen incorporation date as soon as possible after choosing it. This 30-plus day period is an important consideration for purpose of deciding on a particular incorporation date.

The state-shared revenues that a city will receive are the following:

  • Liquor receipts. Cities receive a share of both Liquor Board profits and liquor excise tax receipts.53 RCW 66.08.180, 66.08.190, 82.08.160. The former are distributed on the last day of March, June, September, and December, and the latter are distributed on the last day of January, April, July, and October. To be eligible to receive these revenues, a city must devote at least two percent of the distribution to support an approved alcoholism or drug addiction program. RCW 70.96A.087.

  • Motor vehicle fuel excise tax (gas tax). There are two separate distributions to cities from revenues from this tax. For cities with a population of 15,000 or more, 31.86 percent of the funds received must be deposited in an arterial street fund for the construction, improvement, chip sealing, seal-coating, and repair of arterial highways and city streets. The remainder is deposited in a street fund to be used for street maintenance. RCW 46.68.090, 46.68.110. Cities under 15,000 population may combine the two funds and use all their tax money for maintenance if desired. RCW 46.68.110(4).

An understanding of the timing of the receipt of these revenues is important for revenue flow considerations for the initial operation of a city and for the selection of the official date of incorporation.

Criminal justice revenues.
Funding for criminal justice purposes is from two annual state general fund allocations of $4.6 million for fiscal year 2000, increasing each year by the fiscal growth factor. There are many different bases for the distribution of these funds. A small portion of the funds are distributed on the basis of population only.54 Other moneys are given to cities that qualify as "high crime" and "high violent crime" cities. Cities that contract for law enforcement services qualify to receive some funding. Finally, cities that initiate innovative law enforcement programs, domestic violence reduction programs, or programs for at-risk youth and child abuse prevention may apply to receive funding for these programs. See RCW 82.14.300, .320, .330.

The county legislative body may vote to impose a .1 percent countywide sales tax for criminal justice purposes. The county gets 10 percent of the revenue from this .1 percent tax off the top, with the remaining 90 percent being shared by the county and the cities within it on the basis of population. RCW 82.14.340.

Transportation revenues.
Recognizing that the state-shared revenue from the gas tax was insufficient for the needs of local jurisdictions, the 1990 legislature provided them with a number of local option revenue sources to be used for highway and transportation purposes. These local options include a gas tax that can be levied countywide, a vehicle license fee on certain trucks of up to $15 per vehicle, a commercial parking tax, and creation of a street utility (later found by the state supreme court to be unconstitutional).55 See chapter 82.80 RCW.

Fees, charges, and fines.

  • Franchise fees. These fees are charges levied on private utilities for the right to use city streets, alleys, and other public properties. Franchise fees levied against light, natural gas, and telephone utilities are, however, limited by statute to the actual administrative costs incurred by the city relating to the permitting or franchising process. RCW 35.21.860. Cable TV franchise fees, governed by federal law, may be levied at a rate of up to 5 percent of gross revenues, regardless of the costs of managing the franchise process. 47 U.S.C. § 542 (part of the "Cable Communications Policy Act of 1984").56

  • Other fees and charges. State law provides authority for cities to levy fees and charges to cover the costs of providing services or programs and regulatory activities. A familiar example is the fees that are charged for building permit application and processing, including inspections.57 However, fees may and should be charged for all permitting activities of a local jurisdiction for cost recovery purposes. The guiding principle in fee imposition is that fees may be set at a level no higher than that necessary to recover direct and indirect costs associated with the activity, including administrative overhead.

    A city will be involved in processing and issuing permits (and collecting fees) for numerous activities, some of which involve discretionary approval authority. For example, permits or applications and approvals are necessary for short plats and subdivisions, zoning matters (e.g., rezones, conditional uses, variances, and shoreline substantial development permits), SEPA review, activities requiring use of public streets (street use permits), and fireworks stand permits. Fee schedules for these and other activities requiring permits should be established along with the creation of the permitting mechanisms.

    If the new city is within a county that is required to or that has chosen to plan under the Growth Management Act (GMA), it has specific authority to enact an impact fee ordinance that imposes fees on new development to help finance the public facilities and improvements that are reasonably related to such new development. Among the public facilities for which such fees can be assessed are streets, parks and recreation facilities, open space, schools, and fire protection facilities. See RCW 82.02.050-.090.58

    Fees may also charged for the various licensing activities that a city will conduct. For example, a city may require licensing of businesses, dogs and cats, and bicycles.

    There are numerous other types of fees that municipalities charge for purposes of cost recovery. Other common fees include copying charges, returned check charges, charges for false home security alarms, fees for participation in municipal parks and recreation programs, and charges for use of municipal ambulance services.

    All such fees and charges should be imposed by the council by ordinance or resolution.

  • Traffic and parking fines. Although the state supreme court establishes the schedule for fines for traffic infractions, cities share in the revenue from infractions committed within their boundaries. However, it is necessary for a city to have established a municipal court or a municipal department of a district court or to have contracted with a district court for municipal court services in order to enact and enforce a traffic infraction ordinance.59 After fines are collected by the municipal or district court, 32 percent is sent to the state and, of the remainder, 1.75 percent is sent to the county treasurer for a crime victims and witnesses program. RCW 3.50.100; 3.62.040; 7.68.035(7). The funds retained by the city may be deposited in any city fund.

A city has complete control over setting fines for violation of its parking ordinances. Justice Court Traffic Infraction Rule 6.2(c). It may also charge a penalty of up to $25 for failure to pay a parking ticket fine in the time prescribed by law. RCW 46.63.110(3).

A city may also install and collect revenues from parking meters. Such revenue is to be used to cover the costs of installing and maintaining the meters, for collecting meter fees, and for enforcement of parking meter zone requirements. Revenue collected in excess of such costs may be used for parking studies and for establishing and operating public off-street parking facilities. RCW 46.90.650.

The Budget Process

Interim budget or budgets.
The interim council of a new city must adopt an interim budget for the interim period. If the interim period extends into a new calendar year, it must adopt a second interim budget; the first would extend from the beginning of the interim period to January1 and the second would extend from January 1 to the official incorporation date.60 RCW 35.02.132. The only statutory guidance with respect to creation of the interim budget or budgets is as follows: "These interim budgets shall be adopted in consultation with the state auditor." Id. There are no state auditor guidelines for development of an interim budget. The interim council should contact the state auditor's office soon after taking office in order to develop an interim budget in a timely matter.

First year budget.
Prior to the official date of incorporation, the interim council must adopt a first-year budget. RCW 35.02.132. The budget will actually deal with only a partial year, covering the period from the official date of incorporation until January1 of the following year.61

  • Preliminary first-year budget. RCW 35.02.132 authorizes either the mayor or council, "whichever is appropriate," to prepare, or, in a council-manager city, the council to direct the interim manager to prepare a preliminary budget "in detail."62 In a mayor-council city, the mayor is the appropriate person to prepare the preliminary budget. The statutory scheme for budget preparation after the first year budget provides for preliminary budget preparation by the "chief administrative officer," which, in a mayor-council city, is the mayor. RCW 35A.33.052. Of course, much of the budget preparation will typically be delegated by the mayor to a finance officer or consultant hired for the interim period.

    The preliminary budget is to be made public at least 60 days prior to the official incorporation date "as a recommendation for the final budget." Id. The individual (mayor or interim manager) or body (the council) that prepares the preliminary budget must also prepare and submit, as part of the preliminary budget, a budget message that contains the following:

    • An explanation of the budget document
    • An outline of the recommended financial policies and programs of the city or town for the ensuing fiscal year, and
    • A statement of the recommended appropriation to such policies and programs.

  • Budget hearing. "Immediately following the release of the preliminary budget," the council must publish once each week for two consecutive weeks a notice of a public hearing "on the fixing of the final budget." RCW 35.02.132. The budget hearing must be held at least 20 days before the official incorporation date. Id. "Any taxpayer may appear and be heard" regarding the proposed final budget. Id.

Adoption of budget.
Following the budget hearing, the council may make any adjustments or changes in the proposed budget as it deems necessary. The council may adopt the final budget (by ordinance to be effective on the official incorporation date) at the conclusion of the public hearing or at any time before the official incorporation date.

Important considerations in budget development process.

  • Official incorporation date. The official incorporation date chosen affects both the revenues and expenditures of a new city. It will be helpful to analyze the revenues and expenditures based on a few alternative incorporation dates to compare the advantages of one over the others. See also the section in this publication entitled "Choosing the Official Incorporation Date," at pages 65-68.

  • Vision statement. What is the city's mission or vision? It is important to develop a vision of the city's future based on citizen views of that future. This vision should help guide, among other things, the city's budget priorities and development, the city's organizational structure, its operating procedures, and its plan for community development.

    How does a city determine its vision for the future? It can do this best through some type of survey or questionnaire that seeks to solicit the views of city residents concerning the components of that vision. Often some type of public opinion survey of the residents of a potential city will be conducted in conjunction with an incorporation study or by a transition group prior to election of an interim council.

    Once a new city council and its mayor have some sense of a future direction for the city, a statement of budget issues and priorities can be more readily developed. However, it may take one or two years or more before the city can truly determine its long-range direction.

  • Revenue forecast. Based on estimated state-shared revenues, tax and fee revenues (pursuant to ordinances adopted to take effect upon the official incorporation date), the city must make a good estimate of its first year revenues.

  • Level of services. What services and programs does the city intend to provide? How will they be provided? Will the city contract out for some services? What mix of services is consistent with the city's vision, if any?

    Clearly, it is advisable, if not necessary, to develop a process for evaluating alternative methods of providing services and their respective costs. The determination of which services will be provided, at least initially, by contract will have a significant impact on the size of the city's initial staff. A factor in this determination of which services will be provided by contract is the fact that it simply takes time to get organized and to recruit staff.

  • Level of reserves. The official or officials in charge of financial matters should develop a proposal on the level of reserves the city will need. The purpose of reserves is to provide for (a) revenue shortfalls resulting for either overestimation or economic downturn, (b) any emergency or unanticipated expenditures, (c) catastrophic losses, and (d) to ensure the city's future financial solvency.

  • Capital needs assessment. A number of questions need to be addressed concerning capital project needs,63 such as:

    • What are the city's capital project needs?
    • How will these projects be ranked?
    • What are the estimated operating costs of each desired capital project?
    • How will these projects be financed?
    • If debt financing is considered, what is the city's debt capacity?
    • What is the proposed debt service level and how will it affect future budget years?

    The new city may wish, however, to delay the development of the capital improvement program and budget until sufficient information exists and deliberation time is available to the new city officials.

  • Contracts. The financial consequences of contracts entered into for the first budget year will need to be incorporated into the proposed first year budget.

Providing Municipal Services

When a new city is incorporated, it becomes the primary service provider to residents within its boundaries. Presumably, one of the basic reasons that an unincorporated area incorporates is the desire for more local control over basic services. Nevertheless, a new city cannot possibly provide all at once all the services that it may want to eventually provide. Thus, critical decisions must be made by the interim council concerning what services the city will initially provide, what level of services will be provided, what services will be provided by contract, and with whom the city will contract for those services.64

In addition to the administrative and legislative "services" provided by the mayor or manager and the executive branch and by the city council respectively, a city government commonly provides services in the general areas of public safety, public works, land use planning, and parks and recreation.

Some of these services, such as police, fire, and land use planning, may have been the focus of much debate during the incorporation process, and issues relating to them will likely continue to generate controversy during the interim period and beyond. The very fact of incorporation as well as decisions by the new council concerning certain services may have significant impacts upon special purpose districts such as fire protection and water-sewer districts. The following discussion will summarize the basic considerations involving and the legal and other impacts of service delivery decisions by the new council.

Overview of Service Provision Decisions

The following chart lists, without regard to timing or priority, basic categories of services that a city may provide, who has provided such services prior to incorporation, and the choices for future service delivery:

Service

Pre-Incorporation Provider

Post-Incorporation Provider

Legal (City Attorney)

County

City, by either: establishing city attorney position, or contracting with private firm.

Land Use Planning and Zoning

County

City, although may contract with county for transitional period

Police

County

City or contract with county or with another city; contract may be for short-term during a transition period or be long-term/permanent

Fire Protection

Fire protection district

Options:

· City
· Contract with fire district or another city, for transition, or
· Annex into fire district

Public Works

    

Roads

County

City or contract with county until city attains ability to provide such services at level provided by county or for longer period upon agreement (RCW 35.02.225)

Surface water management

County, special purpose district, or PUD

City either through use of own public works departments or through creation of own surface water drainage utility (can adopt county policies and regulations on interim or permanent basis) or contract with county, or with other city, or private contractor

Solid waste collection

Private hauler

City or contract with private hauler65

Solid waste recycling

Private recycler

City or contract with county or private provider

Building code review, inspection, enforcement

County

City or contract with county or another city or private contractor

Municipal Court

District court

City (creates own municipal court - ch. 3.50 RCW) or through municipal department established in district court (facilities and salaries of judge and personnel paid by city), or contract with district court, contract with another city for municipal court services, or provide no judicial services (have no criminal code or traffic code necessitating such services)

Public Defender

County or contract

City may provide own public defender department, contract with a private firm or organization, or contract with county

Jail

County

City may provide own jail or contract with county for jail services or combination of both 66

Water

Water-sewer district, another city, county, PUD, public corporation, private water association, community water system, other private water purveyors, or individual property owners

· If territory of new city encompasses all or part of water-sewer district, city may assume jurisdiction of that part within its boundaries (see discussion below) and provide own water service, or water district continues providing service, or

· If new city does not overlap water-sewer district, city may provide own water service or provide no water service, or it may contract with another city or with a water-sewer district

· If all or part of territory of new city is served by another city, the latter could continue to provide water service, and new city could provide its own water service in that area not served by other city, or new city could purchase facilities of other city and provide its own service

Sewer

Water-sewer district, another city, county, PUD, metropolitan municipal corporation (e.g., METRO), or individual septic systems

· If territory of new city encompasses all or part of water-sewer district, city may assume jurisdiction of that part within its boundaries and provide own sewer service, or water-sewer district continues providing service, or

· Provide its own sewer service, or contract with another city or a water-sewer district, or become part of metropolitan municipal corporation, or provide no sewer service or

· If all or part of territory of new city is served by another city, the latter could continue to provide sewer service, and new city could provide its own service in that area not served by other city, or new city could purchase facilities of other city and provide its own service

Animal Control

County/humane society

City or contract with county/humane society

Public Health Services

County board of health or multi-county health district

County board of health, multi-county health district, or city with population of 100,000 or more may establish a combined city and county health department, upon agreement with the county

Human Services

County or private non-profit

Provide own human services, contract with county or private group, or provide no such services (private groups, if any, would provide)

Library

County library, regional library, rural county library district, intercounty rural library district, or island library district

Provide own library services, contract with public library or library district, annex into library district,67 or not provide library services
Major service delivery issues.
The following discussion addresses what are typically the major service delivery issues confronting an interim council. The choices involved with these issues generally concern: (1) whether to continue pre-incorporation service delivery either by contracting out for continuation with the existing provider, by not taking the steps necessary to assume jurisdiction over the particular service, or by annexing to a special district providing that service; (2) whether to establish the city's own service delivery; or (3) a combination of (1) and (2). The primary factors involved in making these choices are typically those of cost and affordability and the level of service desired by the community.

The incorporation statutes proclaim the legislative intent that the citizens of a new city receive "uninterrupted and adequate" services prior to the new city "attaining the ability to provide such service levels." RCW 35.02.225. In authorizing a county or counties to contract with a new city for continuation of essential services,68 RCW 35.02.225 provides that such a contract should

be negotiated on the basis of the county's cost to provide services without consideration of capital assets which do not continue to be amortized for principal or interest or depreciated by the county. The exception for not considering capital assets which are no longer amortized for principal and interest or depreciation is recognition of the preexisting financial investment of citizens of the newly incorporated city or town have made in county capital assets.

The incorporation statutes also provide that a successful incorporation election does not remove the responsibility of a county or special district to continue providing services until the official incorporation date. RCW 35.02.220. Special statutory provision is made for continuation of police and road maintenance services beyond the official incorporation date for a period of up to 60 days. Id.

Police.
There are basically two options concerning police services: (1) contract with the county or with a neighboring city for continuation of or provision of police protection at a negotiated service level and cost; or (2) establish a city police department and provide police services at a level consistent with the community's needs, desires, and financial resources. Of course, a new city may decide to initially contract with another jurisdiction for police services and then to establish its own department after the city is comfortably established, or it could establish its own department while contracting with another jurisdiction for certain specialized police services.69 The issues or factors concerning the provision of police services include:

    • Community view of current (pre-incorporation) level of police service
    • Crime rate and public perception of crime rate
    • Economies of scale provided by county police services
    • Start-up costs involved in establishing city police department
    • Liability insurance necessary for city police department
    • Level of experience of city police personnel
    • Continuity of police protection

If the council decides to establish its own department, it will be required to establish a civil service system if the number of full-time police department employees is three or more, including the police chief.70 RCW 42.12.030. (The council may, however, exclude the police chief from civil service when the police department has six or more commissioned officers, including the chief. RCW 42.12.050.) Establishing a civil service system involves appointing a civil service commission, consisting of three persons who serve without compensation. RCW 42.12.030. The commission appoints a secretary/chief examiner and adopts rules and regulations for carrying out the provisions of the statutory civil service system. The council must make an appropriation from the general fund (in an amount not to exceed .4 percent of the total payroll of those included within the jurisdiction and scope of the civil service laws) to fund the civil service system.

Although not necessarily immediately, the council should adopt a criminal and traffic code, assuming it desires to. It is not required that a city have a criminal code, although there may be, depending upon circumstances (such as city size), good reasons to enact one. A city also has the option of providing for civil infractions for violations of city ordinances, rather than criminal sanctions.

The city may adopt by reference the Model Traffic Ordinance (MTO), chapter 308-330 WAC, as its traffic code. RCW 46.90.005, .010. The MTO is a set of statutes, including statutes that incorporate other statutes, that represent together a comprehensive traffic code for local adoption, by reference. All future amendments and additions by the Department of Licensing to the MTO are automatically incorporated into the locally adopted MTO. The MTO essentially eliminates the need for a city to adopt its own lengthy traffic code or to adopt each of the various state statutes individually. A city may specifically exclude certain statutes from the MTO adopted locally.

MRSC has compiled and reproduced the statutes in and incorporated into the MTO, as of April 1998, in a publication entitled Washington Model Traffic Ordinance, MRSC Report No. 41 (April 1998). This publication, along with statutes since added to the MTO, or its equivalent should be filed, after authentication by the city clerk, in the clerk's office along with the ordinance adopting the MTO by reference.

Fire protection. Fire protection outside of incorporated areas is provided by fire protection districts.71 A fire protection district is a type of municipal corporation that is established through an election process and is governed by an elected board of three commissioners. It has the power to levy a property tax, issues bonds, create local improvement districts (LIDs) with voter approval, and exercise the power of eminent domain.

Legislation enacted by the 1993 legislature significantly altered the consequences of an area incorporating as a new city that is a part of one or more fire protection districts. In that common situation, the area of a new city included within a district or districts, which would likely be all of the city, is automatically deemed to have been annexed, at least temporarily, by that district or districts, unless the interim city council passes a resolution precluding annexation by the district or districts. RCW 52.04.161. Under this statute, the city would, absent a resolution precluding annexation, remain annexed to the fire district or districts for the remainder of the year of incorporation, or through the following year if the city council and the board or boards of fire commissioners by resolution provide for that extension. ?The city will be withdrawn from the district or districts at the conclusion of that period unless the voters of the city and a fire protection district approve of annexation of the city to one of the districts involved or of annexation of only that area of the city located within a district or districts. See RCW 52.04.161.72

If the city is withdrawn from the district or districts at the end of the year of incorporation or at the end of the following year, what happens with the district's or districts' assets and liabilities is dictated by the incorporation statutes and is based upon the percentage of the district(s) included within the new city. The following scenarios are possible:

  • City incorporation includes entire area of a fire district. The result in this situation is that the fire district will effectively cease to exist if, after the initial period of annexation discussed above, the city does not annex to the district. RCW 52.08.025. However, for purposes of imposing regular property taxes, the fire district will continue in existence until the first day of January in the year in which the initial property tax collections of the newly incorporated city will be made, if a resolution precluding annexation is adopted under RCW 52.04.161. If no such resolution is passed, either the fire district would continue to exist until the city is withdrawn from the district because the ballot proposition to annex is not approved, or the fire district will continue to exist as it would otherwise (i.e., indefinitely) because a ballot proposition to annex is approved.

    If a resolution precluding annexation is adopted or if no ballot proposition to annex is approved, all the fire protection district's assets and liabilities would become the property of the new city as of the date on which the district ceases to provide fire protection services under RCW 52.04.161. RCW 52.08.025. Under this scenario, the new city may be able to effectively establish its own fire department upon incorporation. It may, of course, also contract with another fire district.

  • City incorporation includes at least 60 percent of assessed value of district. When the area of the new city includes at least 60 percent of the assessed value of the real property of the district and the city does not annex to the district, all the assets of the district become the property of the new city. RCW 35.02.190. The new city must within one year of the date on which the city withdraws from the district, however, pay the fire district in cash, properties, or contracts for fire protection services an amount representing the percentage of the value of the district's assets equal to the percentage of value of the real property in the entire district remaining outside of the city limits. Thus, if, for example, the value of all of the assets of the fire protection district totaled $1,000,000, and 40 percent of the assessed value of the real property in the entire district remained outside of the newly incorporated area, the city would be obligated to pay $400,000 in cash, properties or contracts for fire protection services to the fire protection district.

    A proportionate share of liabilities of the district are transferred under this scenario to the city, equal to the percentage of the total annexed valuation of the district that has been incorporated. RCW 35.02.190.

    However, RCW 35.02.190 goes on to provide that the fire protection district may, by a majority vote of those remaining in the district, require the incorporating city to assume responsibility for fire protection throughout the remaining district, and for the operation and maintenance of the district's property, facilities, and equipment. The district would be obligated in that instance to pay a reasonable fee for such fire protection services.

  • Delay of transfer of assets under the two above scenarios. Under RCW 35.02.202, the interim council and the fire commissioners may, by written agreement entered into during the interim period, delay the transfer of assets and liabilities and the city's responsibility for fire protection under either of the above scenarios for up to one year after the official incorporation date. Under this statute, the fire district may, during this period, annex the city and retain the responsibility for fire protection. This statute, however, may no longer have any practical effect in light of the 1993 legislation discussed above.

  • City incorporation includes less than 60 percent of assessed value of district. If the city incorporates an area equal to less than 60 percent of the assessed value of the fire protection district's real property, pursuant to RCW 35A.14.400 and RCW 35.02.200, the district would retain ownership of all assets of the district, but the district would be required to pay the city (in cash, properties, or contracts for fire protection services) a percentage of the value of its assets equal to the percentage of the value of the real property in the district that has been incorporated into the city. The district is required to make this payment within one year or within such period of time as the district continues to collect taxes in the newly-incorporated area.

  • City incorporation includes less than 5 percent of area of district. If less than 5 percent of the area (not assets) of the district is included in the area incorporated, no payment shall be made to the new city. RCW 35.02.200(1). The fire protection district must, however, provide fire protection to the incorporated area for such period as the district continues to collect taxes levied in that area. Nevertheless, a distribution of assets from the district to the city must occur in this situation if, within 60 days of the official incorporation date, the city adopts a resolution with a finding that the incorporation "will impose a significant increase in the fire suppression responsibilities of the city or town with a corresponding reduction in fire suppression responsibilities by the fire protection district," and the district concurs in the finding within 60 days of when a copy of the resolution is submitted to the board of fire district commissioners. RCW 35.02.205(1). If the district does not concur, the issue goes to arbitration, as detailed in RCW 35.02.205(3). An agreement for the distribution of assets in this situation must be entered into within 90 days of either the concurrence by the district in the town's finding or of the arbitration decision. If the agreement is not entered into within this 90-day period, arbitration is mandated unless the parties agree to an extension of that period. The distribution of assets is to be based upon "the extent of the increased fire suppression responsibilities with a corresponding reduction in fire suppression responsibilities" by the district, and must consider the impact of any debt obligation concerning the property incorporated. RCW 35.02.205(2).

Fire protection alternatives.
There are three basic options for a new city regarding fire protection services.

  • Operate own fire department. It is possible for a municipality to operate its own fire department, either with fully-paid fire fighters, volunteers, or a combination of paid fire fighters and volunteers. Approximately 174 cities and towns in the state utilize volunteer fire