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Ask MRSC - Finance

Below are selected “Ask MRSC” inquiries we have received from local governments throughout Washington State related to finance. Click on any question to see the answer.

These questions are for educational purposes only. All questions and answers have been edited and adapted for posting to the MRSC website, and all identifying information, including the inquirer’s name and agency name, has been removed.

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Reviewed: September 2023

The town needs to consider both the constitutional prohibition against gifts of public funds and the requirement that utility funds only be used for utility purposes. As we note on our Gift of Public Funds page and related blog posts, there are two tests for determining whether an expenditure is an unconstitutional gift of public funds. First, is the expenditure for a fundamental purpose of government? If not, the court looks to see whether the government entity had a “donative intent,” and whether it received an adequate return for the transfer.

The first test is whether the use of town resources is for a fundamental purpose of government. Regardless of the nature of the entity that owns the pool (school district, YMCA, or other non-profit, park district), providing water for a pool that is not owned by the town may not be a fundamental purpose of the town’s government. Looking at the second test, the town would have to show that it did not intend to make a “gift,” and that it considered some kind of agreement to be “adequate return” for the cost of providing water for this purpose. If the town has a contract with the owner of the pool where the pool is providing a service that the town could provide but chooses not to, such as recreation or water safety, the town could provide water in lieu of other payment for those services. An additional consideration is the requirement in RCW 43.09.210(3) that:

All service rendered by, or property transferred from, one department, public improvement, undertaking, institution, or public service industry to another, shall be paid for at its true and full value by the department, public improvement, undertaking, institution, or public service industry receiving the same, and no department, public improvement, undertaking, institution, or public service industry shall benefit in any financial manner whatever by an appropriation or fund made for the support of another.

Washington case law has interpreted this statute to mean that a city or town cannot use utility funds (which are provided by the ratepayers) to benefit a general fund (tax-supported) function. To avoid violating this requirement the town, in addition to determining that it was not a gift of public funds, would separately have to determine that the expenditure directly benefited the water utility, and not just the public as a whole. So, even if the town does have a contract with the pool for services, the town’s general fund would probably be required to pay the water utility for the water. Providing a more specific opinion about this particular request is outside the scope of the general consulting services MRSC provides. We defer to your town attorney to advise you regarding this request.

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Reviewed: May 2023

There are two ways in which funds can be created. They can either be created through a separate ordinance, or they can be created as part of a budget ordinance or budget amendment ordinance. Below are examples that you might find helpful:

The Lakewood and Maple Valley examples are likely the best examples for establishing a fund for grant monies because they are related to use of American Rescue Plan Act (ARPA) funds which is similar to a grant.

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Reviewed: October 2022
As we note in MRSC’s Revenue Guide for Washington Counties (see footnote 56 in p.173), counties do not have the same authority as cities to require general business licenses, and there is no single county statute addressing business licensing. However, counties do have authority to require licenses and charge fees for certain specific businesses or activities within unincorporated areas – for example, gambling (RCW 9.46.295) (RCW 9.46.110), massage therapists (RCW 36.32.122), retail liquor (RCW 67.14.040), public dances and other public recreational or entertainment activities (RCW 67.12.021), and pool halls, billiard halls, and bowling alleys (RCW 67.12.110).

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Reviewed: May 2022

Below are several examples of programs in Washington cities. These examples are a mix of grant and loan programs, but all appear to be funded with non-general fund monies, such as Community Development Block Grant (CDBG) funds.

Here are some additional resources that may be helpful:

  • Main Street Program – Washington’s Main Street Program (MSP) is a state iteration of a nationwide program to revitalize downtown districts. Some examples of cities that participate are Kent, Bellingham, Cle Elum, Puyallup, and Yakima. This program offers funding, networking opportunities, training, and other resources to cities who have an independent 501(c)(3) or 501(c)(6) nonprofit organization dedicated solely to downtown revitalization. Nationally, there are a vast number of cities that participate in this program.
  • USDA Information Center: Downtown Revitalization – Links to a variety of case studies, articles and guides, funding sources, relevant organizations, etc. Some of the topics covered on this site include Business Improvement Districts, community planning, downtown revitalization, and regional rural development.

MRSC staff have noted that an obstacle to building façade improvement loan programs from cities is the state constitutional prohibition on the loaning or gifting of public funds in Article VIII, Section 7 of the State Constitution. Programs that have been successfully implemented appear to have been funded by passing through money from other sources such as the CDBG program or the Economic Development Administration.

For more information, here are links to MRSC’s topic pages Gift of Public Funds and Economic Development in Washington State: An Introduction.

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Reviewed: May 2022

For general information on regulation of special events, including parades, see our Special Events Permits webpage. MRSC also recently published a blog article: A How-To Guide to Sponsoring Summer Celebrations. And here are a couple of examples of city parade regulations:

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Reviewed: April 2022

One of the main criteria to determine eligible use of ARPA funds is: does the use respond to a negative economic impact of the COVID-19 pandemic?

On page 21 of Treasury’s Overview of the Final Rule, it states that local governments can consider the following criteria for identifying eligible businesses:

  • Decreased revenue or gross receipts
  • Financial insecurity
  • Increased costs
  • Capacity to weather financial hardship
  • Challenges covering payroll, rent or mortgage, and other operating costs

The document goes on to say that the following businesses can be presumed to have been disproportionately impacted by the pandemic:

  • Small businesses operating in Qualified Census Tracts
  • Small businesses operated by Tribal governments on Tribal lands
  • Small businesses operating in the U.S. territories

Additionally, on page 40 of the Final Rule, Treasury states:

  • “As discussed in the section Designating a Negative Economic Impact, in the final rule, recipients must identify an economic harm caused or exacerbated by the pandemic on a small business or class of small businesses to provide services that respond. As discussed above, programs or services in this category must respond to a harm experienced by a small business or class of small businesses as a result of the public health emergency. To identify impacted small businesses and necessary response measures, recipients may consider impacts such as lost revenue or increased costs, challenges covering payroll, rent or mortgage, or other operating costs, the capacity of a small business to weather financial hardships, and general financial insecurity resulting from the public health emergency.” [emphasis added]

Because the Final Rule says that recipients “must identify” and “must respond to a harm experienced by a small business,” a conservative approach would be to require small businesses to show that they experienced an economic harm rather than simply certifying they did. A business that did not experience an economic harm caused by the COVID-19 pandemic should not be receiving ARPA funds. We would recommend having documentation for all businesses that receive or have received any ARPA funds. The city should have documentation that demonstrates eligibility listed above.

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Reviewed: September 2021

MRSC has consistently advised that agencies cannot waive permit fees for other public agencies or entities (except for low-income housing, RCW 35.21.685). This is based upon the "local government accountancy act," RCW 43.09.210, which reads in part:

  • All service rendered by, or property transferred from, one department, public improvement, undertaking, institution, or public service industry to another, shall be paid for at its true and full value by the department, public improvement, undertaking, institution, or public service industry receiving the same, and no department, public improvement, undertaking, institution, or public service industry shall benefit in any financial manner whatever by an appropriation or fund made for the support of another (emphasis added).

In our opinion, this statute would require the city department that issues the permits to charge the agency that is proposing the development for the permits. We believe the statute applies to intra-agency permits (e.g., public works department seeking a shoreline permit from planning department), as well as inter-agency permits (e.g., hospital district applying for building permit).

One possible approach is to amend land use/building codes or the fee schedule, providing for a different fee to be paid by all governmental entities. In any case, even if the city were to reduce the amount of the fee, it would still need to recover its costs under RCW 43.09.210.

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Reviewed: July 2021

Yes, our understanding is that funds may be used in this manner provided that the costs of administering the lottery are reasonably proportional to the expected public health benefit.

The U.S. Department of Treasure has issued a series of FAQs regarding use of the Local Fiscal Recovery Funds (LFRF) included in the American Rescue Plan Act (ARPA). FAQ 2.12 asks:

  • May recipients use funds to pay for vaccine incentive programs (e.g., cash or in-kind transfers, lottery programs, or other incentives for individuals who get vaccinated)?
  • Yes. Under the Interim Final Rule, recipients may use Coronavirus State and Local Fiscal Recovery Funds to respond to the COVID-19 public health emergency, including expenses related to COVID-19 vaccination programs. See forthcoming 31 CFR 35.6(b)(1)(i). Programs that provide incentives reasonably expected to increase the number of people who choose to get vaccinated, or that motivate people to get vaccinated sooner than they otherwise would have, are an allowable use of funds so long as such costs are reasonably proportional to the expected public health benefit.

For more on Treasury’s guidance, see this blog written by our Finance Consultant, Eric Lowell: Treasury Issues Guidance for Local Fiscal Recovery Funds.

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Reviewed: April 2021

MRSC recommends that the city council adopt a policy providing for write-offs, stating the criteria that must be met before the write-off can occur. Such a policy should apply to all types of accounts receivable (water, sewer, garbage, court fines and other fees and charges that the city may impose). The policy should consider the variables for each type of receivable with specific criteria and internal controls in place to ensure that the city’s assets (receivables) are being safeguarded, then staff could write the debt off without further council involvement. There are several cities that have adopted write-off policies. Here are a few examples:

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Reviewed: March 2021

A public agency may provide incentives such as gift cards or other small gifts without violating the state’s prohibition on gifting of public funds, provided there is an articulated public purpose for doing so. From our Gift of Public Funds webpage:

In assessing whether a gift has been bestowed to a private entity, the courts have used a two-step process. First, they determine whether the funds are being expended to carry out a fundamental purpose of the government. If so, then no gift of public funds has been made. Otherwise, the court looks to see whether the government entity had a “donative intent,” and whether it received an adequate return for the transfer.

If an incentive program serves a valid purpose of government, then incentivizing participation in that program is not a gift. For example, providing wellness awards to patients that participate in annual check-ups at a hospital district are not gifts under the law. A hospital could also use gift card drawings to get patients to respond to satisfaction surveys. The hospital would be receiving something of value in exchange for the gift card – namely a response to the survey. Similarly, providing some incentive to participate in a community planning process is serving an important governmental purpose.

If a city or other public entity does choose to offer incentives, it should adopt—in advance-- a reasonable policy regarding the incentives and the policy should articulate a valid municipal purpose for the expenditures. If gift cards or other items of monetary value are given as more of an “afterthought” or thank you gift, this would look less like an incentive program and more like a gift.

We recommend discussing the specifics of any program with your city attorney. They will be in the best position to assist in developing an official policy that complies with the constitutional limitations regarding gifting of public funds.

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Reviewed: February 2021

If the council wishes to deviate from the amounts recommended by the LTAC it can do so only after following the procedural requirements of RCW 67.28.1817. This interpretation is based on an informal Attorney General opinion issued in 2016, which is discussed on our Lodging Tax (Hotel-Motel Tax) page:

  • What Does the Municipality Do with the LTAC's Recommendations? The legislative body "may choose only recipients from the list of candidates and recommended amounts provided by the local lodging tax advisory committee" (RCW 67.28.1816(2)(b)(ii), emphasis added). However, an informal opinion from the Attorney General's Office in 2016 states that the legislative body may award amounts different from the LTAC’s recommended amounts, but only after satisfying the procedural requirements of RCW 67.28.1817(2). This requires the municipality to submit its proposed change(s) to the LTAC for review and comment at least forty-five days before final action is taken. For more details, see our blog post on Informal AG Opinion Clarifies Lodging Tax Awards.

So, council may accept the recommendation or reject it without any further action – a vote is all that is required. If the council wants to change the amount awarded to a recommended recipient, it must refer the proposed changes to the LTAC for review and comment.

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Reviewed: January 2021

State law only requires a simple majority vote by the city council for a regular budget amendment; changes to wages, hours, and conditions of employment RCW 35A.33.105; and appropriations of funds received in excess of estimated revenues RCW 35A.33.120(4).

A super majority vote is required when council is amending the budget due to "nondebatable emergencies" RCW 35A.33.080; when the council has declared a public emergency that is not one of the ‘nondebatable’ emergencies RCW 35A.33.090; and when the council declares by facts and findings that it is in the best interest of the city to decrease, revoke or recall an appropriation.

Note: this answer is also applicable to budget amendments for Second and Third Class Cities, Towns and First class cities under 300,000 population. See Chapter 35.33 RCW, specifically RCW 35.33.107; RCW 35.33.121(4); RCW 35.33.081; RCW 35.33.091.

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Reviewed: January 2021

Yes, RCW 82.14.450 provides for a one-tenth of one percent public safety sales tax option for cities or towns. This option is also available to the county with voter approval for up to three-tenths of one percent sales tax. One-third of all money received must be used for “criminal justice purposes, fire protection purposes, or both.” If it is approved countywide then funds are shared with the cities 60/40. If a city adopts it on its own, then it is shared with the county 85/15.

An additional criminal justice sales tax option that is potentially available is RCW 82.14.340. This one-tenth of one percent sales tax option is available only to counties but requires that the counties share with cities within the county using a formula defined within the statute. This sales tax option does not require a vote.

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Reviewed: January 2021

The 6% limitation on a utility tax is applicable only on electricity, telephone, natural gas, and steam energy utilities (RCW 35.21.870). Any increase in excess of 6% requires voter approval. In addition, federal law prohibits taxing internet or broadcast satellite TV services and places limitations on local cable television taxes. See MRSC's Utility Taxes page for a summary of maximum utility tax rates by utility type. There is no limit prescribed by state or federal law for other utilities, such as sewer, solid waste, stormwater and water. However, if the city is proposing to increase the tax on one of these utilities a referendum clause may be required.

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Reviewed: December 2020

Lodging tax has two different components. The state shared retail sales tax portion (2%) RCW 67.28.180, and the additional 2% authorized under RCW 67.28.181(1)

Here is a link to the Revenue Guide for WA Counties that explains the two components of lodging tax (aka: Hotel/Motel Tax). These are both excise tax options available to cities and counties that do not require a vote of the citizens.

There is no difference in the allowed use of these two components of the lodging tax, both of which are restricted resources that may only be used for tourism activities or tourism-related facilities. The distribution by the state for lodging tax is always remitted separately for each component of the tax because the statutory authority to impose the taxes are separate.

RCW 67.28.180 is a credit against the state’s sales tax and therefore is not an increase in taxes but rather a sharing of state sales tax with local government, while the additional 2% authorized in RCW 67.28.181 is an increase in the excise tax. All of the remaining definitions, allowed use, and distribution processes are the same.

The state decision to label one of these tax distributions as a ‘transient rental tax’ is only intended to designate a difference between RCW 67.28.180 and RCW 67.28.181.

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Reviewed: November 2020

Yes, overpayment to an employee is a gift of public funds and should be recovered. State law sets forth a process for an employer to recover the overpayment of wages. See RCW 49.48.200. If recovery of the overpayment is made by deduction from future wages, the deductions cannot exceed 5% of the employee’s disposable earning in any pay period, other than the final pay period, unless the employee agrees to a greater deduction. For more information, see our 2015 blog article, What if We Accidentally Overpaid an Employee?

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Reviewed: November 2020

If the capital project was a project listed within the capital facilities plan (CFP) of the city (RCW 82.46.010 (2)(b) and 82.46.035(3)), then yes the city can use its REET funds for debt service. The statute provides for the financing of capital projects as identified within the CFP element of the city’s comprehensive plan.

  • RCW 82.46.010(2)(b) After April 30, 1992, revenues generated from the tax imposed under this subsection (2) in counties over five thousand population and cities over five thousand population that are required or choose to plan under RCW 36.70A.040 must be used solely for financing capital projects specified in a capital facilities plan element of a comprehensive plan and housing relocation assistance under RCW 59.18.440 and 59.18.450.
  • RCW 82.46.035(3) Revenues generated from the tax imposed under subsection (2) of this section must be used by such counties and cities solely for financing capital projects specified in a capital facilities plan element of a comprehensive plan. However, revenues (a) pledged by such counties and cities to debt retirement prior to March 1, 1992, may continue to be used for that purpose until the original debt for which the revenues were pledged is retired, or (b) committed prior to March 1, 1992, by such counties or cities to a project may continue to be used for that purpose until the project is completed.

You did not specify what type of capital project was bonded, so here are the statutory references for the definition of capital projects within REET 1 (RCW 82.46.010(6)(b)) and for REET 2 (RCW 82.46.035(5)).

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Reviewed: August 2020

The allocations of the motor vehicle fuel tax (MVFT) are done by percentage according to RCW 46.68.090, based upon the various portions of the MVFT collected in RCW 82.38.030:

  • Of the first 23 cents per-gallon in RCW 82.38.030(1) – cities receive 10.6961% of the tax collected, counties receive 19.2287% and the state retains the remainder.
  • Of the 2005 tax (RCW 82.38.030(3)) imposed for an additional 3 cents per gallon – the cities receive 8.3333% of the tax collected.
  • Of the 2006 tax (RCW 82.38.030(4)) imposed for an additional 3 cents per gallon – the cities receive 8.3333% of the tax collected.
  • Of the tax imposed in sub-section (7) and (8) for 11.9 cents per gallon the distribution by the state is a direct appropriation of $5,859,500 to cities which is allocated on a per capita basis. There is no % of allocation.

As you can see, the formulas for calculating the distribution of the various portions of the MVFT are complicated, with allocations being made to numerous programs of the state on specific portions of the tax.

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