HomeMy WebLinkAbout09/16/2025 - Work Study - Packet171. Meeting Location: Contact us:
Council Phone (360)
portor hard
4407
216 Prospect Street cityhall@portorchardwa.gov
Port Orchard, WA 98366 www.portorchardwa.gov
City Council
Work Study Session
Tuesday, September 16, 2025
6:30 PM
Pursuant to the Open Public Meetings Act, Chapter 42.30 RCW, the City Council is conducting its public meeting
in a hybrid format with options for in -person attendance in the Council Chambers at City Hall or remote viewing
and participation via Zoom (link below). The meeting is streamed live on the City's YouTube channel, click here.
Remote Access
Link: https://us02web. zoom. us/j/87978394172
Zoom Meeting ID: 879 7839 4172
Zoom Call -In: 1 253 215 8782
Guiding Principles
Are we raising the bar in all of our actions?
Are we honoring the past, but not living in the past?
Are we building positive connections with our community and outside partners?
Is the decision -making process building a diverse, equitable, and inclusive community?
1. Call to Order
A. Pledge of Allegiance
2. Discussion Items
A. Schedule for the 2025-2026 Mid -Biennial Review (Crocker)
B. General Sewer Plan Presentation (Ryan, Crocker)
C. Multifamily Tax Exemption (MFTE) (Bond)
Estimated Time: 40 Minutes
3. Good of the Order
4. Adjournment
ADA Requirements
In compliance with the American with Disabilities Act, if you need accommodations to participate in this meeting, please
contact the City Clerk's office at (360) 876-4407. Notification at least 48 hours in advance of meeting will enable the City
September 16, 2025 Meeting Agenda
to make arrangements to assure accessibility to this meeting.
REMINDER: Please silence all electronic devices while City Council is in session.
To subscribe to our general news & public notices click the link: http://portorchardwa.gov/subscribe
For current City Council member and contact information, please visit https://portorchardwa.gov/departments/city-
council/.
For Committee Membership please visit https://portorchardwa.gov/city-council-advisory-committees/.
September 16, 2025 Meeting Agenda
2
rfl City of Port Orchard
ORCHARD 216 Prospect Street, Port Orchard, WA 98366
(360) 876-4407 • FAX (360) 895-9029
Agenda Staff Report
Discussion Items: Schedule for the 2025-2026 Mid -Biennial Review (Crocker)
Meeting Date: September 16, 2025
Prepared By: Noah Crocker, M.B.A., Finance Director
Presenter: Noah Crocker, M.B.A., Finance Director
Summary and Background: Discuss the proposed timeline for the 2025-2026 Mid -Biennial Review
Process
Relationship to Comprenhensive Plan: TBD
Recommendation: Discussion
Alternatives: TBD
Attachments:
Mid -Biennial Budget Review Schedule 2025-2026.pdf
3
ORCHARD
Mid -Biennial Budget Review Schedule
• Departments provided Budget Status Report
• Finance Director reviews Budget Status Report with Mayor
• Departments are consulted on possible modifications to the budget
• Potential Department Director interview on modifications
• October 7-10, 2025 Council Finance Committee initial review of Status Report
• October 14, 2025 Public Hearing on Revenue Sources leading to setting of 2026 Property
Tax Levy Collection
• October 21, 2025 Work Study Session Mid -Biennial Review modification
recommendations
• October 21, 2025 Public Hearing on modifications to the Biennial Budget shall be
advertised at least once and shall be held no later than the first Monday in December
and may be continued from time to time.
• October 28, 2025 Ordinance setting 2026 Property Tax Levy Collection
• October 28, 2025 Ordinance Adopting Budget Amendments for 2025-02026
• At such hearing, the Council may consider a proposed Ordinance to carry out any
modification, subject to the other provisions on RCW 35.34.
NOVEMB
DECEMBER
• Finance Director records modifications to the Biennial Budget
Ong City of Port Orchard
ORCHARD 216 Prospect Street, Port Orchard, WA 98366
1.. (360) 876-4407 • FAX (360) 895-9029
Agenda Staff Report
Discussion Items: General Sewer Plan Presentation (Ryan, Crocker)
Meeting Date: September 16, 2025
Prepared By: Sayre Thompson, PW Procurement Specialist
Presenter: Denis Ryan, CPWP-M, CPRP, Public Works Director
Summary and Background: The City of Port Orchard recently completed a Sewer Rate Study to guide
planning through 2030. The study reviewed how much revenue is needed to operate and maintain the
sewer system, and proposed a new rate structure that's simpler and more equitable.
To support rising costs and major infrastructure projects —like pump station replacements and basin
improvements —the City will need to increase sewer revenue by about 3.5% annually. These upgrades
will be funded through a mix of rate revenue, developer fees, grants, and low -interest loans.
The proposed changes aim to keep rates fair, transparent, and financially sustainable while ensuring
reliable sewer service for the community.
Relationship to Comprenhensive Plan: 8 - Utilities
Recommendation: Staff recommends that the City Council review the proposed sewer rate structure
and consider its adoption, taking into account community input, financial impacts, and long-term
utility planning.
Alternatives: The City could maintain the current rate structure, but doing so may result in revenue
shortfalls and continued inequities in how sewer costs are distributed.
Attachments:
Port Orchard Sewer Rates Draft Report v8 (with Appendix).pdf
20250610 Port Orchard Sewer Rates v10.pptx
•
j
` _� •: . - f • ♦ ' ";` ovvman company 4
• 3 +� ``� it s� , �`1� O
I� W
❖>FCS
a Bowman company
August 6, 2025
Noah Crocker, Finance Director
City of Port Orchard
216 Prospect Street
Port Orchard, WA 98366
Re: DRAFT Sewer Utility: Revenue Requirement, Cost -of -Service Analysis, and Rate Design
Dear Mr. Crocker:
FCS, a Bowman company, is pleased to submit this report summarizing the results of the revenue requirement,
cost -of -service, and rate design study for the City's sewer utility. We want to thank you and City staff for your
assistance and participation in data collection, analysis review, and discussion of key policy topics.
It has been a pleasure to work with you and other City staff on this effort. Please let us know if you have any
questions or need additional information. Tage Aaker, the study's project manager, can be reached at (425) 615-
6487 or Tage.Aaker@bowman.com.
Sincerely,
John Ghilarducci
Principal
Tage Aaker
Senior Project Manager
Zech Hazel
Assistant Project Manager
•:> FCS
fcsgroup.com I bowman.com
City of Port Orchard
Sewer Rate Study
Contents
August 2025
page ii
Exhibits................................................................................................................................................................................................................................ iii
1. Introduction...................................................................................................................................................................................................................1
Background...................................................................................................................................................................................................................1
RevenueRequirement Forecast............................................................................................................................................................................1
Costof Service Analysis............................................................................................................................................................................................2
RateDesign...................................................................................................................................................................................................................2
2. Fiscal Policies.................................................................................................................................................................................................................3
OperatingReserve — Fund 431..............................................................................................................................................................................3
CapitalReserve — Fund 433....................................................................................................................................................................................3
AdoptedCity Fiscal Policies....................................................................................................................................................................................4
StabilizationReserve — Fund 432.........................................................................................................................................................................4
DebtManagement.....................................................................................................................................................................................................4
Summaryof Fiscal Policies......................................................................................................................................................................................6
3. Revenue Requirement...............................................................................................................................................................................................7
FundBalances.............................................................................................................................................................................................................. 7
Economicand Inflation Factors.............................................................................................................................................................................7
Operating Revenues and Expenses.....................................................................................................................................................................8
CapitalImprovement Program(CIP)...................................................................................................................................................................8
OverallRevenue Requirement Forecast..........................................................................................................................................................10
4. Cost -of -Service Analysis.........................................................................................................................................................................................12
Background.................................................................................................................................................................................................................12
FunctionalCost Allocation....................................................................................................................................................................................12
CustomerClass Distinctions.................................................................................................................................................................................13
CostAllocation...........................................................................................................................................................................................................14
5. Rate Design..................................................................................................................................................................................................................15
Background.................................................................................................................................................................................................................15
RateDesign.................................................................................................................................................................................................................15
6. Summary.......................................................................................................................................................................................................................16
UpdatingThis Study's Findings...........................................................................................................................................................................16
RateComparisons....................................................................................................................................................................................................16
AppendixA: Existing Rate Schedule.......................................................................................................................................................................17
•:;>FCS
,,. �,a fcsgroup.com bowman.com
8
City of Port Orchard
Sewer Rate Study
Exhibits
August 2025
page iii
Exhibit 1.
Revenue Requirement Diagram........................................................................................................................................1
Exhibit 2.
Cost -of -Service Analysis Overview...................................................................................................................................2
Exhibit3.
Summary of Fiscal Policies..................................................................................................................................................6
Exhibit4.
Allocation of Utility Cash......................................................................................................................................................7
Exhibit 5.
Economic and Inflation Factors.........................................................................................................................................7
Exhibit 6.
Capital Improvement Program (2025-2030)................................................................................................................9
Exhibit 7.
Capital Funding (2025-2030)..............................................................................................................................................9
Exhibit 8.
Annual Revenue Requirement Forecast (2025-2030).............................................................................................10
Exhibit 9.
Fund Balance Forecast (2025-2030)..............................................................................................................................11
Exhibit 10.
Functional Allocation (2026).............................................................................................................................................13
Exhibit 11.
Customer Statistics by Class (2026)...............................................................................................................................13
Exhibit 12.
Cost -of -Service Analysis Results (2026).......................................................................................................................14
Exhibit13.
Rate Design (2026)...............................................................................................................................................................15
Exhibit 14.
Calculated Bi-Monthly Rates per ERU (2026-2030).................................................................................................15
Exhibit 15.
Jurisdictional Survey — Bi-Monthly Single-family Rates (10 CCF of Sewer Flow) .........................................16
•:;>FCS
.• - ,Y ksgroup.com I bowman.com
9
1. Introduction
Background
The City of Port Orchard (City) is located in Kitsap County and provides sewer collection services to most of the
residents of Port Orchard, with treatment services provided by the West Sound Utility District (WSUD). The City
charges bi-monthly sewer rates to cover both collection and treatment costs.
The City along with WSUD jointly own the South Kitsap Water Reclamation Facility (SKWRF), which provides
treatment services to customers in both jurisdictions. The Wastewater Facilities Management Interlocal
Agreement (the Joint Agreement) describes the operation of the SKWRF and the division of operating and capital
costs. Under the Joint Agreement, each jurisdiction splits the operating costs of the SKWRF based on the number
of equivalent residential units (ERUs) in each jurisdiction, where one ERU is equal to 180 gpd of sewer flow. As of
2024, the City was allocated about 49 percent of the total ERUs and WSUD was allocated 51 percent.
In 2023, the City contracted with FCS, a Bowman Company (FCS), to perform a rate study for its sewer utility. This
study includes the elements that are outlined in the sections below and documented in the rest of the report.
Section 6 summarizes the rate study results and outlines the City's implementation steps.
Revenue Requirement Forecast
The first purpose of this rate study is to develop a funding plan ("revenue requirement") for the years 2025
through 2030, a period that aligns with the capital improvement program. The revenue requirement analysis
identifies the total revenue needed to fully fund the utility on a standalone basis considering operating and
maintenance expenditures, fiscal policy achievement, and the capital project needs of the utility. Exhibit 1
outlines the key inputs in the revenue requirement analysis.
Exhibit 1. Revenue Requirement Diagram
Fiscal Policies
Capital I I I Economic
Improvement I Assumptions
Program (CIP)
Revenue
Requirement
Capital Funding Operating Costs
Section 2 discusses fiscal policies that inform the revenue requirement analysis, and Section 3 describes the
revenue requirement analysis. The initial results of the analysis are the recommended percentage rate
adjustments (as applied to the current rate structure) needed to meet the obligations of the utility. The cost -of -
service and rate design tasks described below will provide an alternative rate structure for the City's
consideration that increases the fairness of how rates are charged to customers, while generating sufficient
revenue and meeting other City policy objectives.
:i'FCS fcsgroup.com I bowman.com 10
City of Port Orchard
Sewer Rate Study
Cost of Service Analysis
August 2025
page 2
The purpose of a cost -of -service analysis (COSA) is to provide a rational basis for distributing the full costs of a
utility (i.e., revenue requirement) to each customer class in proportion to the demands they place on the system.
Detailed cost allocations, along with appropriate customer -class designations, help to increase the degree of
equity that can be achieved in the resulting rate structure.
The cost categories documented in this report include the following:
Customer Costs — The costs related to providing customer billing and related services.
Flow Costs — The costs associated with conveying sewer flow to the SKWRF, which include the costs of
boosting sewer flow, maintaining sewer lines, and other such costs.
Treatment Costs — The costs of operating the SKWRF to process sewer flow as outlined in the Joint
Agreement.
Two customer classes were analyzed: Residential and Non -Residential. The Residential class includes all single-
family and multi -family housing units, and the Non -Residential class includes every other customer. These classes
match those used by the City when determining the number of ERUs in its collection system for the purposes of
dividing treatment costs under the Joint Agreement; each Residential dwelling unit is equal to one ERU, and each
Non -Residential customer is assigned ERUs based on its winter average flow. Exhibit 2 below outlines the
approach taken in this report.
Exhibit 2. Cost -of -Service Analysis Overview
Revenue Requirement
1
Allocate Costs by Function
Customer Flow Treatment
Allocate Costs to Customer Classes
Residential Non -Residential
The results of the COSA are documented in Section 4.
Rate Design
The primary goal of rate design is to ensure the rate structure generates sufficient revenue aligned with the cost
of providing service. While guided by cost -of -service results, the rates also reflect the City's policy objectives. This
report focuses on simplifying the rate structure for Non -Residential customers, given the current complexity of
customer classes — the City currently has approximately twenty non-residential rate classes. The supporting
analysis is provided in Section 5.
•:;>FCS
.•- tea, fcsgroup.com I bowman.com 11
City of Port Orchard
Sewer Rate Study
2. Fiscal Policies
August 2025
page 3
The basic framework for evaluating utility revenue needs includes sound fiscal policies. Several policy topics are
important to consider further as part of managing the finances of the City, including operating reserves, capital
reserves, and debt management. The City makes use of four different reserves: operating, stabilization, capital,
and debt service.
When evaluating reserve levels and objectives, it is important to recognize that the value of reserves lies in their
potential use. A reserve strategy that deliberately avoids any use of reserves negates their purpose. The
fluctuation of reserve levels may indicate that the system is working, while the lack of variation over many years
strongly suggests that the reserves are, in fact, unnecessary.
Operating Reserve — Fund 431
An operating reserve is designed to provide a liquidity cushion; it protects the utility from the risk of short-term
variation in the timing of revenue collection or payment of expenses. Industry practice for utility operating
reserves typically ranges from 30 days (8 percent) to 120 days (33 percent) of operating expenses, with the lower
end more appropriate for utilities with stable revenue streams and the higher end of the range more appropriate
for utilities with significant seasonal or consumption -based fluctuations.
Recommended Policy: Achieve a year-end balance target of at least 60 days (16 percent) of
total annual operating expenditures. This equates to $924,000 for the 2025 budget.
Capital Reserve — Fund 433
This reserve provides a source of emergency funding for unexpected asset failures or other unanticipated capital
needs. This capital reserve policy is not intended to guard against catastrophic system failure or extreme acts of
nature. Minimum balances for capital reserves are often based on a percentage (commonly 1 percent to 2
percent) of the original cost of utility fixed assets or an amount determined sufficient to fund an emergency
capital project or equipment failure. Capital reserves larger than these amounts may be prudent if the City is
saving for future capital projects that cannot be funded with same -year rate revenues.
Recommended Policy: Achieve a year-end target of at least 2 percent of the original cost of
fixed assets. In 2025, the City had almost $61 million in sewer assets plus construction in
progress, which results in a $1.2 million capital reserve target. Capital reserves larger than this
may be prudent if the City is saving in advance for future capital projects. This target is
projected to grow over time as the City executes its capital improvement program.
•:;>FCS
.• - 'Y fcsgroup.com I bowman.com 12
City of Port Orchard
Sewer Rate Study
Adopted City Fiscal Policies
August 2025
page 4
Per Resolution No. 053-20, the City's sewer operating reserve (Fund 431) balance must be sufficient to meet
roughly two months of recurring revenue, with a goal to work towards a maximum of three months of revenues.
The City does not have an adopted policy regarding its capital reserve (Fund 433).
Calculating a reserve based on revenue in the rate forecast model can create a circular type of argument, so it
was not modeled that way. As previously noted, operating reserves are typically based on a certain number of
days of operating expenditures. The American Water Works Association (AWWA) published a 2018 Cash Reserve
Policy Guidelines, and it cites recommended reserve levels from the Water Environment Federation, International
City/County Management Association, and the Government Finance Officers Association, all of which reference a
certain number of days of operating expenses. Capital reserves are typically based on a percentage of fixed
assets or an amount sufficient to respond to an emergency capital project.
To make sure the rate plan met the City's adopted policy, FCS tested the combined operating reserve (60 days of
operating expenses) plus the capital reserve (2 percent of fixed assets) to ensure that it was equal to or greater
than 90 days of revenues. In all years of the study period the modeled reserve targets met or exceeded the City's
adopted fiscal policies.
Stabilization Reserve — Fund 432
The City maintains stabilization reserves for each of its water, sewer, and stormwater utilities. Per the City's
adopted fiscal policies, this reserve "shall be used if all efforts have been exhausted to fund a qualifying event
and no reasonable budget adjustments are available to continue to provide essential services to the public." The
policy notes qualifying events as follows:
• The State of Washington or the Federal government formally declares a disaster or emergency.
• A natural or urgent event that jeopardizes public safety, impedes commerce, or threatens additional damage
to City infrastructure.
• Unforeseen events or situations outside of the scope of contingency planning or planned normal course of
government operations.
• An act of war, terrorism, or declaration of Martial law.
Recommended Policy: Per Resolution No. 053-20, the stabilization reserve should target
having 90 days (25 percent) of annual expenditures. Per discussions with City staff, this reserve
is fully funded through the end of 2030. The forecast did not assume these funds were available
for use, nor did the forecast add any funds to this reserve throughout the study period.
Debt Management
The City currently has five outstanding sewer utility -related loans. For the management of current as well as
potential future debt, some considerations are provided below.
Types of Debt Considered as Part of this Forecast
For utilities, there are two primary sources of debt financing: State or federal loans and market debt financing.
•:;>FCS
.• - ,Y fcsgroup.com I bowman.com 13
City of Port Orchard
Sewer Rate Study
State -Administered Loan Programs
August 2025
page 5
State -administered loans (including federal loans administered by the State) are generally preferable to market
debt financing. The interest rate is generally lower for State loans, and the loan terms often offer more flexibility
in administering the debt. For instance, most State loan programs do not include a requirement that the utility
maintain a certain minimum level of debt service coverage.
Market Debt Financing
General Obligation Bonds
General Obligation (G.O.) bonds are voter -approved bonds secured by the full faith and credit of the issuing
agency, committing all available tax and revenue resources to debt repayment. With this high level of
commitment, G.O. bonds have relatively low interest rates. General Obligation taxing authority can be sought as
a backup pledge to reduce the interest rate of utility debt, even if the actual source of repayment is intended to
be utility rates. However, the use of G.O. bond financing is limited in relation to assessed valuation, and G.O.
bonds must be authorized by 60 percent of the voters. For these reasons, G.O. bonds are not often used for
utility capital projects.
Limited Tax General Obligation (LTGO) bonds can also be issued up to a statutory ceiling without a vote of the
people. In Washington, they are sometimes referred to as "council manic" bonds. Unlike G.O. bonds, LTGO debt
does not authorize additional property taxes; instead, it must be repaid within the City's existing taxing authority.
Usually there are competing demands for that funding within a City, and for that reason, LTGO debt is not often
used for utility capital projects either.
Revenue Bonds
Revenue bonds are secured by the revenues of the issuing utility; the debt obligation does not extend to the
City's other revenue sources. With this limited commitment, revenue bonds usually bear higher interest rates
than G.O. bonds. Revenue bonds typically require the achievement of minimum debt service coverage each year.
Revenue bonds can be issued in Washington without a public vote. There is no limit, except the practical limit of
the utility's ability to generate revenue to repay the debt and meet debt service coverage each year.
Forecast Assumption: The forecast assumes that the City will issue revenue bonds when debt
is needed. While low-cost state loans are typically preferred, revenue bonds are conservatively
assumed as they require the forecast to cover higher interest rates and debt service coverage
requirements. If the City secures low-cost state loans, that will be a positive result that will not
negatively impact the forecast, while the inverse could have a negative impact on the forecast
(relying on state loans but ultimately needing to rely on revenue bonds instead which have
higher interest and debt service coverage requirements).
Debt Service / Reserve — Fund 434
A debt reserve is most often required as a condition of bond issuance, though some state loan programs also
require a reserve. The reserve intends to protect bondholders (or the agency issuing loans) from the risk of the
borrower defaulting on their payments and is most often linked to either average annual debt service or
maximum annual debt service.
•:;>FCS
.• - ,Y fcsgroup.com I bowman.com 14
City of Port Orchard August 2025
Sewer Rate Study page 6
Recommended Policy: The policy should be dictated by terms outlined in contracts for debt
obligations.
Debt Service Coverage
Debt service coverage is typically a requirement associated with revenue bonds and some state loans, and it is an
important benchmark to measure the riskiness of the sewer utility's capital funding plans. Coverage is most easily
understood as a factor applied to annual debt service. In such a case, if it issues revenue bonds, the utility agrees
to collect enough revenue to meet operating expenses and not only pay debt service but to collect an additional
factor (often 25 percent) above bonded debt service. The extra revenue is a "cushion" that makes bondholders
more confident that debt service will be paid on time.
Recommended Policy: While a factor of 1.25 is a common legal minimum coverage
requirement for revenue bonds, we recommend a more conservative internal policy coverage
target of at least 1.50 to 2.00 for revenue bond debt. We are not currently aware of any debt
service coverage requirements related to the City's existing sewer utility -related loans.
Summary of Fiscal Policies
Exhibit 3 provides a summary of the recommended fiscal policies for the City.
Exhibit 3. Summary of Fiscal Policies
Achieve a year-end minimum balance target of 60 days (16 percent) of total annual
Operating Reserve
operating expenditures. This target increases as the City's operating costs increase.
Capital Reserve Achieve a year-end target of at least 2 percent of the original cost of fixed assets.
Compare the combined operating plus capital targets against the City's adopted
Operating plus Capital
policy of three months of recurring revenues.
While a factor of 1.25 is a common legal minimum coverage for revenue bonds,
Debt Service Coverage
achieve an internal policy coverage target of at least 1.50 to 2.00+ when possible.
•:;>FCS
.• - ,Y fcsgroup.com I bowman.com 15
City of Port Orchard
Sewer Rate Study
3. Revenue Requirement
August 2025
page 7
This section summarizes the results of the revenue requirement analysis for 2025 through 2030. As noted
previously, the revenue requirement analysis identifies the total revenue needed to fully fund the utility on a
standalone basis, considering all current financial obligations. Those financial obligations include fiscal policy
achievement, operating costs, debt service costs, and capital costs. Resources to meet those obligations include
fund balances, rate revenues, planned debt issuances, and other funding sources. The result of this analysis is a
series of recommended annual rate adjustments to satisfy the revenue requirement.
Fund Balances
A summary of each fund as of the beginning of 2025 is provided in Exhibit 4 below. These balances are
projected into future years using the forecasted revenues and expenses. The theory behind the minimum target
balances is discussed in more detail in Section 2.
Exhibit 4. Allocation of Utility Cash
Operating Reserve $8,750,000 60-90 days of budgeted expenses (about $1.1 million)
Stabilization Reserve 1,700,000 90 days of budgeted revenues (about $1.6 million)
Capital Reserve 10,190,000 2 percent of the original cost of plant assets (about $1.2 million)
Debt Reserve 1,530,000 One year of debt service payments (about $923,000)
Total Fund Balance $22,180,000 The combined totals from above (about $4.8 million)
Economic and Inflation Factors
The study makes several assumptions about economic inflation factors, account growth, taxes on utility revenues,
and interest returns on the City's fund balances. These are outlined in Exhibit 5 below.
Exhibit 5. Economic and Inflation Factors
10 -year average of the Consumer Price Index for Urban Customers (West
General Cost Inflation 3.00%
Region)
Construction Cost 3 .50% 10 -year average of the Engineering News -Record's 20 -City Avg. Construction
Inflation Cost Index
•:;>FCS
.• - ,Y fcsgroup.com I bowman.com 16
City of Port Orchard
Sewer Rate Study
Labor Cost Inflation 3.00% Discussions with the City
Benefit Cost Inflation 5.00% Discussions with the City
Account Growth
Investment Interest
August 2025
page 8
1.25% Kitsap County Countywide Planning Policies
The Local Government Investment Pool rate for Washington. Forecasted to
4.45%
decrease.
Operating Revenues and Expenses
Annual operating revenues and expenses are based on the City's 2025 and 2026 budgets. Those amounts are
then escalated for future years using the factors described in Exhibit 5 above. The exceptions are sewer rate
revenues, which were estimated using the City's customer billing data, as well as treatment costs.
As described in Section 1, the Joint Agreement splits sewer treatment costs between each jurisdiction (the City
and WSUD) based on their share of the total ERUs in both jurisdictions. So, in addition to modelling an increase
in the cost of treatment based on the general cost inflation factor described in Exhibit 5, a forecast of the
number of ERUs in each jurisdiction was also completed to determine how cost recovery might shift between the
City and WSUD. The City's account growth is described in Exhibit 5. A growth rate of 1.75 percent was used for
WSUD, and so it is forecasted that WSUD will slowly begin to take on more of the treatment costs.
In 2025 the City is expecting to collect $7.3 million in operating revenues. Of this total, about $6.4 million is
expected to come from ongoing utility rates, and the remainder is from miscellaneous fees, interest on the City's
fund balances, and capital facilities charges (CFCs) used to pay for the City's existing debt. The City is expecting
to spend $5.6 million on operating costs, of which $2.0 million is for sewer treatment costs.
The utility has five existing debt obligations — four of which are low interest loans related to sewer utility
construction projects, with interest rates ranging from 0.69 percent up to 2.60 percent. It also has one obligation
it shares with other utilities for a City Hall remodel. The total debt service for these obligations is about $923,000
in 2025, though it will decrease to $749,000 in 2030 as some of the debt service is retired.
Capital Improvement Program (CIP)
The City, along with Consor (the engineering firm preparing the City's sewer master plan), prepared a CIP for the
planning period (2025-2030). The average annual cost of this plan in 2024 dollars is $9.0 million. Inflation to the
year of construction for each project was estimated using the construction cost inflation factor described above.
The annual CIP cost by fiscal year is shown in Exhibit 6 below, and totals $60.3 million.
•:;>FCS
.• - ,Y fcsgroup.com I bowman.com 17
City of Port Orchard
Sewer Rate Study
Exhibit 6. Capital Improvement Program (2025-2030) in Escalated Dollars
N $25
c
g $20
2 $15
$10
$5
$-
August 2025
page 9
The City will use several funding sources to cover its capital needs. Between the low-cost loans the City has
secured, and the revenue bonds planned in this revenue requirement, the City will fund about 26 percent of its
capital plan through debt. As much as 46 percent of the plan will be funded by outside sources, such as
agreements with the Washington Department of Transportation (WSDOT), Kitsap Transit (Kitsap), developer
agreements, and capital facilities charges (CFCs). The remaining 30 percent of the capital plan will be funded by
utility rates and existing fund balances. These capital funding sources are summarized in Exhibit 7 below.
CFCs, $5,000,000,
8%
Exhibit 7. Capital Funding (2025-2030)
Low -Cost Loans,
$3,600,000, 6%
r
r
Agreements,
$9,800,000, 16%
Revenue Bonds,
$11,900,000, 20%
WSDOT/Kitsap,
$12,000,000, 20%
Grants, $200,000,
0%
•:;>FCS
• .".Y fcsgroup.com I bowman.com 18
City of Port Orchard
Sewer Rate Study
Overall Revenue Requirement Forecast
August 2025
page 10
Exhibit 8 illustrates the projected revenue requirements through 2030. The columns depict various utility costs,
including operating expenses, debt service, and annual rate revenue allocated for capital projects. The solid black
line indicates revenue at current rates, while the dashed line represents revenue with rate increases.
• Solid black line: Revenue at existing rates (including rate revenue and non -rate revenues).
Rate revenue (at current rates) is expected to be roughly $6.4 million in 2025 and increases with the
account growth rate described in Exhibit 5.
Non -rate operating revenues are about $852,000, about half of which is capital facility charge revenue
used to pay for debt.
Dashed black line: Revenues with rate increases.
Rate revenue must increase to allow the utility to fund the operating costs and capital projects. These
rate increases are forecasted to be 3.50 percent from 2026 through 2030.
• [giiii• : Cash operating expenses.
Operating expenses begin at $5.6 million based on the 2025 budget. The 2026 budget ($6.1 million)
and inflation factors described in Exhibit 5 provide the forecast for future years.
• : Debt service.
Existing debt service is approximately $923,000 annually from 2025 through 2029 before dropping to
$750,000 from there on.
New debt service includes revenue bond issuances for capital: $10.0 million in 2028 and $1.9 million in
2030. Annual debt service is expected to start at $822,000 in 2028 and increase to $979,000 in 2030.
• � : Rate -funded capital.
Rate -funded capital totals $1.4 million from 2025 through 2027. This amount does not include funding
from the City's existing fund balances, which are used to fill funding gaps as they arise.
• Data labels: Annual system -wide rate increase and the bi-monthly bill for a single-family residence.
V, $9
o $8
$7
2 $6
$5
$4
$3
$2
$1
$0
Exhibit 8. Annual Revenue Requirement Forecast (2025-2030)
3.50% 3.50% 3.50%
3.50% 3.50% 4 ! RA ^ $187 05 $193.59
Operating & Maintenance Debt Service Rate Funded Capital
Revenue @ 2025 Rates — — Revenue with Increases
•:;>FCS
.• - ,Y fcsgroup.com I bowman.com 19
City of Port Orchard August 2025
Sewer Rate Study page 11
Fund Balance Forecast
As described in Section 1, the combined Operating and Capital Reserves ending fund balance must be greater
than 90 days of operating revenues. Exhibit 9 below provides a projection of the combined fund balance based
on the revenues and expenses described in the Overall Revenue Requirement Forecast. As shown, the combined
fund balance is above the target throughout the planning period.
Exhibit 9. Fund Balance Forecast (2025-2030)
, $14 $12.53
o $12
$10
$8
$6
$4
$2
$-
tih
,LO
$12.50
O,LO QrLll OT4> O,LO OHO
T T ti T ti
Combined Operating and Capital Reserve Ending Balance —Target (90 Days of Revenues)
>FCS
fcsgroup.com l bowman.com 20
City of Port Orchard
Sewer Rate Study
4. Cost -of -Service Analysis
Background
August 2025
page 12
This section summarizes the results of the cost -of -service analysis. The test year for this analysis was 2026, as that
is the first year the City could raise rates under the plan proposed in Section 3. The purpose of a cost -of -service
analysis is to provide a rational basis for distributing the full costs of the utility service to each class of customers
in proportion to the demands they place on the system. Detailed cost allocations, along with appropriate
customer class designations, help to sharpen the degree of proportionality that can be achieved in the resulting
rate structure design. The key analytical steps of the cost -of -service analysis are as follows:
• Functional Cost Allocation. Establishes a rational relationship between functions (activities) and costs.
Each line item of the City's budget is allocated to each function (i.e., customer, flow, and treatment)
based on how those expenses serve the system. For example, utility billing costs would be attributed all
to the customer function, while the public works director might have some costs allocated across
multiple functions.
• Customer Class Distinctions. Identify the customer classes that will be evaluated as part of the study
and the relevant customer statistics used for cost allocation. It is appropriate to group customers that
exhibit similar usage characteristics and service requirements. The rate study used just two classes:
Residential and Non -Residential.
• Cost Allocation. Allocates the costs from the functional cost allocation to different customer classes
based on their unique demands for service as defined through the cost classification process. For
example, the cost of billing the utility's customers is based on the number of customer accounts, while
the cost of providing collection services is based on contributions to sewer flow. The results identify
shifts in cost recovery by customer class from that experienced under the existing rate structure.
Functional Cost Allocation
The first step in the cost -of -service analysis is to define the functions or activities that are supported by the sewer
utility. As described in Section I, the functions of service are customer, flow, and treatment.
Test -year (2026) revenue requirements for each accounting line item are assigned to the functions of service. As
the City primarily operates as a sewer collection utility, most of the City's line items are related to the Flow
function. Some billing -related line items are allocated to the Customer function. As described in previous
sections, the payments for the Joint Agreement are entirely related to the treatment of sewer flow, and so all $2.0
million of that cost is allocated to the Treatment function.
Using direct assignments to the functions of service for each of the City's accounting line items, the full
functional allocation of the utility's costs can be calculated. Exhibit 10 below summarizes the functional
allocation. As shown, flow costs are the largest share of the utility's costs at 65.36 percent, followed by
treatment costs at 31.79 percent, and finally customer costs at 2.85 percent.
•:;>FCS
.• - ,Y fcsgroup.com I bowman.com 21
City of Port Orchard
Sewer Rate Study
Exhibit 10. Functional Allocation (2026)
Customer
$190,000
2.85%
Flow
$4,440,000
65.36%
Treatment
$2,140,000
31.79%
Total
$6,730,000
100.00%
August 2025
page 13
Customer Class Distinctions
A class of service is a grouping of utility customers with similar characteristics who are served at similar costs.
Classes of service can be defined based on several factors such as sewer flow patterns, service requirements,
geography, or other factors. The classes evaluated as part of the sewer rate study include just two: Residential
and Non -Residential. These customer statistics are used to allocate costs to each class:
• Number of Accounts. Used to allocate Customer costs.
• Water usage (in thousands of gallons — kgal). Used to allocate Flow costs. An annualized winter -
average usage is used for the Residential class to remove water usage related to irrigation. Total annual
usage is used for Non -Residential.
• Equivalent residential units (ERUs). Used to allocate Treatment costs, ERUs are the defined metric by
which Treatment costs are shared with WSUD under the Joint Agreement. One ERU is equal to 180
gallons per day of water use.
Account and water usage statistics are based on customer billing statistics from 2022, with four years of
estimated account growth included as described in Exhibit 5. ERU statistics are taken from the 2024 count of
ERUs done for the Joint Agreement, with two years of estimated account growth. Exhibit 11 summarizes the
forecasted customer stats for each customer class in 2026.
Exhibit 11. Customer Statistics by Class (2026)
Residential
4,614
93.71%
217,192
72.86%
5,690
83.75%
Non -Residential
310
6.29%
80,898
27.14%
1,104
16.25%
Total
4,924
100.00%
298,090
100.00%
6,794
100.00%
•:;>FCS
.• - 'Y fcsgroup.com I bowman.com 22
City of Port Orchard August 2025
Sewer Rate Study page 14
Cost Allocation
The last step in the cost -of -service analysis is to assign costs by function (see Exhibit 10) to each class using
relevant customer statistics (Exhibit 11). The allocated cost of service can then be compared to the actual
revenue collection by class to determine where adjustments need to be made.
Exhibit 12 summarizes the results of the cost -of -service analysis for 2026. Results are shown assuming the 3.50
percent rate increase planned for 2026 in Section 3 takes effect.
Exhibit 12. Cost -of -Service Analysis Results (2026)
Residential $5,535,709 $5,177,543 106.92%
Non -Residential 1,195,679 1,553,845 76.95%
Total $6,731,388 $6,731,388 100.00%
A cost -of -service analysis is a reasonable allocation of the test year revenue requirement to classes of service
based on available financial and operational data, expectations of future demands for service, and the allocation
methodologies described in the previous sections. Given the need for assumptions and these other factors, FCS
recommends a reasonable range for class -specific results to be plus or minus 5 percent. Based on this framework,
the cost -of -service results indicate that the revenue generated by the Residential class exceeds its cost of service.
This means that the rates charged to the Residential class are over -collecting relative to its cost -of -service. In
contrast, the Non -Residential class is below the reasonable target, and therefore the rates charged to that class
are generating less than their fair cost share.
Strategies to address the cost -of -service differences are discussed in detail in the rate design section.
•:;>FCS
.• - 'Y fcsgroup.com I bowman.com 23
City of Port Orchard
Sewer Rate Study
5. Rate Design
Background
August 2025
page 15
Rate design is the third and final technical step in utility rate setting. The first two technical steps (identifying the
total rate revenue needs and determining the proportional distribution of those revenue needs to the utility's
customer classes) provide the revenue targets for rate design. The principal objectives of rate design are to
implement rate structures that collect the appropriate level of revenue and that are reasonably aligned with cost -
of -service.
The City's existing sewer rate structure includes 20 different classes, many with distinct rate classifications
contained within those classes. There are a total of 55 different rate codes that could be used when calculating a
customer's bill. The City's existing sewer rate structure is shown in Appendix A. The complexity of this existing
schedule is one of the primary reasons the City was interested in developing a new rate design schedule.
Rate Design
The proposed rate structure simplifies the City's scheduling by basing the charge on the City's annual ERU count
performed for the Joint Agreement. Using this count ensures that the data is updated at least annually to reflect
changes in a customer's flow contributions. It also precludes the City from having to develop a new method of
measuring customer statistics or relying on the water usage data, which is not always available to the City.
Exhibit 13 summarizes the proposed rate design. As shown, the cost -of -service for each class is divided by the
number of ERUs and by six to produce a bi-monthly rate per ERU by class. As shown, the Residential rate per ERU
would drop to $151.67 per ERU (from $163), whereas Non -Residential customers would pay $234.56 per ERU.
Exhibit 13. Rate Design (2026)
Residential
$5,177,543
5,690
$151.67
Non -Residential
1,553,845
1,104
$234.56
Total
$6,731,388
6,794
$165.13
Exhibit 14 below provides the calculated bi-monthly rates per with annual rate increases of 3.50 percent.
Exhibit 14. Calculated Bi-Monthly Rates per ERU (2026-2030)
Residential
$151.67
$156.97
$162.47
$168.16
$174.04
Non -Residential
$234.56
$242.77
$251.26
$260.06
$269.16
•:;>FCS
.• - ,Y fcsgroup.com I bowman.com 24
City of Port Orchard
Sewer Rate Study
6. Summary
August 2025
page 16
Based on the results of the revenue requirement analysis, FCS recommends a 3.50 percent overall rate increase in
2026 to be implemented January 1, 2026. Additional 3.50 percent increases are recommended to be adopted on
January 1 of each year until 2030.
In addition, should the City wish to recover the cost -of -service for each class and implement a simplified rate
structure, FCS recommends that the City uses the proposed rate schedule provided in Exhibit 14, which is based
on the number of ERUs for each customer.
Updating This Study's Findings
It is recommended that the City revisit the study findings during the forecast period to check that the
assumptions used are still appropriate and that no significant changes have occurred that would alter the results
of the study. The City should use the study findings as a living document, comparing study outcomes to actual
revenues and expenses each year. Any significant or unexpected changes may require adjustments to the rate
strategy recommended in this report.
Absent the results of a recent rate study, we recommend that the City adopt a policy of applying annual
Consumer Price Index (CPI) -based adjustments to its sewer rates. This will help ensure that revenues keep pace
with inflation and reduce the need for periodic large rate increases.
Rate Comparisons
As a resource to the City and its customers, a rate survey of regional utilities was performed. Exhibit 15 below
shows each jurisdiction's estimated bi-monthly single-family sewer bills, assuming 10 CCF of sewer flow. Note
that each jurisdiction has a unique set of geographic traits, customers, and system characteristics that can have a
significant impact on rates.
Exhibit 15. Jurisdictional Survey - Bi-Monthly Single-family Rates (10 CCF of Sewer Flow)
Poulsbo
Gig Harbor
Kitsap County
Bremerton
Port Orchard - Existing
Port Orchard - Proposed
West Sound Utility District
$244.04
$209.79
$208.50
_ $193.96
' $163.00
$151.67
$148.52
$0 $50 $100 $150 $200 $250
$300
•:;>FCS
.• - ,Y fcsgroup.com I bowman.com 25
City of Port Orchard
Sewer Rate Study
Appendix A: Existing Rate Schedule
August 2025
page 17
•:;>FCS
•�-•� fcsgroup.com I bowman.com 26
13.04.020 Bimonthly sewer rates.
Effective January 1, 2016, and January 1st of each subsequent year shown, the sewer rates,
as calculated bimonthly, are shown as follows:
Sewer Rates
2016
2017
2018
2019
2020
Class
Class
Description
No.
Description
1
Single-family
For each dwelling
$111.00
$124.00
$137.00
$150.00
$163.00
residences and
unit
mobile home
on single
parcel
2
Business and
For each business
$111.00
$124.00
$137.00
$150.00
$163.00
professional
with a fixture
For each business
$22.20
$24.80
$27.40
$30.00
$32.60
with an employee
present, without a
fixture
For each floor of
$111.00
$124.00
$137.00
$150.00
$163.00
an office building
or retail complex
that has a public
or community
bathroom
Plus the following
surcharge, based
on the store/office
interior size:
Small, less than
$0.00
$0.00
$0.00
$0.00
$0.00
15,000 sf, or
Medium, 15,000 to
$111.00
$124.00
$137.00
$150.00
$163.00
30,000 sf, or
Large, more than
$222.00
$248.00
$274.00
$300.00
$326.00
30,000 sf
3
Churches
For the church,
$111.00
$124.00
$137.00
$150.00
$163.00
plus*
27
Sewer Rates
2016
2017
2018
2019
2020
Class
Class
Description
No.
Description
For the rectory,
$111.00
$124.00
$137.00
$150.00
$163.00
plus*
For the annex
$111.00
$124.00
$137.00
$150.00
$163.00
*Class 6 for
educational
parochial schools
4
Hotels and
Base fee, plus
$111.00
$124.00
$137.00
$150.00
$163.00
motels, rest
homes and
care centers,
and Kitsap
County jail
Per unit
$22.20
$24.80
$27.40
$30.00
$32.60
5
Apartments
Per dwelling unit
$111.00
$124.00
$137.00
$150.00
$163.00
and mobile
home parks
6
Schools
For each pupil,
$3.30
$3.70
$4.10
$4.50
$4.90
teacher,
maintenance and
administrative
person
7
Kitsap County
$4,329.00
$4,836.00
$5,343.00
$5,850.00
$6,357.00
courthouse
(main complex)
8
Restaurants
Based on the
seating capacity
as determined by
the building official
P
Sewer Rates
2016
2017
2018
2019
2020
Class
Class
Description
No.
Description
Espresso Bar
Seating not
$111.00
$124.00
$137.00
$150.00
$163.00
applicable.
Classification
includes similar
food preparation
businesses which
do not require the
cooking of food or
the maintenance
of kitchen
equipment.
Deli
No seating
$166.50
$186.00
$205.50
$225.00
$244.50
Small
Seating for 1 to 50
$333.00
$372.00
$411.00
$450.00
$489.00
Medium
Seating for 51 to
$499.50
$558.00
$616.50
$675.00
$733.50
150
Large
Seating for more
$666.00
$744.00
$822.00
$900.00
$978.00
than 150
9
Laundromats
Base fee, plus
$55.50
$62.00
$68.50
$75.00
$81.50
Per washing
$22.20
$24.80
$27.40
$30.00
$32.60
machine
Laundromats with
less than 4
washing machines
are considered
Class 2. Dry
cleaners without
washing machines
are Class 2.
10
Taverns
$277.50
$310.00
$342.50
$375.00
$407.50
11
Car
For sales and
$111.00
$124.00
$137.00
$150.00
$163.00
dealerships
administrative
office, plus
29
Sewer Rates
2016
2017
2018
2019
2020
Class
Class
Description
No.
Description
For service
$111.00
$124.00
$137.00
$150.00
$163.00
department, plus
For car washing
$111.00
$124.00
$137.00
$150.00
$163.00
when the water is
used to determine
cost sharing for
the sewer
treatment plant
12
Post office
$388.50
$434.00
$479.50
$525.00
$570.50
13
Grocery stores
Basic fee, plus the
$55.50
$62.00
$68.50
$75.00
$81.50
following
surcharges
Basic store
$55.50
$62.00
$68.50
$75.00
$81.50
Bakery
$55.50
$62.00
$68.50
$75.00
$81.50
Wetted -down
$111.00
$124.00
$137.00
$150.00
$163.00
produce
Food disposal
$111.00
$124.00
$137.00
$150.00
$163.00
Meat cutting area
$222.00
$248.00
$274.00
$300.00
$326.00
14
Bowling alley,
Base fee, plus
$55.50
$62.00
$68.50
$75.00
$81.50
boat marina,
health
maintenance
organizations
and work
release and
juvenile
facilities
30
Sewer Rates
2016
2017
2018
2019
2020
Class
Class
Description
No.
Description
For each
$55.50
$62.00
$68.50
$75.00
$81.50
equivalent
residential unit
(ERU) as
determined for the
cost -sharing
formula for the
sewer treatment
plant
15
Car washes
Base fee, plus
$55.50
$62.00
$68.50
$75.00
$81.50
Per car washing
$166.50
$186.00
$205.50
$225.00
$244.50
bay
16
Beauty shops
$111.00
$124.00
$137.00
$150.00
$163.00
and barber
shops
17
Day care
Basic fee, plus
$111.00
$124.00
$137.00
$150.00
$163.00
For less than or
$0.00
$0.00
$0.00
$0.00
$0.00
equal to 6 children
For 7 to 25
$222.00
$248.00
$274.00
$300.00
$326.00
children
For more than 25
children, use
Class 6 rates
18
Gas stations
For gasoline retail,
$111.00
$124.00
$137.00
$150.00
$163.00
which could
include service
bay
For nonautomotive
$111.00
$124.00
$137.00
$150.00
$163.00
retail
19
Assisted living Base fee, plus $111.00 $124.00 $137.00 $150.00 $163.00
units
Per unit with $111.00 $124.00 $137.00 $150.00 $163.00
private kitchen
31
Sewer Rates
2016
2017
2018
2019
2020
Class
Class
Description
No.
Description
Per unit without
$22.20
$24.80
$27.40
$30.00
$32.60
private kitchen or
studio apartment
20
Bed and
Base fee, plus
$111.00
$124.00
$137.00
$150.00
$163.00
breakfasts
Per rentable
$8.90
$9.90
$11.00
$12.00
$13.00
bedroom
21
Public market
Basic fee, plus the
$222.00
$248.00
$274.00
$300.00
$326.00
following
surcharges
Nonfood retail
$27.80
$31.00
$34.30
$37.50
$40.80
Nonfood service
$27.80
$31.00
$34.30
$37.50
$40.80
business
Juice/soda/ice
$111.00
$124.00
$137.00
$150.00
$163.00
cream/espresso
bar
Restaurant
$222.00
$248.00
$274.00
$300.00
$326.00
(consume and buy
on premises)
Delicatessen
$111.00
$124.00
$137.00
$150.00
$163.00
(counter sales
takeout ready -to -
eat food products)
Retail meat/
$111.00
$124.00
$137.00
$150.00
$163.00
seafood
Retail bakery
$111.00
$124.00
$137.00
$150.00
$163.00
Special notes:
a) Home occupations will not be charged additional sewer fees.
b) For a combination of classes in one business, the highest rate will be
selected.
c) In the event that an established rate class does not accurately reflect the
impact on the sewer system, the city engineer may determine the specific
monthly rate.
32
Sewer Rates
2016
2017
2018
2019
2020
Class Class
Description
No. Description
d) Water accounts which serve a marina pier and do not have a connection
to the sewer shall not be charged a sewer bill. A sewer bill will be charged
and based on winter consumption if the water meter serves both the marina
pier and any facility or pump station that is connected to the sewer system.
For billing purposes, live-aboards will not be considered as a dwelling unit.
e) Properties served which are outside the city limits shall have a 50 percent
surcharge on the bimonthly rates.
(Ord. 038-16 § 2; Ord. 020-15 § 2; Ord. 027-11 § 1; Ord. 016-10 § 2; Ord. 021-09 § 3; Ord. 027-08 § 2; Ord.
010-05 § 3; Ord. 1897 § 3, 2003; Ord. 1799 § 3, 2000).
33
IRCHARD
Sewer
Orcha
Study
•FCS
Bowman Company
34
) Agenda
Revenue requirement
"What revenue adjustments are needed to cover the
utility's costs?"
Study period: 2025-2030 ,.
Cost of service analysis (COSA)
"What is the cost to serve each of the City's
customer classes?"
Varies by class characteristics
Rate Design
"How should rates be set to collect the costs of
service?"
Rates can be also be set to meet other City
objectives
•FCS
'I:'
••.! '. :
Slide 2
35
Operations & Capital
Maintenance Expenditures Revenue
Fiscal Policies
Debt Requirement
Service
Class Functional _____Cost of Service
Characteristics I Costs Analysis (COSA)
City's Rate Design
Objectives
•) Rate Increase History
Rates have been $163.00 bi-monthly per dwelling unit since 2020
Sewer Rates
2016
2017
2018
2019
2020
Class
Class
Description
No.
Description
1
Single-family
For each dwelling
$111.00
$124.00
$137.00
$150 00
S163 00
residences and
unit
mobile home
on single
parcel
•FCS
Slide 4
37
•;) Bi-monthly Sewer Rates (SFRs) vs. Inflation
$250
$200.36
$200
$163.00
$150
$100
$50
•FCS
2020 2021 2022 2023 2024 2025
Bi-Monthly Bill (SFR) -Bill with Inflation (CPI -U West)
Slide 5
38
39
•>
Financial Policies
General Reserve
(per Resolution 053-20)
Stabilization Reserve
(per Resolution 053-20)
Debt Service Coverage
FCS
Accommodate variations in revenue &
expenses.
Used for emergency costs outside of
typical contingency planning.
Compliance with existing debt covenants;
Maintain credit worthiness
Policy
Assumptions
60-90 days of annual budgeted
revenues
25% (90 days) of annual
expenditures
Target 1.5 to 2+
Typical legal minimum of 1.25
Slide 7
40
•) Introduction to Ratemaking
Rates are set to recover the cost of providing service
EXAMPLE
Sewer programs incur two primary types of costs
Operating costs (regular! ongoing)
» Employee salaries and benefits
» Routine asset / equipment repair and maintenance
» Supplies and materials
» Regulatory compliance
Bill processing
Capital costs
Repair and replacement
Capital improvement projects
•:;>FCS
III
Year 1 Year 2 Year 3
■ Operating
Year 4 Year 5
Capital
irori
41
•�• Operations and Maintenance Cost Increases
[ITh Fli Es] ii -..
General Cost 3.00% Based on the Consumer Price Index for Urban Customers (West)
Construction Costs 3.50% 10 -year average of the Engineering News -Record's 20 -City Avg. CCI*
Labor Cost 3.00% Set to be no less than the General Cost inflation assumption
Benefits Cost 5.00% Set 2.00% higher than Labor Cost inflation
Account Growth 1.25% Growth estimates per Kitsap County Countywide Planning Policies
•:;>FCS
Slide 9
42
.) Capital Funding Philosophy (after Outside Funding)
Cash (pay-as-you-go)
» Higher near -term rates
» Existing customers pay 100% of costs
Debt
�y Lowest near -term rates... but interest cost
4' » Spreads cost between existing / future customers
p
» Execute projects sooner; reduce effects of inflation
Hybrid
ai » Cash fund repair and replacement projects
» Debt fund large expansion projects
•:;>FCS
Slide 10
43
•) Capital Improvement Program
6-1
Annual Preservation
$ 583,333
$ 583,333
$ 583,333 $ 583,333
$ 583,333 $ 583,333
6-2
Marina Pump Station Construction
8,611,000
-
- -
- -
6-3
Bay Street Pump Station Replacement
1,000,000
-
3,500,000 3,500,000
- -
6-4
Minor Lift Station Improvements
650,000
650,000
- -
- -
6-5
Port Orchard Boulevard Lift Station and Siphon
-
1,522,000
- 6,088,000
- -
6-6
Sidney Road SW 2nd Force Main
1,300,000
-
- -
- -
6-7
McCormick Woods Sewer Lift Station #3
-
1,000,000
- -
- -
6-8
Ruby Creek Lift Station
-
3,140,000
- -
- -
6-9
Sidney Road Gravity Sewer Main Extension
-
2,290,000
- -
- -
6-10
Bravo Terrace (Sedgwick) Lift Station
-
-
- -
2,500,000 -
6-11
Bravo Terrace (Sedgwick) Force Main
-
-
- -
4,860,000 -
6-12
Sewer Facility Capacity Upgrades (PWO)
-
-
- -
- 2,000,000
6-13
McCormick East/Glenwood Sewer Basin Improvements
-
-
- 7,600,000
- -
6-14
2029 General Sewer Plan and Sewer Rate Study
-
-
- 350,000
- -
Total
$ 12,144,333
$ 9,185,333
$ 4,083,333 $ 18,121,333
$ 7,943,333 $ 2,583,333
•:;>FCS
Slide 11
44
•>
$20,000,000
$18,000,000
$16,000,000
$14,000,000
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$-
•FCS
Capital Spending Forecast
Capital Costs (2024$)
$12,100,000
$9,200,000
$4,100,000
2025 2026 2027
■ Outside Funding
Major projects include:
• Marina Pump Station Construction for $19.4 million in
2024-2026
• Bay Street Pump Station for $8.0 million in 2027-2028
• McCormick East/Glenwood Sewer Basin Improvements
for $8.7 million 2028
• Pipe replacement of $583,000 per year
$18,100,000
2028
■ City Costs
$7,900,000
2029
$2,600,000
2030
Slide 12
45
.) Capital Funding Strategy (2025-2030)
$3,600,000 Low -Cost Loans included:
Low -Cost Loans
6% Pottery Lift Station Repairs
Rate Revenue & $11,900,000 $253,000
Fund Balances Revenue
30% Bonds 0.94% interest
20% Sewer Lift Station
$200,000 » $825,000
Grants » 0.94% interest
0%
Bay Street Lift Station
» $850,000
$5,000,000 » 0.69% interest
CFCs $12,000,000
8% WSDOT/Kitsap Marina Pump Station
$9,800,000 20%
Developer Agreements $13 million (some already drawn)
2.60% interest
16%
>FCS Slide 13
46
•;�� Revenue Requirement Summary
$10,000,000
$9,000,000
$8,000,000
$7,000,000
$6,000,000
$5,000,000
$4,000,000
$3,000,000
$2,000,000
$1,000,000
3.50% 3.50%
3.50% 3.50%
$187.05 $193.59
2025 2026 2027 2028 2029 2030
=Operating & Maintenance = Debt Service Rate Funded Capital
• —Revenue @ 2025 Rates --Revenue with Increases
>FCS
Slide 14
47
48
•>
•:;>FCS
How Will Costs Be Equitably Distributed?
Existing Revenue Collection
Slide 16
49
•>
>FCS
Allocating the Costs of Service
$180,000 (3%)
Customer m
(Accounts)
94% of accounts,
$169,000
Flow
(Thousand gallons)
1 6% of accounts,
$11,000
Non -
Residential
Treatment
(ERUs*)
Customer
Accounts
*ERUs = equivalent residential units, as calculated per the City's joint treatment agreement
Slide 17
50
•) COSA Results
Typical results fall within +1- 5% of the cost -of -service
COSA indicates a need for a non-residential rate increase
% of Cost of Service
120%
100%
80%
60%
40%
20%
0%
•:;>FCS
107%
Residentia
76%
Non -Residential
Slide 18
51
52
•;) Current Rate Schedule
The current rate schedule is complex
It includes 21 different classes
Each class has multiple rates
Complex rate schedules have
disadvantages
Difficult for customers to understand
Administratively burdensome
Obscure relationship between costs
and services provided
City staff wants to simplify the rate
schedule
•FCS
Sewer Rates
2016
2017
2018
2019
2020
Class
Class
Description
No.
Description
1
Single-Tamily
For each dwelling
$111.00
$124.00
$137.00
$150.00
$16300
residences and
unit
mobile home
on single
parcel
2
Business and
For each business
$111.00
$124.00
$137.00
$150O0
$16300
professional
with a fixture
For each business
$22.20
$24.80
$27.40
$30.00
$32.60
with an employee
present, without a
fixture
For each floor of
$111.00
$124.00
$137.00
$150.00
$163.00
an office building
or retail complex
that has a public
or community
bathroom
Plus the following
surcharge, based
on the store/office
interior size:
Small, less than
$0.00
$000
$0.00
$0.00
50 Co
15.000 sf, or
Slide 20
53
••) South Kitsap Water Reclamation Facility (SKWRF) Contract
Port Orchard and West Sound Utility District share the SKWRF
Agreement began in 1983, last updated in 2014
Equivalent residential units (ERUs) are measured annually for
each utility to determine cost sharing
How an ERU is defined:
1 per residence
Flow / 700 CF (180 gpd) for non-residential
•:;>FCS
Slide 21
54
•;> ERU Update
Customer stats support an ERU of 117 gpd per residence
Contract determines how ERUs are counted (180 gpd)
Options to accurately collect cost of service:
Change agreement with SKWRF
Use different ERU definitions for different purposes
Use a weighting factor for commercial
•FCS
Slide 22
55
•,•) Rate Calculation
ERUs (counted as per SKWRF)
Residential
Non-residential
Total
Cost of Service
Residential
Non-residential
Total Cost of Service
Calculated Bi-Monthly Rate per ERU
Residential
Non-residential
•:;>FCS
5,690
1,104
6,794
$ 5,174, 666
1,556,721
$ 6,731,388
$151.58
$234.99
Slide 23
56
Current Units Rate per Bi-Monthly Annual • S
Method Unit Bill Total
Total
Total
$151.58
$151.58
•:;>FCS
1
1
$163.00
$163.00
$978.00
Slide 24
57
Current Units Rate per Bi-Month ly Annual •
Method Unit Bill Total
Billing Units 132 $4.90 $646.80 $3,880.80
Total $646.80 $3,880.80
Total
1 $234.99 $234.99 $1,409.94
•:;>FCS
Slide 25
58
•) Sample Bill — Large Restaurant (150 seats or more)
� . Bi-monthly rates would
increase by $1,606.89
Billing Units 1 $978.00 $978.00 $5,868.00
Total $978.00 $5,868.00
Total
11 $234.99 $2,584.89 $15,509.34
•:;>FCS
Slide 26
59
•) Sample Bill - County Jail
$163.00 $978.00
Base Charge 1 $163.00
Housing Units 284 $32.60
Total
Total
156 $234.99 $36,658.44 $219,950.64
•:;>FCS
$9,258.40 $55,550.40
$9,421.40 $56,528.40
• Bi-monthly rates would
increase by $27,237.04
The jail makes up 15%
of the City's non-
residential ERUs, but
currently pays just 3.5%
of the non-residential
costs
Slide 27
60
•) Sample Bill — Small Restaurant
_______ � . Bi-monthly rates would
decrease by only $19.02
Base Charge 1 $489.00 $489.00 $2,934.00
Total $489.00 $2,934.00
Total
2 $234.99 $469.98 $2,189.88
•:;>FCS
Slide 28
61
•) ERUs with Proposed Increases
Revenue Increases
n/a
3.50%
3.50%
3.50%
3.50%
3.50%
Rate per ERU
$163.00
$168.71
$ 174.61
$ 180.72
$ 187.05
$ 193.59
IL I4
Rate Design 2025 02 2030
Revenue Increases n/a 3.50% 3.50% 3.50% 3.50% 3.50%
Residential Rate per $163.00 $151.58 $156.89 $162.38 $168.06 $173.94
ERU
Non-residential Rate n/a $234.99 $243.22 $251.73 $260.54 $269.66
per ERU
•:;>FCS
Slide 29
•;> Rate Survey — Bi-Monthly SFR Bill, 10 CCF
$300.00
$250.00
$200.00
$163.00
$150.00
$100.00
$ 50.00
$-
$151.58
Poulsbo Gig Harbor Kitsap County Bremerton Port Orchard Port Orchard - West Sound Utility
Proposed District
>FCS Slide 30
63
•;> Summary
Revenue needs increase by 3.5%
Rate structure:
Continue with existing rate structure
Simplified and equitable ERU structure
•:;>FCS
Slide 31
64
Thank you! Questions?
Tage Aaker — Senior Project Manger
(425) 615-6487
TageA@fcsgroup.com
www.fcsgroup.com
•FCS
a Bowman company
Ong City of Port Orchard
ORCHARD 216 Prospect Street, Port Orchard, WA 98366
1.. (360) 876-4407 • FAX (360) 895-9029
Agenda Staff Report
Discussion Items: Multifamily Tax Exemption (MFTE) (Bond)
Estimated Time: 40 Minutes
Meeting Date: September 16, 2025
Prepared By: Nick Bond, AICP, Community Development Director
Presenter: Nick Bond, AICP, Community Development Director
Summary and Background:
Discussion
In 2024, the City Council requested that a discussion of the Multi -Family Tax Exemption (MFTE)
program be placed on a future agenda for discussion. This discussion was on hold pending completion
of the City's Comprehensive Plan Update and Middle Housing ordinance. After completing work on
the Comprehensive Plan in June, staff prepared a discussion item on MFTE at the July 2025 work study
meeting. Based on the direction at that meeting and at subsequent Land Use Committee and
Economic Development Tourism Committee meetings, staff has prepared a new MFTE ordinance and
target area map for discussion.
The new ordinance is based on the ordinance that was repealed in 2023. The ordinance is revised in
several ways. Most notably, the old ordinance had three different maps that corresponded to
different MFTE approval criteria while the new ordinance has a single map. Now, to qualify for MFTE,
a project would have to meet one of four criteria listed in section 3.48.060 (6). For the 12 -year
affordable housing MFTE, the project would have to meet one of these four criteria and provide
affordable housing at lower rents than required in the 2023 ordinance.
The four criteria listed in proposed section Port Orchard Municipal Code (POMC) 3.48.060 (6) are as
follows:
(a) The multi -family housing project must be in a mixed -use shopfront building containing commercial
ground floor uses measuring at least 4,000 square feet or 40% of the building's footprint, whichever is
less; or
(b) The multi -family housing project must be in a building containing at least 4 stories of residential
units and achieving at least 40 units per net acre (gross acreage, less critical areas and associated
buffers). All portions of buildings must contain 4 -stories of multi -family units. Where buildings step
down following topography, each portion of the building must contain 4 -stories of multi -family units;
(c) The multi -family project must provide middle housing and be on a parcel/lot measuring less than
15,000 square feet with between 4-12 multi -family units; or
(d) Projects that will provide 100% of any on -site parking below grade.
The affordability criteria for a 12 -year MFTE project as proposed in POMC 3.48.060 (7) changed the
required rent for affordable units from 10% below HUD fair market rent to 25% below HUD fair
market rent.
Background
The State of Washington has authorized cities to adopt Multi -Family Tax Exemption (MFTE) programs
since 1995, pursuant to RCW 84.14. These programs are intended to support the development of
multifamily housing and, in some cases, affordable housing in urban areas experiencing growth
pressures. Port Orchard adopted its MFTE program in 2016 to incentivize the construction of new
multifamily housing, including affordable units, by providing a limited property tax exemption on the
value of residential improvements for a period of eight or twelve years.
Since 2016, the City entered seven MFTE agreements supporting the construction of 442 apartment
units, with two projects (totaling 97 units) reserving 20% of units as affordable housing in exchange for
a 12 -year exemption. Several other multi -family projects have been constructed since 2016 without
participating in the MFTE program.
Under the repealed framework, there were two types of 8 -year exemptions and a 12 -year exemption.
The 8 -year exemptions targeted redevelopment and encouraging projects with structured parking.
The 12 -year exemption required that 20% of units be rented at 10% below HUD fair market rent for
the duration of the MFTE approval.
Increasing housing supply has been shown to be effective in combatting rent increases. As many new
apartments became available in 2021 and 2022, data shows that vacancy rates climbed above 5% and
rents in Port Orchard stopped increasing at the rates seen between 2014 and 2021 when vacancy
rates were below 5%. MFTE does not significantly impact the property tax revenues received by the
City or junior taxing districts. Instead, the savings that go to developers is shifted to other properties
in Port Orchard resulting in very small property tax increases for the duration of the MFTE approval.
(See the attached "What is Tax Shift" document produced by Commerce.) At the same time, the City
receives numerous one-time revenues such as impact fees, connection charges, permit fees, and a
boost in Sales Tax and REET revenue related to the construction and sale of new housing units.
In October 2023, the City Council repealed POMC Chapter 3.48, eliminating the City's previously
adopted MFTE program. This decision followed extensive policy review and deliberation, including
ongoing discussions at the Land Use Committee and during the City's Housing Action Plan (HAP)
development.
In June 2023, the City adopted its Housing Action Plan, which included recommendations for
expanding the MFTE program tailored to local housing, affordability goals and allowing middle housing
67
projects to qualify for MFTE. The City's 2024 Comprehensive Plan, adopted after the repeal of Chapter
3.48, reaffirms support for MFTE as a policy tool to address housing needs, directing staff to evaluate
options for reimplementation.
For additional MFTE resources, please visit the following Department of Commerce website:
https://www.commerce.wa.gov/growth-management/housing-planning/mfte/
Relationship to Comprenhensive Plan: Use of the MFTE tool is supported in the Comprehensive Plan
and Housing Action Plan.
Recommendation: Discuss the draft ordinance and residential target area maps and provide staff with
direction for next steps.
Alternatives: The City Council may wish to continue revising the ordinance and map or may wish to
schedule a public hearing on the proposed ordinance.
Attachments:
MFTE Ordinance Draft 081225 with underline and comments.docx
Draft MFTE Map Committee Recommendations 20250909.pdf
Draft MFTE Map Committee Recommendations w Zoning 20250909.pdf
Factsheet - What is MFTE.pdf
Commerce MFTE - FACTSHEET What is Tax Shift - 2023 0126.pdf
MFTE Sept Presentation.pdf
68
ORDINANCE NO. _ -25
AN ORDINANCE OF THE CITY OF PORT ORCHARD, WASHINGTON, ADOPTING A NEW
CHAPTER 3.48 (MULTIFAMILY PROPERTY TAX EXEMPTION) OF THE PORT ORCHARD
MUNICIPAL CODE; PROVIDING FOR SEVERABILITY AND CORRECTIONS; AND
ESTABLISHING AN EFFECTIVE DATE.
WHEREAS, the city previously offered a Multifamily Tax Exemption (MFTE) program as
codified in POMC 3.48 but repealed the program in 2023 by passing ordinance 026-23;
WHEREAS, after studying the options for providing tax incentives to encourage the
development of multi -family housing, the City Council wishes to adopt a new and revised MFTE
code; and
WHEREAS, the City Council wishes to encourage increased residential opportunities,
within those areas of the city designated as residential targeted areas in Figure 1 of the
proposed POMC 3.48; and
WHEREAS, the City Council wishes to further the City's goals of redevelopment and
additional, affordable residential units within the City's downtown area, which is likely to have
higher costs for development and redevelopment due to the nature of building below -grade
parking and building on shoreline fill; and
WHEREAS, the City Council wishes to stimulate rehabilitation and redevelopment of
existing vacant and underutilized buildings and properties for multifamily housing in
designated residential targeted areas and centers, to increase and improve housing
opportunities, including affordable housing; and
WHEREAS, the City Council wishes to encourage the development of higher value
residential projects than those currently being constructed by providing incentives with the
aim of increasing long term property tax revenues; and
WHEREAS, the City Council wishes to adopt requirements for 12 -year tax exemptions
to establish standards to be met and to obtain a greater percentage of housing that is more
affordable than previously required, in order to maximize public benefit; and
WHEREAS, the City Council wishes to adopt requirements for 8 -year tax exemptions
to establish certain performance and project value standards, in order to maximize public
benefit; and
11092614.2 - 366922 - 0021
69
Ordinance No. _-25
Page 2 of 15
WHEREAS, on July 6, 2020, the City Council's Land Use Committee reviewed the
amendments to Chapter POMC 3.48, and recommended that they be forwarded to the full
City Council for review and approval; and
WHEREAS, on July 8, 2020, the City submitted the proposed amendments to POMC
Chapter 3.48 to the Department of Commerce along with a 60 -day request for review; and
WHEREAS, on July 17, 2020, the City's SEPA official issued a determination of non -
significance for the proposed amendments to POMC Chapter 3.48, and there have been no
appeals; and
WHEREAS, on September 15, 2020, the City Council reviewed the amendments at its
work-study meeting, and directed staff to bring the amendments forward for Council
adoption with certain changes; and
WHEREAS, the City Council, after careful consideration of all public comment and of
the Ordinance, finds that this Ordinance is consistent with the City's Comprehensive Plan and
development regulations, the Growth Management Act, Chapter 36.70A RCW, and that the
amendments herein are in the best interests of the residents of the City; NOW, THEREFORE,
THE CITY COUNCIL OF THE CITY OF PORT ORCHARD, WASHINGTON, DO ORDAIN AS
111119 ►YiTE�
SECTION 1. Findings and Recitals. The recitals set forth above are hereby adopted and
incorporated as findings in support of this Ordinance.
SECTION 2. A new Chapter 3.48 of the Port Orchard Municipal Code is hereby adopted
to read as follows:
Sections:
3.48.010 Purpose.
3.48.020 Definitions.
3.48.030 Residential targeted areas — Criteria — Designation.
3.48.040 Residential targeted areas — Types 1 through 3
3.48.040 Terms of the tax exemption.
3.48.050 Project eligibility.
3.48.060 Application procedure.
3.48.070 Application review — Issuance of conditional certificate — Denial — Appeal.
11092614.2 - 366922 - 0021
70
Ordinance No. _-25
Page 3 of 15
3.48.080
Extension of conditional certificate.
3.48.090
Application for final certificate.
3.48.100
Issuance of final certificate.
3.48.110
Annual compliance review — Reporting.
3.48.120
Cancellation of tax exemption.
3.48.130
Conflict of provisions.
3.48.010 Purpose.
As provided for in Chapter 84.14 RCW, the purpose of this chapter is to provide limited
exemptions from ad valorem property taxation for multifamily housing in designated residential
targeted areas to:
(1) Encourage increased housing opportunities in residential and mixed -use projects, including
affordable housing units, middle housing, infill housing, mixed -use shopfront buildings containing
housing, and apartments [reference density and or height], within areas of the city designated
by the city council as residential targeted areas; and/or
(2) Stimulate new construction or rehabilitation of existing vacant and underutilized buildings for
multifamily housing in designated residential targeted areas to increase and improve housing
opportunities, including affordable housing; and/or
(3) Accomplish the planning goals required under the Growth Management Act, Chapter 36.70A
RCW, as implemented by the city's comprehensive plan.
3.48.020 Definitions.
When used in this chapter, the following terms shall have the following meanings, unless the
context indicates otherwise:
(1) "Affordable housing" means the definition provided for in RCW 84.14.010.
(2) "Department" means the city department of community development.
(3) "Director" means the director of the department of community development, or designee.
(4) "Fair market rent" means the federal department of housing and urban development's
estimate of what a household seeking a modest rental home in a short amount of time can expect
to pay for rent and utilities in the current market, as updated annually.
(5) "Household" means the definition provided for in RCW 84.14.010.
(6) "Median family income" means the median family income for the Bremerton -Silverdale
Metropolitan Statistical Area, as calculated by the federal department of housing and urban
11092614.2 - 366922 - 0021
71
Ordinance No. _-25
Page 4 of 15
development and updated annually.
(7) "Middle Housing" means the definition provided for in POMC 20.12 for buildings consisting
of at least four (4) dwelling units.
(8) "Mixed -use shopfront building" means the definition provided in POMC 20.32.
(9) "Multifamily housing" (for the purposes of this chapter) means a building having 4 or more
dwelling units not designed or used as transient accommodations and not including hotels and
motels. Multifamily units may result from new construction or rehabilitated or conversion of
vacant, underutilized, or substandard buildings to multifamily housing.
(10) "Owner" means the definition provided for in RCW 84.14.010.
(11) "Permanent residential occupancy" means the definition provided for in RCW 84.14.010.
(12) "Rehabilitation improvements" means the definition provided for in RCW 84.14.010.
(13) "Residential targeted area" means the definition provided for in RCW 84.14.010 and the
area(s) that have been so designated by the city council pursuant to this chapter.
(14) "Substantial compliance" means the definition provided for in RCW 84.14.010.
(15) "Urban center" means the definition provided for in RCW 84.14.010.
3.48.030 Residential targeted areas — Criteria — Designation.
(1) Following notice and public hearing as prescribed in RCW 84.14.040 of the city council's
intention of designating a residential targeted area, the city council may, in its sole discretion,
designate one or more residential targeted areas. Each residential targeted area must meet the
following criteria, as determined by the city council:
(a) The area is within an urban center; and
(b) The area lacks sufficient available, desirable, and convenient residential housing,
including affordable housing, to meet the needs of the public who would be likely to live in
the urban center if affordable, desirable, attractive, and livable residences were available;
and
(c) Providing additional housing opportunities in the area will assist in achieving one or
more of the purposes of this chapter.
(2) In designating a residential targeted area, the city council may also consider other factors
including, but not limited to:
11092614.2 - 366922 - 0021
72
Ordinance No. -25
Page 5 of 15
(a) Additional housing in the residential targeted area will attract and maintain an increase
in the number of permanent residents;
(b) An increased permanent residential population in the residential targeted area will help
to achieve the planning goals mandated by the Growth Management Act under Chapter
36.70A RCW, as implemented through the city's current and future comprehensive plans;
(c) Encouraging additional housing in the residential targeted area is consistent with public
transportation plans; or
(d) Additional housing may contribute to revitalization of a distressed neighborhood or area
within the city.
(3) At any time the city council may, by ordinance, and in its sole discretion, amend or rescind
the designation of a residential targeted area pursuant to the same procedural requirements as
set forth in this chapter for original designation.
3.48.040 Designated residential targeted areas.
In accordance with section 3.48.030, the City Council has designated a residential targeted area,
as provided below and as shown on Figure 1. Figure 1 is provided for planning purposes only, and
all development that is proposed to qualify for tax exemption within these areas must meet the
criteria of this chapter, as well as all other relevant City standards, including but not limited to:
the comprehensive plan, Unified Development Code, building code, public works standards,
critical areas regulations and the shoreline master program. The project must also comply with
any other standards and guidelines adopted by the city council, including but not limited to those
listed in POMC 3.48.060. Inclusion within the residential targeted areas does not guarantee the
ability to obtain approval under this chapter. Property within the residential targeted areas that
does not have the zoning or comprehensive plan designation that allows a project to satisfy the
minimum reauirements of this chanter. orthat does not otherwise meet the reauirements of this
chapter, may not utilize this program.
Figure 1. Residential Target Areas.
[Insert new map once finalized]
3.48.050 Terms of the tax exemption.
(1) Duration of Exemption. The value of new housing construction, conversion, and rehabilitation
improvements qualifying under this chapter is exempt from ad valorem property taxation, as
11092614.2 - 366922 - 0021
73
Ordinance No. _-25
Page 6 of 15
follows:
(a) For both 8 -year and 12 -year exemptions, the exemption begins on January 1st of the year
immediately following the calendar year of issuance of the tax exemption certificate.
(b) For 12 -year exemptions, the number of residential units identified to meet the
requirements for an affordable housing component per 3.48.040(1)(c) shall continue to be made
available for the length of the exemption period.
(iii) The mix and configuration of housing units (e.g., studio, one -bedroom, two -
bedroom) used to meet the requirement for affordable units shall be substantially
proportional to the mix and configuration of the total housing units in the project.
(iv) When a project includes more than one building with multifamily housing units, all
of the affordable housing units required in this subsection must not be located in the
same building.
(2) Limits on Exemption. The exemption does not apply:
(a) To the value of land or to the value of non -housing -related improvements not qualifying
under this chapter.
(b) In the case of rehabilitation of existing buildings, to the value of improvements
constructed prior to submission of the completed application required under this chapter.
(c) To increases in assessed valuation made by the Kitsap County Assessor on nonqualifying
portions of building or other improvements and value of land nor to increases made by lawful
order of a county board of equalization, the Department of Revenue, or Kitsap County, to a
class of property throughout the county or specific area of the county to achieve the
uniformity of assessment or appraisal required by law.
(3) Conclusion of Exemption. At the conclusion of the exemption period, the new or rehabilitated
housing cost shall be considered as new construction for the purposes of Chapter 84.55 RCW.
3.48.060 Project eligibility.
A proposed multifamily housing project must meet all of the following requirements for
consideration for a property tax exemption:
(1) Location. The project must be located within a residential targeted area as provided in POMC
3.48.040.
(2) Tenant Displacement Prohibited. The project must not displace existing residential tenants of
11092614.2 - 366922 - 0021
74
Ordinance No. -25
Page 7 of 15
structures that are proposed for redevelopment. If the property proposed to be rehabilitated is
not vacant, an applicant shall provide each existing tenant housing of comparable size, quality,
and price and a reasonable opportunity to relocate.
(3) Noncompliance with Building Codes. Existing dwelling units proposed for rehabilitation must
fail to comply with one or more standards of the applicable state or city building codes.
(4) Size of Project. The new, converted, or rehabilitated multiple -unit housing must provide for a
minimum of 50 percent of the space (excluding structured parking) for permanent residential
occupancy. The project, whether new, converted, or rehabilitated multiple -unit housing, must
include at least 10 units of multifamily housing within a residential structure or as part of an
urban development, with an exception for middle housing located on lots of less than 15,000
square feet consistent with subsection 6(c) below. In the case of existing multifamily housing that
is occupied or which has not been vacant for 12 months or more, the multifamily housing project
must also provide for a minimum of four additional multifamily units for a total project of at least
10 units including the four additional units. Existing multifamily housing that has been vacant for
12 months or more does not have to provide additional units.
(5) Proposed Completion Date. New construction of multifamily housing and rehabilitation
improvements must be completed within three years from the date of approval of the
application. "Completed" for this purpose means that a certificate of occupancy has been issued
for all of the improvements prior to the expiration of the three-year period or prior to expiration
of any extension period granted in accordance with POMC 3.48.090.
(6) Project performance standards and form. To qualify for a limited exemption from ad valorem
property taxation pursuant to this chapter, the proposed project must meet one of the following
performance standards and forms in addition to meeting all other reauirements of this chaster.
(a) The multi -family housing project must be in a mixed -use shopfront building containing
commercial ground floor uses measuring at least 4,000 square feet or 40% of the building's
footprint, whichever is less; or
(b) The multi -family housing project must be in a building containing at least 4 stories of
residential units and achieving at least 40 units per net acre (gross acreage, less critical areas and
associated buffers). All portions of buildings must contain 4 -stories of multi -family units. Where
buildings step down following topography, each portion of the building must contain 4 -stories of
multi -family units; or
(c) The multi -family project must provide middle housing and be on a parcel/lot measuring less
than 15,000 square feet with between 4-12 multi -family units; or
11092614.2 - 366922 - 0021
75
Ordinance No. _-25
Page 8 of 15
d) Projects that will provide 100% of any on -site parking below grade.
(7) Additional performance standards for 12 -year tax exemption. To qualify for a 12 -year
limited exemption from ad valorem property taxation, and affordable housing component is
required:
(a) A minimum of 20 percent of all residential units in the development shall be rented for at
least 25 percent below fair market rent for 12 years. to tenants whose household annual
I.Tg.,.:T L
• At or below 40% of median family income, for housing units in con
residences or small efficiency dwelling units;
• At or below 65% of median family income for one -bedroom units;
• At or below 75% of median family income for two -bedroom units: and
• At or below 80% of median family income for three -bedroom and larger
units.
(b) If calculations for the minimum 20 percent of the residential units required under subsection
1 of this section result in a fraction, then the minimum number of residential units required to
meet the affordable housing requirement shall be rounded up to the next whole number.
(c) For the purpose of administering this chapter, the Department of Community Development
shall publish annual rent limits and a utility allowance which may be subtracted from the rent
limits required by this chapter. This annual allowance shall be published by July 1 annually,
provided that all relevant data is made available by the Department of Housing and Urban
Development (HUD). If publication of HUD data is delayed, the prior year's limits shall remain in
effect until new data is released. Project owners may choose to include utilities (other than
telephone) in the rent charged or may deduct the annually released utility allowance from the
maximum allowed rent.
3.48.070 Application procedure.
A property owner who wishes to propose a project for a tax exemption shall complete the
following procedures:
(1) The exemption application provided by the city shall be completed and filed with the
department prior to issuance of a building permit for the project. The completed application shall
11092614.2 - 366922 - 0021
76
Ordinance No. -25
Page 9 of 15
be accompanied by the application fee as authorized by RCW 84.14.080 and as set forth in the
city's current fee resolution.
(2) The exemption application shall contain and require such information as deemed necessary
by the director, including:
(a) A brief written description of the project, including timing and construction schedule,
setting forth the grounds for the exemption.
(b) Floor and site plans of the proposed project, which may be revised by the owner, provided
such revisions are made and presented to the director prior to the city's final action on the
exemption application.
(c) For rehabilitation projects, the applicant shall provide a report prepared by a registered
architect identifying property noncompliance with current building codes. This report shall
identify specific code violations and must include supporting data that satisfactorily explains
and proves the presence of a violation. Supporting data must include a narrative and such
graphic materials as needed to support this application. Graphic materials may include, but
are not limited to, building plans, building details, and photographs.
(d) If applying for a 12 -year exemption, it shall include information describing how the
applicant will comply with the affordability requirements set forth in POMC 3.48.040(1)(c).
(e) A statement from the owner acknowledging the potential tax liability when the project
ceases to be eligible under this chapter.
(f) An affidavit signed by the owner stating the occupancy record of the property for a period
of 12 months prior to filing the application.
(g) Verification of the correctness of the information submitted by the owner's signature and
affirmation made under penalty of perjury under the laws of the state of Washington.
3.48.080 Application review — Issuance of conditional certificate — Denial — Appeal.
(1) Director's Decision. The director may certify as eligible an application which is determined to
comply with all applicable requirements of this chapter. A decision to approve or deny an
application shall be made within 90 calendar days of receipt of a complete application.
(2) Approval of Application — Contract Required. If an application is approved, the applicant shall
enter into a contract with the city, regarding the terms and conditions of implementation of the
project, and pursuant to the following:
(a) The contract shall be subject to approval by the city council, in the form of a resolution,
11092614.2 - 366922 - 0021
77
Ordinance No. _-25
Page 10 of 15
regarding the terms and conditions of the project and eligibility for exemption under this
chapter. This contract shall be recorded against the property and will constitute a covenant
running with the land and shall be binding on the assigns, heirs, and successors of the
applicant.
(b) For any development project including owner -occupied units, the contract with the city
shall also require that an owners' association organized under RCW 64.34.300 be formed for
all owner -occupied units within the development, for at least the length of the exemption
period granted, to assume the responsibility for collecting from all individual unit owners the
information and documents required to complete the annual reporting requirements and for
filing the required annual report with the city for each of the individual homeowners
pursuant to POMC 3.48.120.
(c) Amendment of Contract. Within three years of the date from the city council's approval
of the contract, an owner may request an amendment(s) to the contract by submitting a
request in writing to the director. The fee for an amendment is as set forth in the city's
current fee resolution. The director shall have authority to approve minor changes to the
contract that are reasonably within the scope and intent of the contract approved by the city
council, as solely determined by the director. Amendments that are not reasonably within
the scope and intent of the approved contract, as solely determined by the director, shall be
submitted to the city council for review and approval. The date for expiration of the
conditional certificate shall not be extended by contract amendment unless all the conditions
for extension set forth in POMC 3.48.090 are met.
(3) Issuance of Conditional Certificate. Upon city council approval of the contract required under
subsection (2) of this section, the director shall issue a conditional certificate of acceptance of tax
exemption. The conditional certificate shall expire three years from the date of city council
approval unless an extension is granted as provided in this chapter.
(4) Denial of Application. If an application is denied, the director shall state in writing the reasons
for denial and shall send notice to the applicant at the applicant's last known address within 10
calendar days of issuance of the denial.
(5) Appeal. Per RCW 84.14.070, an applicant may appeal a denial to the city council within 30
calendar days of receipt of the denial by filing a complete appeal application and fee, as set forth
in the city's current fee resolution, with the director. The appeal before the city council will be
based on the record made before the director. The director's decision shall be upheld unless the
applicant can show that there is no substantial evidence on the record to support the director's
decision. The city council's decision on appeal will be final.
11092614.2 - 366922 - 0021
78
Ordinance No. _-25
Page 11 of 15
3.48.090 Extension of conditional certificate.
(1) Extension. The conditional certificate and time for completion of the project may be extended
by the director for a period not to exceed a total of 24 consecutive months. To obtain an
extension, the applicant must submit a written request with a fee, as set forth in the city's current
fee resolution, stating the grounds for the extension. An extension may be granted if the director
determines that:
(a) The anticipated failure to complete construction or rehabilitation within the required time
period is due to circumstances beyond the control of the owner; provided, that financial
hardship, regardless of the cause or reason, shall not be considered by the director as a
circumstance beyond the control of the owner in order to grant an extension;
(b) The owner has been acting and could reasonably be expected to continue to act in good
faith and with due diligence; and
(c) All the conditions of the original contract (and as amended) between the applicant and
the city will be satisfied upon completion of the project.
(2) Denial of Extension. If an extension is denied, the director shall state in writing the reason for
denial and shall send notice to the applicant's last known address within 10 calendar days of
issuance of the denial.
(3) Appeal. An applicant may appeal the denial of an extension to the hearing examiner within
14 calendar days of receipt of the denial by filing a complete appeal application and appeal fee
with the director. The appeal before the hearing examiner shall be processed as a closed record
hearing. No appeal to the city council is provided from the hearing examiner's decision.
3.48.100 Application for final certificate.
Upon completion of the improvements agreed upon in the contract between the applicant and
the city and upon issuance of a temporary or permanent certificate of occupancy, the applicant
may request a final certificate of tax exemption by filing with the director such information as
the director may deem necessary or useful to evaluate the eligibility for the final certificate,
including the following:
(1) A statement of expenditures made with respect to each multifamily housing unit and the total
expenditures made with respect to the entire property;
(2) A description of the completed work and a statement of qualification for the exemption;
(3) The total monthly rent or total sale amount of each multifamily housing unit rented or sold to
date;
11092614.2 - 366922 - 0021
79
Ordinance No. _-25
Page 12 of 15
(4) A statement that the work was completed within the required three-year period or any
authorized extension;
(5) If a 12 -year exemption, information on the applicant's compliance with the affordability
requirements of this chapter; and
(6) Any additional information requested by the city pursuant to meeting any reporting
requirements under Chapter 84.14 RCW.
3.48.110 Issuance of final certificate.
(1) Director's Decision. Within 30 calendar days of receipt of all materials required for a final
certificate, the director shall determine whether the specific improvements satisfy the
requirements of the contract, application, and this chapter.
(2) Granting of Final Certificate. If the director determines that the project has been completed
in accordance with this chapter and the contract between the applicant and the city, and has
been completed within the authorized time period, the city shall, within 10 calendar days of the
expiration of the 30 -day review period above, file a final certificate of tax exemption with the
Kitsap County assessor. The director is authorized to cause to be recorded, at the owner's
expense, in the real property records of the Kitsap County department of records, the contract
with the city, as amended if applicable, and such other document(s) as will identify such terms
and conditions of eligibility for exemption under this chapter as the director deems appropriate
for recording, including requirements under this chapter relating to affordability of units.
(3) Denial of Final Certificate. The director shall notify the applicant in writing that a final
certificate will not be filed if the director determines that:
(a) The improvements were not completed within the authorized time period;
(b) The improvements were not completed in accordance with the contract between the
applicant and the city; or
(c) The owner's property is otherwise not qualified under this chapter.
(4) Appeal. An applicant may appeal a denial of a final certificate to the hearing examiner within
14 calendar days of issuance of the denial of a final certificate by filing a complete appeal
application and appeal fee with the director. The appeal before the hearing examiner shall be
processed as a closed record hearing. No appeal to the city council is provided from the hearing
examiner's decision.
11092614.2 - 366922 - 0021
80
Ordinance No. _-25
Page 13 of 15
3.48.120 Annual compliance review — Reporting.
(1) Within 30 calendar days after the first anniversary of the date of filing the final certificate of
tax exemption and each year for the tax exemption period, the property owner shall be required
to file a notarized declaration with the director indicating the following:
(a) A statement of occupancy and vacancy of the multifamily units during the previous 12
months;
(b) A certification by the owner that the property has not changed use and continues to be
in compliance with the contract with the city and the applicable requirements of this chapter;
(c) A description of changes or improvements to the property made after the city's issuance
of the final certificate of tax exemption;
(d) The total monthly rent of each multifamily housing unit rented or the total sale amount
of each unit sold during the 12 months ending with the anniversary date;
(e) A breakdown of the number, type, and specific multifamily housing units rented or sold
during the 12 months ending with the anniversary date;
(f) If granted a 12 -year exemption, information demonstrating the owner's compliance with
the affordability requirements of this chapter, including, but not limited to, the income of
each renter household at the time of initial occupancy or the income of each purchaser of
owner -occupied units at the time of purchase;
(g) The value of the tax exemption for the project; and
(h) Any additional information requested by the city pursuant to meeting any reporting
requirements under Chapter 84.14 RCW.
(2) City staff may also conduct on -site verification of the declaration and reporting required under
this section. Failure to submit the annual declaration and report may result in cancellation of the
tax exemption pursuant to this chapter and shall result in a review of the exemption per RCW
84.14.110.
(3) If the city issues final tax exemption certificates pursuant to this chapter, the director shall
submit the report required by RCW 84.14.100 to the state Department of Commerce by
December 31st of each year.
3.48.130 Cancellation of tax exemption.
(1) The director may cancel a tax exemption on a property if he/she determines any of the
following:
11092614.2 - 366922 - 0021
81
Ordinance No. _-25
Page 14 of 15
(a) The owner is not complying with the terms of the contract or this chapter;
(b) The use of the property is changed or will be changed to a use that is other than
residential;
(c) The project violates applicable zoning requirements, land use regulations, building, or fire
code requirements; or
(d) The owner fails to submit the annual declaration and report specified in POMC 3.48.120.
(2) If the owner intends to convert the multifamily housing to another use, the owner shall notify
the director and the Kitsap County assessor in writing within 60 calendar days of the change in
use.
(3) Cancellation may occur in conjunction with the annual review or at any such time
noncompliance has been determined.
(4) Upon cancellation of the tax exemption, additional taxes, interest, and penalties shall be
imposed on the property, and a priority lien may be placed on the land, pursuant to state law.
(5) Notice of Cancellation. Upon determining that a tax exemption is to be canceled, pursuant to
RCW 84.14.110(2), the director shall notify the owner by mail, return receipt requested.
(6) Appeal of Cancellation. The owner may appeal the determination of cancellation to the
hearing examiner by filing a notice of appeal and appeal fee with the city clerk within 30 calendar
days of the date of the notice of cancellation, specifying the factual and legal basis for the appeal.
The appeal shall be heard by the hearing examiner as a closed record hearing. No appeal to the
city council is provided from the hearing examiner's decision.
3.48.140 Conflict of provisions.
If any provision of this chapter is in legal conflict with the provisions of Chapter 84.14 RCW, as
currently adopted or hereafter amended, the provisions of Chapter 84.14 RCW shall apply as if
set forth in this chapter.
SECTION 3. Corrections. Upon the approval of the city attorney, the city clerk and/or
code publisher is authorized to make any necessary technical corrections to this ordinance,
including but not limited to the correction of scrivener's/clerical errors, references, ordinance
numbering, section/subsection numbers, and any reference thereto.
SECTION 4. Severability. If any section, subsection, paragraph, sentence, clause, or
phrase of this ordinance is declared unconstitutional or invalid for any reason, such decision shall
11092614.2 - 366922 - 0021
82
Ordinance No. _-25
Page 15 of 15
not affect the validity of the remaining parts of this ordinance.
SECTION 5. Effective Date. This ordinance shall be published in the official newspaper of
the city and shall take full force and effect five (5) days after the date of publication. A summary
of this ordinance in the form of the ordinance title may be published in lieu of publishing the
ordinance in its entirety.
PASSED by the City Council of the City of Port Orchard, APPROVED by the Mayor and
attested by the City Clerk in authentication of such passage this day of
202
Robert Putaansuu, Mayor
1119X.119
Brandy Wallace, MMC, City Clerk
APPROVED AS TO FORM: Sponsored by:
Charlotte A. Archer, City Attorney
PUBLISHED:
EFFECTIVE DATE:
11092614.2 - 366922 - 0021
Scott Diener, Council Member
83
LII h j
muIHH lull I1:' Q=
IIII!i!iI:.IIii:=!m
�a
w ,♦v- ' unnnnnnl��
�,O�,,`�I�IIo -- �IIII >• a- ,
Q�O ��IP.1111111�
����jID 1111111
.• �I�Ij ���, ' �p1111111P �IIIII
11� 111111►� ��
annnnm `;
'F III��I -�
IMIlU
1111111
■ `■:■ IIIIIIUI1-
rI����w�IQ�� ��p'�■111
�� � �`� ` '�� ■111111:
' ► I�: •�.�� �,r ■111 �■1��:
____ I'll!
ra■■■■�
:i iiii
•♦i
'till
■'
--w
mm
lii
B
HARD
City of Port Orchard
Draft
Multi -Family Tax Exemption
Residential Targeted Areas
Map
Land Use Recommendation
EDT Recommendation
MFTE Original
_____ MFTE Original
Effective Date of Ordinance XXX-24
N
0 0.10.2 0.4 0.6 0.8
Miles
84
LII h j
muIHH lull I1:' Q=
II II !i I I:.I Iii:=!m
�a
w ,♦��- ' unnnnnnl��
� ',�Ij�•� ���,�,�OIIIIIIIII�� ��
iiii���i��i?�� ,�OQ��`,��I�IIo =_ .1111 : >•��a ,
���IQ,�� � �► Q�i1�ID 1111111
,Mp1111111P X1111/
�iumlunp�
annnnm o.
111
n
11 'i1iij111w N
A
P (1! -
ILE n�
■■1JiWLUN_
fit. U= =-_==
pr I■��-IIwi1
•- =_� •== ■.•�
INN
�1111111
iIiiiiI
•� �•� � `� ` '�� ■111111:
•- J
. ` ;� ■111
ii
ra■■■■�
"Iii
:i iiii
'till
k
■'
--w
mm
liiu
B
0 CHARD
City of Port Orchard
Draft
Multi -Family Tax Exemption
Residential Targeted Areas
Map
Land Use Recommendation
EDT Recommendation
2024 ZONE
BPMU
CC
CH
CI
CMU
i4 DMU
GB
i4 GMU
IF
LI
NMU
PF
PR
R1
R2
R3
R4
Effective Date of Ordinance XXX-24
a
00.126.25 0.5 0.75 1
Mi
0
851
GROWTH MANAGEMENT
SERVICES
SHORT GUIDE FOR COUNCILS AND STAKEHOLDERS
What is MFTE?
METE (Multifamily Housing Tax Exemption) programs are
property tax waiver programs enacted by cities and counties to
support local housing goals. Under Chapter 84.14 RCW, local
governments can give exemptions for new construction,
conversion, and rehabilitation of multifamily residential
improvements with at least four units.
Under these exemptions, a property owner does not have to
pay property taxes on the residential improvements for a given
number of years. The property owner still pays tax on the land
and on non-residential improvements like the commercial
portion of a mixed -use building.
For the annual property taxes collected on a development...
Commercial Residential
Land Improvements Improvements
1
7'
... an exemption under MFTE removes the residential portion of
property value from taxation for an eight- to 20 year period.
Advantages
o Cities and counties can give financial incentives to meet
housing goals without the need for direct funding. This can
support affordable housing but can also incentivize
market -rate housing in a way that complies with state
constitutional requirements.
o Requirements in state law can be flexible and let cities and
counties tailor programs to meet policies. Some programs
consider on -site improvements, building requirements, or
mandates for services.
o MFTEs are commonly used by developers across
Washington, who are often familiar with how they operate
and how to use them with projects.
.1►' Washington State
Deartment of
!i j Commercep
V3.0
Types of MFTE
MFTE programs are usually divided according to the For an 8 -year MFTE... tax exemptions are provided as
length of the program: a general incentive for new residential investment.
For an 8 -year MFTE program, there are no
requirements for affordable housing, although some ❑ ❑ ❑ ❑ ❑ ❑ ❑
cities provide their own requirements. Many o ❑ o a ❑ o ❑
communities use this to promote market -rate
housing construction in neighborhoods where new New multifamily development
(rental or homeownership)
housing investment is needed.
Tax exemption for 8 years
A 12 -year MFTE program must set aside at least 20%
of housing units for low- and moderate -income
households. Under the statute, household income is For a 12 -year MFTE... tax exemptions are provided in
based on Area Median Income (AMI), with households exchange for at least 20% of units being set aside as
with incomes at 80% of AMI or less considered "low affordable for 12 years (rentals or units for sale).
income", and households at 115% of AMI or lower
"moderate income". This MFTE is used for providing
affordable rental housing options, including choices
in market -rate private housing projects.
A 20 -year MFTE program requires that 25% of units
be sold as permanent affordable housing for
households at 80% AMI or below, with a nonprofit or
government agency sponsoring the sale and
restrictions in place for resale to ensure long-term
affordability. This is a new option implemented in
2021 and is intended to be used to encourage
affordable housing homeownership. There is an
option for permanent affordable rentals (20% of units
for 99 years at 80% AMI or less) but a deadline for
passing this program restricts new programs.
Note that communities can also choose to impose
higher affordability requirements and include other
requirements for MFTE projects as well.
Considerations
O MFTEs can result in either a loss of tax revenue
to the community, or a tax shift where other
property owners will pay more in taxes.
O MFTE programs require staff time to conduct
regular monitoring, oversight, and reporting.
O Regular updates can be necessary to make sure
the program provides a sufficient incentive to
maximize public benefits.
WHAT IS MFTE?
Tax exemption for 20 years
Affordable rents for 12 years
(20% of units, tow -/moderate -income)
Affordable units for sale
(20% of units, short-term restrictions)
For a 20 -year MFTE... tax exemptions are provided in
exchange for permanently affordable rental housing
homeownership.
Affordable rents for 99 years
(20% of units for low-income HH)
OR
rc❑❑❑❑ ❑ ❑ o ❑ o
Affordable units for sale
(25% of units, permanently affordable)
2
87
GROWTH MANAGEMENT
SERVICES
SHORT GUIDE FOR COUNCILS AND STAKEHOLDERS
What is Tax Shift?
MFTE (Multifamily Housing Tax Exemption) programs can be
an effective way of incentivizing market -rate and affordable
housing options. To understand how it works stakeholders
often ask, "Where does the money come from to pay for the
exemption?"
This question can be hard to answer because of how property
taxes work in Washington State. When making decisions about
an MFTE program, it is important to consider possible tax and
revenue impacts.
Generally, these impacts can be distributed in two ways:
o Foregone tax revenues that are not collected, which reduce
total revenues for a city and other taxing districts (e.g., the
port, county, school district, state, etc.).
O A shift of tax obligations to all other payers of property
taxes in these districts, where there is an increase in taxes
collected to offset the losses from the exemption.
How these costs are distributed depends on two things:
O Levy limits provided under RCW 84.55.010 mean that
property tax levies are restricted to no more than a 1%
increase in revenue from the assessed value from the
previous year. This restricts how much cities and other
districts can raise property taxes on these properties to
make up this difference and can mean that deferred taxes
will be foregone revenue for these jurisdictions.
O However, projects that receive MFTEs could still increase
that total levy. Under WAC 458-12-342, county assessors
must assess building value during construction and add it
to these levy limits, which may not be removed from the
total levy amount before the final certificate for exemption
is received and the exemption begins.
The amount of tax shift versus deferred revenue depends in
part on the practices of the county assessor. However, there
are currently no requirements for assessors to consider MFTE
in these levy limits. If cities do not consider these effects, an
MFTE can shift most or even all of the exempted tax
obligations to other properties.
Washington State
Department of
!j Commerce
Tax Shift Considerations
If an MFTE is supported through tax shifts, there are
some important policy considerations:
O Communities may be less likely to support
incentives for market -rate development that use
property tax increases, especially for high -end
projects that do not seem to provide public
benefits.
O Shifted tax obligations are not usually calculated,
meaning that the full impacts of this program may
not be transparent, especially to affected property
owners.
O Depending on the popularity of the program, the
total increases in property taxes could be
equivalent in magnitude to affordable housing
levies that would require voter approval and have
tighter requirements (ROW 84.55.150).
Foregone Revenue Considerations
On the other hand, if a city foregoes tax revenue to
support MFTEs, there may be other policy concerns:
O Communities will have reduced long-term tax
revenues from the MFTE program, especially if
they will be foregoing most or all of the exempted
tax revenue. This can have a significant fiscal
impact on local budgets.
O Other taxing districts may be impacted by tax
exemptions but are not in a position under the
statute to object to a community's MFTE program
This can have some significant effects on special
districts that cannot make up for this lost revenue
in other ways.
O The total budget impacts may be more
unpredictable, especially without limitations on
the number of exemptions issued by the
community. However, placing limits on the
number and value of exemptions could affect the
ability of the MFTE program to meet housing
goals.
Under typical situations, total property tax levies will
increase by 1 % over the previous year (plus new
development):
New construction is added to the
total tax base by the assessor... Total Tax Levy Amount
El
Encreaseiyea
r
2
a ...increasing the value
o f of the tax base.
a
as°oB oo°o°uoo ` g°og°og°ooa
Year
If new construction value is added to the levy limit but
exempted from property taxes through the MFTE,
property tax obligations will be shifted to the rest of
the tax base:
Tax exempted properties add to the
property tax levy limit...
2
...but these tax obligations will be
covered by non-exempt properties.
IoIoIIoI
Year
However, if exempted value is taken out of the levy
limit in some way, the tax levy amount will decrease.
This will reduce tax revenue, but note that this is not
usually done by assessors in practice.
Tax exempted properties that do not
contribute to the levy lid...
X
Q ... would not shift tax obligations
o but will result in foregone revenue.
Q o 0 0 0 0 0 0
Year
89
■
City Council Work Study
September 16, 2025
90
Case Study
017-03 001.00
00� "
027-00
024-00
oo7-on
1123-00
!
022-00
. 1
011-00
- z.
2-008
is
h.015 -00,
Overlook Apartments (The Charleston) vs. Peyseno Apartments
2025 WEB TAX STATEMENT
2025 WEB TAX STATEMENT
Peter J Boissonneau
w, Peter J Boissonneau
Ritsap County Treasurer
Kitsap County Treasurer
PO Box 169
Printed: 0 710 1120 25
PO Box 169
Printed0710112025
Port Orchard, 35A90366
Port Orchard, WA 90366
ccount Number
312402-2-022-2009
tecount Number
302402-3-062-2009
First Half
$0.00
First Half
Dun April 30th
Due April 30th
$0.00
PAYSENO LANE II LLC
Second Half
$63,374.34
FAC PORT ORCHARD LLC
Second Half
7533 CLOVER VALLEY RD SE
Due October 31st
2302 N 77TH ST
Duo October 31st
$1,000.54
PORT ORCHARD, WA 90367
Total Due 2025
SEATTLE, WA98103
RrindludN�,rdu..maR1a
$63,374.34
Totai Due 2025
$1,444.54
roll
Past Due Amounts
$0.00
Past Due Amou nts
$0.00
hoperty Desrnplion: REsuLTANraARrxxnor uoJsr RvurF nnursrernr RE➢cv➢muuDERwmoos PILE IS Land Value5426,500
0211 D1000et, AND AO DEPICTED CN 511 RVEY RECORDED UNnFR AIMOR'S FlFM1 Xfi1101tl0a2,
IN—UNIF R60F
dy Eescnpfon: RESNLTAM PARCEL IOF RONNOMYLINEasJLrsn rrr REWRomllrl EliAlloRIXi5 FILE NO. Land Val us: 5329,2t
005055, PAGES 104 ThNOLGHIO&INCLLPSIVE, PECLFOS OF NLrsw COUNrl', WA4K
Budding Value: $14,105,846
Fu TILI. 9FlP1 LIOl O, E0
1810270137. BEING A PpirION OF LOTGO AND D OFTIE GIY OP PORT ORCHM➢3Ni PLATN0. PQ7dR-l(S10LdR-2t
ccm atiAdshss: Multiple addresses utiie
Personal Properly Value: so
Ec ORDEDUNRERwTSARcoUNrrAUDnoas—No. mmdeTrma,REINGu1,wEND1ENrxmll�so�Rr Euilding Va.: $8,341,500
ahon Address: Multiple addresses m He
Personal Properly Value: 50
Distribution of Your 2025 Taxes
Current Year (2025) Details
0.5% PUD
$645.80
Taxable Value $14,532,340
Distribution of Your 2025 Taxes
Current Year (2025) Details
2.2% PORT
$283800
Tax Code Area 0810
0.5% PUD
$10.20
Taxable Value $229,200
3.1% REGIONAL LIBRARY
$3987 s0
Levy Rate 0721692
22% PORT
54450
Tax Code Area 0810
General Property Tax $97,392.07
Levy Rate 0.721692
7.4% COUNTY
$9,409.30
VoterApproved Rate 23.16%
39% REGIONAL LIBRARY
General Property Tax $1,536.05
12.9% CITY
$16,292.10
VoterApprovedTax $29,354.51
7.4% COUNTY
5148.40
VoterApprovedRate 23.16%
22.3% FIRE
$2824520
Noxious Weed $2.10
129% CITY
6257.00
VoterApprovedTax $46297
232% LOCAL SCHOOL
$26,34560
Total 2025 Charges $126,748.68
22.3% FIRE
5445$0
Noxious Weed $2.06
20.4% STATE GENERAL
$35,952.90
Past Due Unpaid Amounts
P
23.2% LOCAL SCHOOL
546290.
Total 2025 Charges $2,001.08
Year I
Principal
Int/PenlFees
ITatal
20.4% STATE GENERAL
5567.50
Past Due Unpaid Amounts
2024 130.00
100.00
10000
Year I
Principal
Int/Pen/Fees
Total
2023
$0.00
$0A0
$0.00
2024
$0.00
50.00
$0.00
To view details of each levy change, go to
2022+ Prior
$0.00
$0.00
$0.00
2023 I
$0.00
50.00 100.00
wow. kitsap.govftreasurer
To view details of each levy change, go to
2022 -1 Prior
$0.00
$0.00
$0.00
92
• Overlook Apartments (12 -year MFTE):
• Total Units: 39
• Affordable Units: 8 Units with reduced rent
• Annual property tax bill: $2,001.08
• Estimated annual tax savings is $84,722. (prorated based on Payseno tax bill per unit)
• Estimated 12 -year tax savings to developer/operator is $1,016,665.
• Estimated annual value of rent relief to qualified tenants based on 10% below HUD fair market
rent is $19,747 ($2,468.40 per unit).
• Estimated annual value of rent relief to qualified tenants based on proposed 25% below
HUD fair market rent is $49,368 ($6,171 per unit).
• Estimated 12 -year value of rent relief to qualified tenants based on 10% below HUD fair market
rent is $236,996 ($29,620.80 per unit).
• Estimated 12 -year value of rent relief to qualified tenants based on 25% below HUD fair
market rent is $592,416 ($74,052 per unit).
• Payseno Apartments (no MFTE):
• Total Units: 57
• Annual property tax bill: $126,748.68
93
• Pre -application meeting for a 3 -story 24 -unit Garden Apartment
• Zoning currently allows 4 -stories, developer choosing to build 3 -stories due to
increased cost of taller building.
• A new MFTE program, assuming that the developer opts for a 4 -story building to
receive MFTE, would result in 32 units instead of 24 and would result in an increased
building valuation.
• Total 2025 assessed value if constructed:
• 3 Stories 24 -units: $6,118,880
• 4 Stories 32 -units: $8,158,500
• Total Annual Tax Paid 24 -units: $53,367.87
• Total Annual Tax Paid 32 -units (shifted for 8-12 years): $71,157.15
94
Cumulative Property Tax Revenue
$35,000,000.00
$30,000,000.00
$25,000,000.00
$20,000,000.00
$15,000,000.00
$10,000,000.00
$5,000,000.00
$0.00
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89
-Without MFTE 3 -Stories (Cumulative) -With MFTE Tax Shift 4 -Stories (cumulative)
• Port Orchard Gains $7,886,857 Over 90 Years with MFTE and 4 -Story Project
• Cost of tax shaft for average property value is $10.36 per year for 8-12 years.