You May Need to Amend Your Real Estate Excise Tax Ordinances

I got a question from a city administrator the other day. His city was thinking of levying the second quarter percent of the real estate excise tax (REET 2), and he wanted to know if the revenues could be used for operations and maintenance and what kind of ordinance they had to pass.

“Oh…..fiddlesticks!” I suddenly realized that we had not revised the sample ordinances on our real estate excise tax webpage and in our MRSC Index to reflect the 2011 legislation that expanded the uses of REET funds. (We have now done so.) And, we had never reminded cities and counties that had already passed such ordinances that these ordinances might need amending.

So, I am doing that now. If you have no intention of using your REET funds for operations and maintenance (or, for counties, of using REET 2 revenues for debt service on REET 1 projects), then you can stop reading right now. If your reaction is, “Oh yes, we need to amend our ordinances right away,” then skip down to the section where I discuss amendments. However, if your memory is a bit fuzzy on the changes made by the 2011 legislature, read the next section where I reproduce, with some edits, the explanation of the legislation that we first published in Budget Suggestions for 2012.

New Uses for Real Estate Excise Tax Revenues (HB 1953, Ch. 354, Laws of 2011)

The 2011 legislature expanded, for a limited period of time, the uses of the real estate excise tax, both the first quarter percent (REET 1) under RCW 82.46.010 and the second quarter percent (REET 2) under RCW 82.46.035.[1] Cities and counties may now, with some restrictions, use REET 1 and REET 2 for operations and maintenance (O&M) of existing capital projects. Counties may use REET 2 funds for debt service on existing projects that are listed in RCW 82.46.010 (the REET 1 statute). This new authority expires on December 31, 2016.

What are the new uses?

Cities and counties may use REET 1 funds for operations and maintenance of existing capital projects as listed under RCW 82.46.010(6). These projects are:

streets; roads; highways; sidewalks; street and road lighting systems; traffic signals; bridges; domestic water systems; storm and sanitary sewer systems; parks; recreational facilities; law enforcement facilities; fire protection facilities; trails; libraries; administrative and/or judicial facilities. 

Cities and counties may use REET 2 funds for operations and maintenance of existing capital projects as listed in RCW 82.46.035(5). They are:

streets, roads, highways, sidewalks, street and road lighting systems, traffic signals, bridges, domestic water systems, storm and sanitary sewer systems, and . . . parks.

Counties only may use REET 2 revenues for payment of existing debt service on capital projects listed in RCW 82.46.010(6).[2] See the list above.

Limits on the amounts that may be expended.

  • The maximum amount of REET 1 that may be spent on O&M is the greater of $100,000 or 35 percent of the available funds, not to exceed $1 million.
  • The maximum amount of REET 2 that may be spent on O&M is also the greater of $100,000 or 35 percent of the available funds, not to exceed $1 million.
  • For counties that use REET 2 monies for payment of debt service, the total they can spend on debt service and O&M together is the greater of $100,000 or 35 percent of the available funds, not to exceed $1 million.
  • The funds may be new tax receipts or past REET revenues that you are holding reserves in your capital improvements fund.

Here are some examples:

1)  If your available funds of REET 1 (and/or REET 2 funds) are $200,000, 35 percent of that amount is $70,000. You may, however, choose to spend up to $100,000 on O&M. In fact, for any amount of funds up to $285,217, $100,000 will always be a greater amount than the 35 percent amount. 

2) If your available funds of REET 1 (and/or REET 2 funds) are, say, $700,000, you may choose to spend up to $245,000 (.35 times $700,000) on O&M.

3) From available REET 1 funds (and/or REET 2 funds) of $2,857,143, you may choose to spend $1,000,000 on O&M. Thirty-five percent of $2,857,143 is $1,000,000, so you have hit the upper limit. Even if you have REET 1 funds (and/or REET 2 funds) of more than $2,857,143, you cannot spend more than $1,000,000.

Amending Your REET Ordinances

We originally provided six ordinances, three for cities and towns and three for counties, and we have now updated them on our real estate excise tax webpage and the MRSC Index to reflect the 2011 legislation. If you are a city, town, or county that has not yet levied REET 1 or REET 2, these are the ordinances you should be using.

Whether or not you need to amend your REET 1 and REET 2 ordinances depends on how your original ordinances were worded. If you used the sample ordinances that we provided, you do need amendments. If you did not use our ordinances to begin with, then amend your ordinances in a manner consistent with the amendment we are presenting, if necessary. Of course, if you are not interested in any of the new uses, you don’t need to do anything.

To amend these ordinances, use the matching amendments below.

Cities and towns:

Amendment to REET 1 ordinance to add operations and maintenance uses for all cities and town that are planning under the Growth Management Act and have a population of less than 5,000

Amendment to REET 1 ordinance to add operations and maintenance uses for cities  and towns that are planning under the Growth Management Act, or that are not planning under GMA but have a population of more than 5,000

Amendment to REET 2 ordinance for cities and towns to add operations and maintenance uses

Counties:

Amendment to REET 1 ordinance to add operations and maintenance uses for all counties that are planning under the Growth Management Act and have a population of less than 5,000

Amendment to REET 1 ordinance to add operations and maintenance uses for counties that are planning under the Growth Management Act, or that are not planning under GMA but have a population of more than 5,000.

Amendment to REET 2 ordinance for counties to add operations and maintenance and debt service uses

A couple things to note:

1.   We have used the cross-out and underline method of amending. This is what the state legislature uses. This method makes it clear to the reader what the changes are: words that are crossed out are deleted and those that are underlined are added by the amendment. When the ordinance gets codified, these markings are removed so that only the “good” language is left.  However, you don’t have to include these markings in your ordinance if you don’t want.

2.  If you have not spent any REET funds on one of the new uses already, then you can leave out the “Ratification and Confirmation” section. If you have spent funds on new uses, then inclusion of this section will “ratify and confirm” your prior actions.


[1] For information on other uses of REET funds, see A Revenue Guide for Washington Cities and Towns (Municipal Research and Services Center: Seattle, 2009), pp. 26-29,  and A Revenue Guide for Washington Counties (Municipal Research and Services Center: Seattle, 2010) pp. 35-38.

[2] Note that since REET 1 was first authorized in 1982, cities and counties have been able to spend REET 1 revenues for debt service on projects eligible for the use of REET 1 revenues. And, cities and counties have been able to spend REET 2 revenues for debt service on projects eligible for the use of REET 2 revenues since it was introduced in 1990. What is new in this legislation is that counties (and counties only) may spend REET 2 revenues on existing debt service for projects that are eligible for the use of REET 1 revenues – those listed in RCW 8 2.46.010(6). Yes, it is confusing.

About Judy Cox

Judy is MRSC’s expert on budgeting, revenue options and forecasting, financing capital projects, and everything else related to local government finance. If you’ve got a money question, Judy’s your go-to resource.
This entry was posted in Finance. Bookmark the permalink.