Downturn in Island real estate drags down city budget

The recession’s effect on the Island housing market has rippled through the Island economy. It is felt keenly by those who are buying and selling homes and those who make their living in financial services and property marketing. Yet, they are not the only ones. The decline in the number of homes sold and their sliding prices also affects the bottom line at City Hall.

Lower housing prices for Island real estate and the dropping number of sales has had a dramatic effect on the amount of money that the city collects from real estate excise sales taxes (REET) paid when homes are sold. The tax paid by sellers is .5 percent of the closed sale price of a home. According to figures from the city, REET taxes were expected to bring in $2.63 million for the first nine months of this year. Instead, the depressed housing market generated just $1.48 million. The reason? The average sales price for all Island homes and property that have sold for the first nine months of 2009 was down by nearly 30 percent.

Despite the press given to the dramatic slide in both the number and prices of high-end homes, it is the declining number of properties sold between $1 and $5 million that concerns Chip Corder, the city finance director.

“We have been anticipating lower REET revenues for a couple of years,” he said, pointing to activity in the Town Center. “At some point, the number of transactions there will dry up.”

Indeed, city figures show that the number of homes that have sold between $1 and $5 million has fallen from 545 homes in 2006 to 260 homes in 2008.

City financial managers have both anticipated the longer term effects on the ability of the city to continue maintenance and capital projects moving ahead. REET tax revenues however, like many revenue sources, can only be spent in certain ways. REET monies can only be spent for some maintenance and certain capital projects. The effect on projects slated for this year and next includes a reduced scope of work for 72nd Avenue S.E., Luther Burbank shoreline projects, and what is termed as “minor projects” for the Lid park and other city open spaces.

Given the dismal state of the housing market both here and elsewhere, city financial managers find themselves — like everyone else — trying to keep the Island’s checkbook in balance. How the city of Mercer Island balances its budget is a Rubik’s Cube-esque stakes game that combines chess moves, poker guesses and skill. The budget worksheets presented to the City Council last month reveal the meticulous effort required to keep city services at their current level while retaining employees and key maintenance at its present level.

Due to the expected tax revenue shortfall of tax revenue, the city has worked to rebalance the city budget by cutting expenses wherever it can. But the city intends to make up some of that loss through using some of the city’s reserves to rebalance the 2009 budget and anticipates using more in 2010. The city will take $300,000 funds this year from the revenue stabilization fund, set aside for just this purpose. The city will leave the rainy day fund or contingency fund — which is separate from the revenue stabilization fund — until 2010.

Average prices of homes $5 million and under have risen every year since 2000. Presumably, given other factors regarding interest rates and personal income, those higher prices depressed sales.

The City Council can institute its discretionary ability to increase some tax rates slightly. City planners are also looking to continue to decrease spending wherever they can and are contemplating eliminating or restricting cost of living raises for employees, union or not, and suspending the pay for performance program. If those changes are made, Corder estimates that the city could save $125,000 in 2010 — an amount that is the equivalent of the tax revenues generated by the sales of three Island homes priced under $1 million.

Corder points out that with the changes in spending made this year, the city will only spend 95 percent of its 2009 budget. The city usually spends 99.5 percent of the budget amount, he said.

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