The city of Mercer Island may remain reliant on property taxes to finance the bulk of its operations into the future without economic growth.
Mercer Island has a relatively small business district, nestled off the highway at the north end of the island. The town center has no restrictions on density, but its small size means it only generates about 16 percent of the city’s total general fund balance, the portion of the budget that pays for services the city council has discretion in spending.
Per capita sales tax revenue for Mercer Island is on the low end when compared to other cities in the area that have more robust business districts. The city estimated that for its 2019-20 budget each resident will pay about $413 in sales tax, some 43 percent less than the area average of $724. About 16 percent of Mercer Island’s general fund comes from sales tax compared to the peer average of 32 percent, according to a study commissioned by the city. That is likely due to its small retail base, slowing construction and relatively low density.
General fund revenues from sales tax for the 2019-20 budget were expected to be about $10.2 million, making it the third least for cities in the study, only ahead of Mukilteo and Kenmore. To help compensate, Mercer Island has the third highest utility user taxes among other comparable cities in the county at roughly $340 per person, surpassed by Lynnwood at $343 and Bothell at $381.
That has put Mercer Island in a financial bind, leading the city to ask voters to approve a property tax levy last November, which was shot down as 58 percent of voters cast their ballots in opposition. The city has been implementing cuts to several services as a result.
Relatively small commercial zones on the island mean there isn’t much room for new businesses to set up, said Mercer Island city manager Julie Underwood.
“The reality is it’s such a small percent, especially given that our land use and our land uses that are zoned commercial are less than 3 percent of our total area,” she said. “It’s such a small, limited area of growth, and so naturally our residential property owners kind of end up carrying more of that load as opposed to our commercial.”
Even though sales tax on Mercer Island is about 10 percent, the city gets less than 1 percent of the total revenue. Additionally, sales tax from construction has also been leveling off, both from commercial and residential development. Underwood said that will likely drop lower if another recession hits.
“We don’t expect the economy to keep booming and just going higher — we expect there to be a recession at some point,” she said.
Portions of the city could be rezoned to facilitate more commerce, but Underwood said that has not been seriously discussed recently. The city went through a process of revising building codes in its town center in recent years, said city Councilmember Bruce Bassett, but most changes ended up restricting height.
The town center has a height limit of five stories on the north end closer to the freeway and tapers off until it hits residential neighborhoods a few blocks to the south. The process was contentious, Bassett said, and future efforts to change density or height limits will likely be equally controversial.
However, once Mercer Island’s Sound Transit light rail station is opened in 2023 it could spur more discussion about whether islanders want to create more density in the area. Most other cities have already begun building dense mixtures of commercial and residential development near light rail stations.
“Over time what you may see is a gradual shifting of majority opinion toward something that has more density,” Bassett said.
Puget Sound Regional Council spokesperson Rick Olson said nearly every other city along the light rail’s path is upscaling certain areas to meet future demand, including Seattle, which has upzoned many neighborhoods to facilitate greater density. A light rail station will attract people from across Sound Transit’s service area. However, unlike other cities, Mercer Island cannot annex new neighborhoods to facilitate greater growth or develop new business districts.
That conversation likely will be years in the future though, Bassett said.
“I think you don’t undertake those kinds of public efforts lightly, because they’re a lot of work and they’re contentious and it’s challenging for both the staff, the council and the community to work through it,” Bassett said.
But a future light rail station doesn’t help the city’s financial situation right now. After the failure of Proposition 1 on November’s ballot, city officials are looking for ways to save through cuts to service. If the city doesn’t make cuts, or find new revenue, it is projected to run out of general fund reserves by 2023.
The city is planning on eliminating pay-for-performance programs in 2020 which will save about $314,000, the youth and family services fund by 2020 which will save $309,000 and the Summer Celebration this year, which will save $92,000.
“It’s not a fun exercise, I will say,” Underwood said. “But it has to be done, we have to have a balanced budget.”