Though home values and property taxes on Mercer Island continue to increase, the city is facing projected multi-million dollar budget deficits starting in 2019.
It seems counterintuitive, but city revenues are levy-based and not rate-based, finance director Chip Corder said at a community meeting on Mercer Island’s financial challenges on March 14.
In addition to meeting with an appointed Community Advisory Group (CAG), Corder and City Manager Julie Underwood have been hosting informational forums with various groups over the last few months. The CAG met for the last time on April 2, and finalized its recommendation.
A majority (74 percent) supported a small levy lid lift and other revenues, plus operational effectiveness and cost control measures, Underwood said at the April 3 Mercer Island City Council meeting.
The council will review the recommendation — and results of an upcoming citizen survey — on May 15, and will hear Underwood’s proposal and host a public hearing on June 5. Discussions are also planned for the June 9 mini planning session and June 19 and June 26 meetings.
Corder has been warning of a “structural imbalance” in the city’s budget for years, while still reporting year-end budget surpluses. Corder said that was due to a peak period in development activity on the Island, as many school projects, new Town Center buildings and single-family homes were under construction. He said that when development slowed down, the city would need to raise revenue or cut expenses, which means trimming staff. Personnel costs account for 71 percent of the city’s General Fund expenditures.
“We are a service organization,” Corder said. “Most of our costs are people.”
Cities are limited to raising property taxes by 1 percent per year — plus an allowance for new construction that equates to another 1 percent per year in Mercer Island, on average — but inflation and the cost of doing business are rising at a much higher rate, Corder said. Many cities in the area are projecting operating deficits in 2019-20, despite having larger sales tax bases than Mercer Island.
The most significant deficits in Mercer Island are projected in the General Fund and Youth and Family Services (YFS) Fund, which account for most of the city’s services, excluding utilities.
Mercer Island is exploring other ways to raise revenue — including expanding the Thrift Shop, raising B&O tax, increasing the utility tax or supporting economic development — but believes that property tax is “the only revenue source that can generate the amount of funding needed to bridge the projected deficits on an ongoing basis” and that a levy lid lift is the “best single revenue option.”
Corder explained one levy lid lift scenario at the community meeting: a “smaller” levy that would combine a property tax increase with other revenue options, costing the average taxpayer $254 in 2019 and increasing 5 percent each year after that, through 2024. Corder said he likes the six-year levy option because it has “built-in voter accountability.” He presented that and four other options to the CAG on Monday.
Some community members are against tax increases and have suggested potential cuts, including contracting out the mental health counseling service in Mercer Island schools (which is 90 percent funded by the city), charging for parking in public parks or having Summer Celebration every other year, to name a few. Alternative service models have also been explored, including de-annexing from the King County Library System and contracting out Marine Patrol, fire and emergency medical services. Some CAG members also presented a “minority report” that questioned the need for a levy lid lift and suggested running a cost containment program.
Underwood said that the city is “looking under the couch for change” but that “nickels and dimes” aren’t going to fix the problem. She said that for Mercer Island to continue providing the same level of service to residents, the city can do some belt-tightening, but needs to be “focused on the bigger options.”
It is ultimately a question of what the community wants, she said.
“We want to package the right solution that most Islanders are in favor of,” she told the Reporter. “We don’t want to be at odds with our community. We want to be in alignment.”
See www.mercergov.org/FinancialChallenges for more.