With 61 confirmed cases of COVID-19 and four related deaths on Mercer Island, the city attempted to forecast the local financial impacts of the worldwide pandemic during its April 7 city council meeting.

The city finance department presentation depicted a “middle of the road” impact, but stressed that impacts could be more or less severe depending on unknown factors. As of the April 7 meeting, staff believed the city could see a $1.3 million loss of sales tax revenue.

The city started the year with a surplus. The general fund had an ending fund balance of about $6.9 million. According to interim finance director Matt Mornick, about $3.9 million of that surplus is “tied to commitments.” The remaining $3.03 million is up for grabs.

The city also has a contingency fund with about $4.1 million set aside to mitigate emergency expenditures. The city council had recently set a policy to maintain the contingency fund (also referred to as a “rainy day fund”) at 12.5% of general fund expenditures (up from 10% historically). As of the end of 2019, the fund had met the policy’s requirements, but it could be time to review that fund said city manager Jessi Bon.

“What we’re quickly learning from this pandemic is not all rainy days are created equal,” Bon said.

Several departments were financially impacted more than others, including the department of Youth and Family Services (YFS) and the parks department.

Further discussions were anticipated, however, the council sharpened its pencil and took some actions recommended by the finance department to mitigate the financial impacts.

ARCH

Two actions by the council included reducing the ARCH (A Regional Coalition for Housing)Housing Trust Fund allocation from from $50,000 to $33,768, and allocating the difference of $16,232 to the ARCH administrative budget for 2020. That change allowed the city to meet its agreed obligation to ARCH for 2020 but also potentially reduce its overall contribution for 2020.

The move was at least reluctantly supported by most councilmembers.

Councilmember Jake Jacobson was focused on his immediate neighbors.

“I think charity does begin at home, and we’re going to have a bunch of people… who are soon going to be between an absolute rock and a hard place in rent and paying utility bills,” Jacobson said. “I’m very much in favor of being sure that we spend the money at home that we can spend at home.”

Councilmember Craig Reynolds cast the only dissenting vote for the motion to short the ARCH trust fund contribution. During the discussion he pointed out the regional need for ARCH and how lowering the city’s amount of participation might impact future discussions with the regional group.

“I recognize there’s a great deal of need on the Island right now. It’s tragic. I also recognize there’s a great deal of need in the region,” Reynolds said. “This just does not seem like a time to be reducing our contribution to a regional need. When you take a city that is arguably one of the most well-to-do cities in the region and say, ‘Nope — we’re no longer going to fund any regional need anymore, we’re only looking inward,’ I don’t think that’s the right thing to do, and I don’t think it’s going to serve us well in our relations with our neighboring communities.”

Councilmember David Rosenbaum echoed Reynolds’ concerns during the discussion.

“We’re going to be asking for a lot of help from the region, especially as federal funds come, from the state, from the county — I think we need to be really cognizant of that and what making a move like this right now would mean,” Rosenbaum said.

Councilmember and Deputy Mayor Wendy Weiker took a moderate tone meeting Reynolds and Jacobson in the middle.

“I know we have a lot of need on the Island, and I know we also need to rely on our regional partners… Homelessness hasn’t gone away,” Weiker said.

Mayor Benson Wong supported the move, noting that it was historically consistent with past council contributions.

Councilmember Lisa Anderl had questions about the amount moving from one account to the other, but ultimately voted for the motion.

YFS

Not all departments were hit equally in terms of finance.

At the top of the list was the department of Youth and Family Services (YFS). The department provides necessities to families in need, running the Island’s Thrift Shop, and significant counseling services to residents, both at its city location and in schools.

YFS is expected to see a painful decline in revenue through the remainder of 2020.

According to the budget presentation, the YFS Thrift Shop revenue accounts for some 65% of YFS annual revenue. The Thrift Shop was closed last month due to COVID-19, meaning that revenue has been stopped.

For 2020, the city had expected to collect about $2.2 million in revenue through the Thrift Shop. What the post-COVID-19 future may bring for the Thrift Shop is uncertain. The financial presentation posed two possible scenarios — one objectively bleak, and the other bleaker.

Scenario A anticipates the Thrift Shop opening in June and collecting half of its revenue for the year. That would leave a $1.1 million funding gap.

Scenario B anticipates the Thrift Shop remaining closed through the rest of 2020 and opening on Jan. 1, 2021, leaving a $1.7 million funding gap.

Councilmember Anderl questioned why Scenario A anticipated a closure of only about 20% of the year but projected losing half of its revenue.

Bon said the post-COVID-19 world is not expected to immediately return to normal.

“One of the things that we’re assuming is what I call ‘restricted operations,’” Bon said. “For probably well into 2021, we will not be able to throw open the doors of the thrift store and just let people shop like they did freely before.”

The city already had taken action to mitigate some of the financial shortcomings, including cuts to seasonal staff, nearly all contract staff, and work study student staff.

“What I have been focusing on prioritizing is the school counselors, emergency services, and preserving some portion of our counseling services at Luther Burbank — we may not be able to retain the full function,” Bon said. “A number of programs will likely be suspended. Things like the VOICE program. We will probably have to take an administrative reduction in the YFS department to balance our losses.”

Potential action discussions are ongoing.

Sales tax

Finance department staff used reginoal sales tax projections to create its projections.

Interim finance director Mornick said the city’s projections had the possibility of being more accurate than some other projections. City staff looked at tax revenue by sector, rather than overall. Those sectors were food services, retail/wholesale and construction.

“The city is able to track sales tax by sector and that adds a level of specificity that increases the quality of forecast moving forward. Rather than just applying a percentage decrease to sales tax revenue in Mercer Island… we were able to apply that COVID-19 projection that we’re seeing in the region specifically to (each sector),” Mornick said.

Councilmembers Jacobson and Anderl asked if Internet sales could help recovery.

City finance staff member Lujuan Tuttle said the city could not access detailed taxpayer data that would specify between brick and mortar or Internet sales, so it’s unclear how much Internet sales would impact the city’s projections.

Tax reports are delayed by two months, so the impacts of March and April won’t be clear until May and June.

Councilmember Jacobson also wondered how much construction would help in economic recovery and he suggested ways the city could help construction jump start the local economy.

“Once the wraps come off, I suspect the contractors are going to be all over doing work because they need to do that for their own cash flow,” Jacobson said. “I think it’s important at that point that we as a city are in a position to remove any unnecessary barriers where people are getting caught, whether it’s permits or inspections.”

“Whatever we can do to kick that in the hind end and get it moving.”

As a bit of optimism, Mornick suggested the recovery could be quicker than the 2008 recession.

Parks

Like YFS, the parks department is facing a $1.1 million loss. That includes the community center and its programs.

“This is a situation like we’ve never seen before — our (parks) revenue went to zero literally overnight,” Bon said.

Summer programs will be canceled, and the associated fees are lost revenue. Even if the stay-home order from the governor is lifted before the summer, the city no longer is staffed to cover the summer programs in a post-COVID-19 recovery scenario.

“We don’t have a lot of staff in reserve for these types of programs, so if we start operating knowing that we’re still dealing with a pandemic and staff gets sicks, we’ll be in a shutdown cycle much like we were experiencing before the full stay-home order was issued,” Bon said.

The council agreed the best course of action is to continue the discussion as the situation develops.

“When the stay-home order is lifted, that doesn’t mean everybody is going to feel safe going back to work or dropping their kids off at summer camps right away… it’s not going to be a flipped switch right at once,” Reynolds said. “There’s also the possibility of a double or triple dip here, where once we start allowing people to get back, infection rates climb back up again, and we have to shut down again. I think it’s fully appropriate to be a little bit conservative here in these forecasts.”

More

For 2019, the city finished ahead in terms of finances, earning more than expected and spending less than it earned. Overall expenditures were down some 3.7% and revenue was up a modest 0.2%. Utility expenses were nearly 38% below estimates. Mornick attributed the gains to staff vacancies filled at a cost below estimates, savings in repair and maintenance, and lower than expected utility usage at city facilities.

Also during the meeting, the city council elected Councilmember Salim Nice to serve as a second alternate to Mayor Benson Wong. Nice would be third in line to lead the city if the mayor and deputy mayor are unable to fulfill their duties.