J. Jacob Edel
Mercer Island Reporter

Concerned about rising inflation and a slowing real estate market, city officials are planning to make some adjustments for the upcoming 2009-2010 budget.

The eventual completion of Town Center redevelopment, which has supplied the city with a boost in revenues over the past several years, is also expected to lower the city’s budget. According to finance director Chip Corder, a drop in construction-based sales taxes has not happened yet, but is expected once the development downtown slows down. Real estate excise tax revenues, generated by home sales and used for capital and street improvements, are also expected to have an impact on the city’s budget in the coming years.

Earlier this month, Francie Lake, the city’s financial operations manager, told the Council she is expecting a drop in the average Island home sale price and number of sales until 2011. She also said she expects only 400 home sales this year, which would generate an estimated $2.2 million for the city.

“We are forecasting sales to start to come back again in 2009. We won’t be back to the forecasted average of 500 based on the 10-year average until 2011,” Lake said.

There were 441 Island homes sold in 2007 and a large number were $5 million-plus, which helped boost tax revenue up to $2.85 million, Lake said. In 2005, however, there were 590 homes sold on the Island and revenues have been higher — record highs, according to Corder — during the past two years from the sale of the Farmer’s building and the Shorewood Heights Apartments. Island Corporate Center also sold last year, bringing in about $200,000 to the city. Island Square is for sale and would add similar revenues should it sell.

As for the slowing national economy, Corder said the city hasn’t experienced the impacts that other parts of the nation have so far, with the exception of a slight decrease in the real estate market.

“One of the things I am worried about is inflation,” Corder said. “It’s very high right now, and city employee cost of living adjustments are tied into it.”

On the national level in 2007, consumer inflation increased 4.1 percent, the biggest increase in 17 years, while core inflation rose 2.1 percent over the last 12 months. While the federal labor department reported Friday that consumer prices were unchanged in February, rising inflation has been steady, with steep gains in the last half of 2007 and January. Core inflation, which excludes energy and food, increased .3 percent in January, as food costs went up .4 percent last month and .7 percent in January.

Here in Washington, the Economic and Revenue Forecast Council’s February report indated that inflation was above the national average in Seattle, at 3.9 percent in 2007. The report also stated that inflation is expected to decrease during the next three years, down to 2.2 percent in 2011, but remain above the national average.

Despite the inflation, the finance director said Washington state is doing much better economically than the nation as a whole and Mercer Island tends to be a bit more insulated in addition to that.

“We haven’t slowed as much as other communities in the Puget Sound region. We’ve done better than Kirkland, Redmond and Bellevue because our sales tax revenue from construction costs hasn’t slowed at all. But we are seeing an indicator in the drop in real estate tax.”

The city may also experience a drop in revenues during its next biennium if the construction climate cools on the Island. In addition to the redevelopment of Town Center, several single family homes have been demolished and redeveloped over the past few years. Significant drops in both of those would equal a decrease in revenue in the city’s budget.

However, Shorewood Heights plans to construct 124 new units, including townhomes, and sell them as condos after subdividing the 45-acre property into five lots. The old Safeway redevelopment will also begin to take place, possibly this summer. Add the possibility of PEAK construction, and construction-based sales taxes may not drop that much.

However, if that revenue source does dry up, Corder would have to replace it or cut city staff.

“I’ll need to replace some of that revenue with other sales taxes,” Corder said. “If not, we’d be forced to make cuts.”

City staff will propose its 2009-2010 biennial budget to the City Council during the summer months and the Council must approve it this fall.