City’s Operating and Capital Financial Challenges - 2017/18
The shortcut to this page is: www.mercergov.org/FinancialChallenges
“Houston, we have a problem.” This oft-quoted line from Apollo 13 succinctly captures the City’s financial challenges in the 2017-2018 biennium and beyond. The City had to use almost $2.0 million in one-time resources to balance the 2017-2018 budget in the General Fund and Youth & Family Services Fund, which together account for most of the City’s services, excluding water, sewer, and storm water utilities. In 2019, the City is projecting a $1.8 million combined deficit in these funds, increasing to $6.8 million in 2024.
|Click to view the 6-page mailer (March 2018)|
Annual Revenue Growth
What is driving these projected deficits? Simply put, annual revenue growth is not keeping pace with annual expense growth. Why not? There are two primary reasons:
1) Property tax, which is the City’s largest revenue source, is capped at 1% growth per year plus an allowance for “new construction,” which equates to another 1% per year on average.
2) Development activity declined significantly in 2017 and is projected to decline further in 2018-2019, after generating record-setting spikes in construction-related sales tax and development fees in 2016.
As a result, total revenues in both the General Fund and Youth & Family Services Fund are projected to grow only 2.4% per year, on average, in 2019-2024.
Annual Expense Growth
Total expenses, on the other hand, are projected to grow 4.9% per year, on average, in 2019-2024, primarily driven by the following: 1) inflation (as measured by the Seattle-Tacoma-Bellevue CPI-W), which hit 4.0% in December 2017; and 2) employee benefit costs, which are projected to grow 7.5% annually due to the uncertainty surrounding the Affordable Care Act, increases in state retirement system contribution rates (determined by the state), and increases in Labor & Industries (L&I) insurance payments to the state for workers’ compensation.
Accordingly, total expenses are projected to grow 2.5% per year more than total revenues, resulting in a structural imbalance in the General Fund and Youth & Family Services Fund. Moreover, this difference between total revenue and total expense growth is compounding annually, which is why the projected deficit increases from $1.8 million in 2019 to $6.8 million in 2024.
In terms of services, the General Fund, which receives 72% of its revenues from property tax, sales tax, and utility taxes, accounts for the following: police, fire and emergency medical response, street and right-of-way maintenance, park maintenance, recreation and special events, land use planning and community development, and municipal court.
The Youth & Family Services Fund, which receives 74% of its revenues from Thrift Shop sales and MIYFS Foundation support, accounts for the following services, which are provided by the Youth & Family Services Department: school-based mental health counseling, community-based counseling, Thrift Shop operations, youth volunteer programs, emergency assistance, senior outreach, healthy youth initiative, and employment assistance. No other King County city, except for Seattle, has a human services department. Moreover, all school-based mental health counselors are City, not School District, employees.
According to past biennial citizen surveys, 80-85% of Island residents believe the City provides “about the right” level of services. To maintain current service levels, a new, ongoing revenue source is needed, such as a voter-approved property tax levy lid lift. Otherwise, significant service level cuts will be required beginning in 2019, primarily impacting non-essential, quality of life services provided by the Parks & Recreation and Youth & Family Services Departments.
In addition, the City has capital project funding challenges related to public buildings, streets, parks, beaches, and pedestrian/bicycle facilities, all of which are unfunded or only partially funded. The City Maintenance Building, which houses all Public Works and Parks Maintenance staff, is long overdue for renovation and expansion. If the Thrift Shop could be expanded by 40-50%, the $400,000 annual operating contribution from the General Fund to the Youth & Family Services Fund could be eliminated, thereby reducing future operating deficits. The other capital project funding needs include sports field improvements (e.g., replacing grass with synthetic turf); safe routes to school; beach improvements at Luther Burbank Park, Groveland Beach, and Clarke Beach; completion of the Mercer Way pedestrian/bicycle shoulders; I-90 pedestrian/bicycle trail resurfacing; and other park improvements.
Additional Property Tax Information
Click here for tables showing the 2018 property tax levy amount and tax rate in Mercer Island, and a comparison with nearby cities.
What’s Happening Now?
In late April 2018, the City conducted its biennial citizen survey to determine satisfaction levels with City services, identify funding priorities, and gauge public support for an operating levy lid lift. On May 15, 2018, the survey results were presented to the City Council (view materials and footage).
Visit our frequently updated FAQ page for answers
On May 15, 2018, Council also heard the recommendations of a 23-member Community Advisory Group (CAG) formed to advise the City Manager on solutions to the City's financial challenges.
Council discussion and public hearings will be conducted on June 5 and June 19, 2018 regarding placing an operating levy lid lift on the November 2018 ballot. The City Council will make its final decision at its June 19, 2018 meeting.
Visit our public engagement and outreach page for educational materials and meeting schedules
Frequently Asked Questions
If you don't find the answer you need in the FAQ, or have comments, please Email us at Financial@mercergov.org
|Click to read the March 2018 Financial Challenges Mailer (6-pages)|