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9611 SE 36th Street
Mercer Island, WA 98040
Phone: 206.275.7600
Fax: 206.276.7663
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FAQ For Financial Challenges Discussions

Last updated June 4, 2018

Note: The previous round of FAQ (Nov 9, 2017) is available here as a downloadable Pdf (18 pages).

Q:  Given the structural imbalance in the General Fund, how did the City balance the budget in 2013-2018
      (i.e. the three most recent biennial budgets?)

Q:  Why can’t the City just “tighten its belt”?
Q:  Will there be a negative financial impact to the City from the adopted changes to the
      Town Center development code in 2016?
Q:  
How does Washington State's property tax system work?
Q:  How much of my property tax goes to the City of Mercer Island?
Q:  Where do my sales taxes go?
Q:  When was the last time the City was audited?
Q:  Is the City overstaffed?
Q:  How has the total number of employees changed over the past 10 years?
Q:  How do City employee salaries compare to other cities’ salaries?
Q:  How are City employee salaries and benefits determined?
Q:  I’ve heard the City gives overly generous vacation benefits to employees, which is a
      significant liability for the City. Is this true?
Q:  Is the City paying too much for employee health care benefits?
Q:  Why is the City looking at a property tax increase rather than promoting economic
      development (to generate more sales tax revenue) or exploring a utility tax increase?    
Q:  Over and above the projected operating deficits, what are the City’s other operating needs?
Q:  How much would a six-year operating levy lid lift cost a typical homeowner in 2019-2024?​
Q:  Why did the City wait so long to bring the structural imbalance issue to the public’s attention?
Q:  What will happen if the structural balance isn’t addressed?
Q:  Can the $10.05 million settlement amount from Sound Transit be used to address the City’s
      operating or capital financial challenges?
Q:  What exactly is a “levy lid lift?”
Q:  How many votes are needed to pass a levy lid lift?
Q:  How can I learn more about this issue?



Q:  Given the structural imbalance in the General Fund, how did the City balance the budget in 2013-2018 (i.e. the three most recent biennial budgets)?
After cutting 12.4 positions in the 2011-2012 budget, the City balanced its 2013-2014, 2015-2016, and 2017-2018 budgets through a combination of the following Council actions and favorable market conditions:
  • The high level of development activity on the Island in 2013-2016 generated significant spikes in construction-related sales tax and development fees and added 1.4% per year, on average, in additional property tax revenue from “new construction” in 2014-2018
  • The Council significantly increased the cost-recovery target levels on development services in 2014 and again in 2016, resulting in development fee increases
  • A new utility tax on the City’s water, sewer, and storm water utilities was instituted beginning in 2013 (3.9%) and increased in 2014 (5.3%)
  • The Council approved a 1% property tax levy increase in 2013-2018
  • One-time surplus revenues (from the high level of development activity) and department expenditure savings were used to balance the 2013-2014, 2015-2016, and 2017-2018 budgets 
  • Annual inflation was only 1.8%, on average, in 2013-2017, keeping salary and wage growth low in those years
  • Annual medical insurance premium growth was only 3.5%, on average, in 2013-2017
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Q:  Why can’t the City just “tighten its belt”?
Such a question implies that the City has “fat” that could be cut. First, the City is very leanly staffed.  Compared to other full-service cities in King County, the City has one of the lowest total staffing ratios (relative to population) and the lowest administrative staffing ratio (see Question below:  Is the City overstaffed?).  Second, there are staffing reductions made during the Great Recession that haven’t been restored yet.  In addition, there are deferred maintenance projects on public buildings that have not been addressed yet.  Accordingly, there is no “fat” in the budget.  Any “belt tightening” would require service level reductions and/or additional deferred maintenance.
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Q:  Will there be a negative financial impact to the City from the adopted changes to the Town Center development code in 2016?
It’s too soon to say definitively, but it's fair to say that there has been no new development in the Town Center since the Town Center development code was revised in 2016.

To provide some historical perspective, development activity generates three types of revenues: 1) sales tax (one-time); 2) development fees (one-time); and 3) “new construction” property tax (ongoing). 

Construction sales tax and development fees for the period 2007-2017 are presented in the graph below.

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Note the major upswing in development activity in 2013-2016, encompassing single family residential, public school, and commercial/mixed-use projects.  The highest revenue year on record is 2016, in terms of construction sales tax and development fees.  Also note that while development fees were still high in 2017 due to Sound Transit construction work, construction sales tax dropped almost $650,000 due to the following:  1) the decline in public school and commercial/mixed-use projects on the Island; and 2) the sales tax exemption that applies to Sound Transit construction work.

For the period 2009-2018, “new construction” has generated only 1.1% per year, on average, in property tax revenue for the City.  That equates to $132,215 per year.  In 2017, which is the highest year on record, “new construction” generated 1.8%, or $227,861, in property tax revenue for the City.

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Q:  How does Washington State's property tax system work?
As home values rise, people often assume their property taxes automatically go up too.  In fact, that's not the case:  Washington is one of just two states where property taxes are levy-based, rather than rate-based.  That means rising property values on Mercer Island don't translate to higher revenues for your City government or any other taxing jurisdiction.

In a rate-based system, used by the other 48 states, a tax rate is typically expressed in dollars per $1,000 of assessed property value (AV).  For example, if the rate is $1.00 per $1,000 AV, then the owner of a $1.0 million home pays $1,000.  The total amount collected fluctuates year to year as property values rise or fall.  Under Washington's levy-based system, state law only allows a taxing district to collect a specified total dollar amount (the "levy") each year, the annual growth of which is capped at 1% plus an allowance for “new construction.”  If the total assessed value of all property within a jurisdiction goes up, then that jurisdiction’s levy rate is reduced to ensure the authorized amount of property tax is levied.  But, if the total assessed value of all property within a jurisdiction goes down, then that jurisdiction’s levy rate is increased based on the authorized levy amount.  For example, following the Great Recession, Mercer Island property values have increased significantly, resulting in the City’s levy rate (per $1,000 AV) decreasing from $1.44 in 2013 to $1.00 in 2018.

See also a Seattle Times article (18 March 2018) on the state's complex property tax system and recent increases.

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Q: How much of my property tax goes to the City of Mercer Island?
The City receives only 11.6% of property taxes paid by a Mercer Island resident (See graph below)

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Q:  Where do my sales taxes go?
The total general sales tax rate on Mercer Island is 10%.  Of this rate, 6.5% goes to the State of Washington, 1.4% goes to Sound Transit, 1.15% goes to King County, 0.85% goes to the City, and the remaining 0.1% is a King County voter approved tax that is shared with the City.  In total, the City receives less than 1% of the 10% total general sales tax rate.
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Q:  When was the last time the City was audited?  
The City of Mercer Island is audited annually by the Washington State Auditor's Office and has received "unqualified" (i.e., clean) audit opinions for 23 years running, most recently in 2017 for the 2016 fiscal year.  Mercer Island is one of just a handful of cities in Washington that can make this claim. No other indicator provides a better measure of an organization's financial management practices.  The financial audit for the 2017 fiscal year is scheduled for the fourth quarter of 2018.

In addition, the City has a “Triple A” (Aaa) rating from Moody’s, which is the highest possible bond rating.  This means that the City can secure the lowest possible interest rates when it needs to issue bonds to fund a capital project.

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Q:  Is the City overstaffed?
There are 208 authorized employees in 2017, including 12 contract (i.e., term limited) employees.  Relative to the population served, Mercer Island’s staffing ratio is one of the lowest among full-service cities in King County.  A full-service city generally provides all or most of the following services to its residents:  police, fire/EMS, parks & recreation, street maintenance, planning & community development, municipal court, water utility, sewer utility, and storm water utility.  A 2017 staffing comparison between Mercer Island and other full-service Eastside cities is provided below.  Sammamish was excluded because it contracts for police and fire services and does not have a water or sewer utility.  Despite the population differences among these cities, this is a generally accepted method for comparing staffing.  Note that Bellevue, which has the largest population, has a lower staffing ratio than Redmond, which has a population that is less than half of Bellevue.
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It should be noted that Mercer Island had the lowest staffing ratio among this group of cities up until Kirkland’s annexation of Juanita, Finn Hill, and Kingsgate in 2011.

Looking at administrative functions only, Mercer Island has the lowest staffing ratio among full service Eastside cities (see table below).  These functions include the following:  Executive/City Manager’s Office, City Clerk’s Office, City Attorney’s Office, Finance, Human Resources, Information Technology (IT), Geographic Information Services (GIS), and Public Communications.  
 

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Q:  How has the total number of employees changed over the past 10 years?
The total number of authorized employees, including contract staff, has increased from 189 in 2009 to 208 in 2018.  That represents an increase of 19 employees, or 9.9%.  By comparison, the City’s population is projected to increase 10% from 2009 to 2018. Below is a breakdown by department of regular employees (FTEs) and contract employees for 2009-2018.


Comparing 2018 to 2009, noteworthy staffing increases and decreases in each department are identified in the table below, ignoring the following:  1) restored positions that were cut during the Great Recession; and 2) conversions of contract to regular employees.

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Q:  How do City employee salaries compare to other cities’ salaries?
Mercer Island pays at the midpoint (50th percentile) of the market, which encompasses 10 cities (see listing below).  Paying competitive wages allows the City to attract and retain high quality employees.  The City’s high rate of employee retention has been a major asset that contributes to a positive, productive work culture.

The 10 comparable cities include: Auburn, Bothell, Edmonds, Issaquah, Kirkland, Lynnwood, Redmond, Sammamish, SeaTac, and Shoreline.  The criteria used in their selection include:
  • Cost of living (must be located in King County & South Snohomish County)
  • Population (20,000-100,000)
  • Sales tax per capita ($200-$1,000)
  • Number of employees (150-750)
  • Number of “like” job matches
An exception was made for Sammamish, which only had 115 employees in 2017.  Though it currently contracts for police and fire/EMS services and doesn’t operate a water or sewer utility, it is very similar to Mercer Island based on the other criteria.

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Q:  How are City employee salaries and benefits determined?
Slightly more than half of the City’s employees are represented by one of four unions. Their salaries and benefits are established through the negotiation process. Bargaining with Fire and Police employees is subject to interest arbitration, which requires the City to pay a competitive wage based on at least the midpoint of the comparable market.  State law prohibits the City from unilaterally changing, freezing, or reducing salaries and/or benefits.  If the City and a bargaining unit reach an impasse during the negotiation process, an arbitrator, appointed by the Public Employees Relations Commission (PERC), will make a binding decision that applies to both parties.

As for the City’s non-represented employees (i.e., non-union), which comprise the management team, professional staff, engineers, and various administrative staff, their salaries are benchmarked to the midpoint of the comparable market, and their benefits have been below the midpoint of the comparable market for many years.

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Q:  I’ve heard the City gives overly generous vacation benefits to employees, which is a significant liability for the City.  Is this true?
The City provides vacation benefits that are typical of other cities and professional organizations in our region.  City employees earn vacation benefits over the course of their employment based on an accrual schedule that is set either by City policy or a bargained (union) agreement.  For all non-represented (i.e. non-union) employees, vacation benefits are earned at the following rates:



Non-represented employees can accumulate a vacation balance up to a maximum of 240 hours, or 30 days.  The 240-hour limit is also the maximum amount eligible for cash-out at retirement or termination of employment.  Overall, there is typically no capacity for employees to “fill-in” for other staff during periods of vacation.  As a result, many City employees find it difficult to schedule and take vacations around their workload demands.  This challenge has resulted in an increase in earned vacation accruals.

Generally Accepted Accounting Principles (GAAP) define vacation hours as an earned benefit, meaning the leave is attributable to past service.  An employee is entitled to receive payment for the hours earned, either through paid time off or a cash-out when terminating employment.  GAAP and the Washington State Auditor’s Office mandate that a liability be calculated and reported on the City’s financial statements for the value of this earned benefit.  The rules further state that earned vacation hours should be valued at the employee’s current rate of pay.  The resulting liability, commonly referred to as the “compensated absences liability,” is determined at the end of each year.

Looking at the past two years, the City’s employee turnover rate has been low, and actual vacation cash-outs have been less than 12 days per employee on average (for those employees who have retired or otherwise left the City).  Specifically, in 2016, the City had a turnover rate of 9.22%, and the average vacation cash-out was 88.75 hours per employee.  In 2015, the City had a turnover rate of 4.85%, and the average vacation cash-out was 79.0 hours per employee.

In addition to the vacation benefit, the compensated absences liability includes the value of earned compensatory (or comp) time off (i.e., time off in lieu of overtime pay).  Historically, bargained agreements for represented employees have included the option for employees to elect comp time off instead of receiving overtime pay.  The agreements allowed for the accumulation of comp time hours up to the maximum amount.  Overtime pay is regulated by federal employment law.  Comp time accruals are also defined as an earned benefit by both GAAP and the State Auditor’s Office.  Approximately 20% of the compensated absences liability on the City’s financial statements is attributable to comp time accruals.

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Q:  Is the City paying too much for employee health care benefits?
Relative to the 10 comparable cities noted above, Mercer Island’s employee health benefits are below the midpoint of the market, in terms of what the City pays.
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Q:   Why is the City looking at a property tax increase rather than promoting economic development (to generate more sales tax revenue) or exploring a utility tax increase?  
Property tax is the largest revenue source in the General Fund, representing 41% of total revenues.  It is the only single revenue source that can generate the amount of funding needed to bridge the projected deficits on an ongoing basis, thereby correcting the City’s structural imbalance.

Sales tax is the next largest revenue source, accounting for 18% of total revenues.  Unlike Bellevue, Kirkland, Redmond, and Issaquah, Mercer Island is a bedroom community with a very modest commercial sector.  Economic development efforts wouldn’t make much of a difference, potentially generating only $100,000-$200,000 annually in new sales tax revenue, because:  1) the City receives less than 1% of the 10% total general sales tax rate on Mercer Island sales; and 2) major retail businesses are already located near Mercer Island in Seattle and Bellevue.

Utility taxes are the third largest revenue source, comprising 14% of total revenues.  Making the temporary tax rate increase from 5.3% to 8.0% on the City’s water, sewer, and storm water utilities permanent, beginning in 2019, would generate $500,000 annually in new utility tax revenue.  This could be part of the revenue solution, but it would come up short of addressing the total projected operating deficit of $1.80 million in 2019, which grows about $1.0 million each year thereafter.

A breakdown of General Fund revenues budgeted in 2017 is provided in the chart below.



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Q:  Over and above the projected operating deficits, what are the City’s other operating needs?
The following needs are driven by mandates or increasing community demands for services:
  • Police records:  A half-time Records Clerk in the Police Department is needed to backfill for the current half-time Records Clerk, who has been pulled away from her primary duties to address ongoing public records requests related to public safety.  It should be noted that a half-time Records Clerk was cut in 2011 due to the Great Recession.

  • Right-of-way (ROW) maintenance:  A half-time ROW Arborist in the Public Works Department needs to be increased to full-time to better manage the vegetation in the City’s undeveloped rights-of-way.  In 2011 and 2015, 2.5 employees were cut from the ROW Team due to the Great Recession.  In 2017, a half-time ROW Arborist was restored.  By increasing the ROW Arborist to full-time, the net reduction to the ROW Team would be 1.5 employees.

  • Youth development:  The Youth Development Coordinator, which was reduced from full-time to half-time in 2011 due to the Great Recession, needs to be increased back to full-time in order to expand the VOICE program during the school year and to coordinate community-wide substance abuse prevention (i.e., Healthy Youth Initiative). This position is in the Youth and Family Services Department.

  • Public communications & community relations:  Given the major community issues that have consumed both the Council and staff in 2014-2017 and that are expected to continue in 2018 and beyond, a new, full-time position in the City Manager’s Office would be more cost effective than contracting out for additional public communications, community relations, and analytical support.  Currently, the City has only 0.6 of an employee dedicated to public communications.
Taken together, these other operating needs equate to 2.5 employees.

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Q:  How much would a six-year operating levy lid lift cost a typical homeowner in 2019-2024?
Two levy lid lift (property tax) options are presented in the table below for a typical homeowner on Mercer Island (i.e., $1.20 million home assessed value, which is the median assessed value for the 2018 tax year). 
Costs shown are the total amount for each year.

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Under Option 1, which relies wholly on a levy lid lift to address the projected operating deficits, the cost to a typical Mercer Island homeowner would be $331 in 2019, growing 5% annually thereafter to $422 in 2024.  Under Option 2, which reduces the levy lid lift by making the temporary 8.0% utility tax on the City’s water, sewer, and storm water utilities permanent in 2019 and by increasing the B&O tax rate from 0.10% to 0.15% in 2019, the cost to a typical Mercer Island homeowner would be $254 in 2019, growing 5% annually thereafter to $324 in 2024.

Option 2 was recommended by a strong majority (17 of the 23 members) of the Community Advisory Group (CAG), which studied the City’s financial challenges in depth and explored various solutions.

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Q:  Why did the City wait so long to bring the structural imbalance issue to the public’s attention?
City staff publicly identified the structural imbalance issue and its primary drivers in 2014 during the development of the 2015-2016 budget.  Afterwards, staff kept this issue on the Council’s radar at its 2015 and 2016 Planning Sessions and during the development of the 2017-2018 budget in 2016. Read more history here.

The problem was temporarily alleviated in 2015-2016 when a spike in new development on the Island resulted in record levels of construction sales tax and development fees, generating a one-time revenue surplus that was used to balance the 2017-2018 budget.  However, the development activity level on the Island declined in 2017 and is projected to decline in 2018-2019, with no major projects currently in the pipeline for the Town Center.

The original plan per the adopted 2017-2018 budget was to conduct a public engagement process regarding the City’s financial challenges in the first half of 2017.  However, City staff and the Council were consumed by critical transportation issues (litigation with Sound Transit, HOV access issues, traffic mitigation from light rail construction, etc.) during this period.  In addition, staff was focused on updating the residential development code.  As a result, the City simply lacked the staff capacity to begin an important community dialogue on the City’s financial challenges until the second half of 2017.  In addition, the City Manager was concerned about the community’s capacity to engage on a third major issue during the first half of 2017.  Accordingly, the public engagement process was re-scheduled to begin in October 2017, with most of the outreach efforts occurring in January through April 2018.

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Q:  What will happen if the structural balance isn’t addressed?
Without a new ongoing revenue source to maintain current City services, the City estimates that 24% of its workforce, or 49 employees, will need to be cut over a 6-year period (2019-2024) to balance the budget.  Most of the cuts would impact “non-essential” services provided by the Parks & Recreation and Youth & Family Services Departments.  However, all City departments would likely be impacted, including Police and Fire, given the magnitude of the projected deficits in 2019-2024.
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Q:  Can the $10.05 million settlement amount from Sound Transit be used to address the City’s operating or capital financial challenges?
No, the City’s use of the $10.05 million settlement amount is limited to reimbursing specific expenditures in the categories of traffic/safety enhancements ($5.1 million), short and long-term commuter parking ($240,000 and $4.41 million respectively), first/last-mile solutions ($226,900), police and fire personnel emergency training ($23,100), and Aubrey Davis Park Master Plan preparation and implementation ($50,000).  While there is some flexibility to transfer remaining funds between categories, the settlement funds cannot be used to subsidize the City’s day-to-day operating expenses or capital projects other than those expressly contemplated in the settlement agreement.
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Q:  What exactly is a “levy lid lift?”
Under state law, cities cannot increase the amount they collect from property tax by more than 1% annually.  One percent is the “lid.”  If the City wants to collect more than that, it needs to go to the voters to “lift” the lid.  Levy lid lifts can be temporary or permanent, and all the specifics must be spelled out clearly to voters in the ballot measure.


Q:  How many votes are needed to pass a levy lid lift?
A simple majority (50% + 1) of the votes cast.  
Q:  How can I learn more about this issue?
The City started holding community meetings to solicit questions and input beginning in October 2017 and has presented to dozens of different groups. View meeting schedule.

There are many other ways to learn more about this issue:


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