“Citing Initiative 722 as a message from the voters, the Oak Harbor City Council raised property taxes by only 2 percent and set the stage for some major budget cutting.Mayor Patty Cohen warned that lay-offs of city employees are likely in the future unless the state comes through with some bail-out money.In passing the small tax increase at Tuesday night’s meeting, the council also banked the remaining 4 percent increase. State law allows a maximum 6 percent increase each year. The banked tax increase can be activated in the future if there’s ever a super-ultra-serious budget emergency.Both Cohen and city council members say they prefer budget cutting to tax increases. City Council member Sheilah Crider said that the voters sent a clear message in passing I-722 by a wide margin on election day: No new taxes.If the money is there it just seems to dissolve, Crider said. I’m really glad to take the conservative approach.I-722 limits property tax increases to 2 percent or the inflation quotient each year, and limits the increase of assessed property value to 2 percent or inflation. Also, it voids all taxes increased between July 2, 1999, and Dec. 31, 1999 and mandates that government bodies give back to the taxpayers any taxes already collected.That means a loss of $1.28 million from next year’s $8 million city budget, according to Interim City Supervisor Doug Merriman. Many people think I-722 will go the way of last year’s I-695, which was recently deemed unconstitutional by the state Supreme Court. Seattle has already filed a lawsuit against the new initiative, claiming that it’s unconstitutional, and the Seattle City Council is ignoring it in budgeting for next year.Oak Harbor, however, is adhering to I-722, or at least to some extent. The city is going to budget for part of the $1.28 million loss, Merriman said, though probably not the entire amount. The councilors will decide exactly how much to chop in an upcoming series of budget workshops.Crider said it’s simply not smart to ignore I-722. Even if it’s declared unconstitutional, she said the state Legislature could always take a cue from the voters and pass some of the provisions in I-722 as bills, which is what happened with I-695.The council members and department heads are currently in the process of identifying the city’s core functions, which will be safe from the budget-cutting axe. Cohen has also asked the department heads to find 20 percent in reductions within each department. The department heads and the City Council will meet together Monday to discuss the issue. Exactly which programs and employees likely to be whacked from the budget hasn’t been decided yet. Potentially, everything but core services could go.We’re broke and we need some way to avoid bankruptcy, Councilman Bob Morrison said. Even though he calls himself an eternal optimist, he says staffing shrinkage is a real possibility.As far as chopping people, that’s our last resort, he said. Yet at this point the budget numbers for next year aren’t exactly crystal clear. The 2 percent property tax increase will mean only about $40,000 extra for the city next year.There’s a 7 percent utility tax that expires at the end of the year, which means a $400,000 budget deficit. The council passed it last year to make up for funds lost because of I-695, but promised it would go away unless approved by voters.Of course, if I-722 is upheld, then the city will have to give back the $400,000 in utility taxes collected this year. Yet I-722 does not set a timetable for the refund, so it may not necessarily have to happen next year.Also, the city expects to get about $270,000 from the state next year to make up for some of the I-695 losses.To top off all the confusion, Crider said the city is behind in the budget process this year since the finance director is also acting as the city supervisor. Cohen said those programs or employees cut from the budget could be brought back next year if the community wants them. She has proposed having a special election early next year in which the citizens can vote for or against a tax increase.But until then, the city leaders will undoubtedly have a tough time balancing the budget. This round of budget whittling comes on the heels of nearly five years of cuts. Former Mayor Steve Dernbach was surprised to find that the city was about $1 million in the red when he took office and had to do some budget slashing.Last year even more fiscal incisions were made after I-695 was passed, which meant a $800,000 loss in state funds for the city.We don’t have a lot of fluff or excess, Crider said. This is going to be the hardest thing many of us have ever had to do. “