The city of Oak Harbor is facing a possible $200,000 shortfall in next year’s $9.5 million budget because of the slumping economy and sales tax numbers that are coming in below projection.

City Finance Director Doug Merriman said the deficit could get worse if Initiative 747 passes in next month’s election, though the larger effects of the measure won’t be felt for a few years.

In addition, the city just found out this week that insurance costs are going to increase by an estimated 24 percent.

Left with few options, Mayor Patty Cohen said the city may have to cut some popular programs and services, reduce city staff benefits, bring back the utility tax, or a combination of these things.

If I-747 passes, there’s always the option of holding a special election next year to let the voters decide whether they want a tax increase beyond the 1 percent permitted by the initiative.

The city council’s annual series of budget workshops are set to start next Tuesday at 6 p.m. in City Hall.

Merriman, who’s also serving as the city’s interim city administrator, said he will have a clearer idea about the shape of next year’s budget in a few weeks, after the city’s contracts with the police and fire departments are settled. Also, at that point the fate of I-747 will have been decided and the city will have received the latest sales tax figures from the state.

Based on sales tax figures through August, Merriman says it looks like Oak Harbor will rake in just over $2 million of the tax money this year. That’s about $180,000 below the budget projection, though he says this year’s budget is still in the black because of the cost savings from several positions that have gone unfilled.

Unhealthy sales tax figures for automobile sales, general retail and construction were the most worrisome, Merriman said.

Based on these figures, Merriman said he’ll have to update the 2002 budget with a projected 1.8 percent increase in sales tax revenue. In typical years the percentage is about 3 percent.

The city passes a biennial budget each year, and then updates the coming year’s budget with the latest information.

If approved by the voters, I-747 would limit property tax increases to 1 percent a year, unless a greater increase is approve by residents in an election. Under current law the tax increase is limited to 6 percent.

Merriman said his preliminary budget calls for a 2 percent increase in the city’s share of property taxes. That means if I-747 passes, he’ll have to decrease that to 1 percent, which means a loss of about $25,000 for the city.

In other words, if I-747 passes the city is looking at a $225,000 deficit for the year 2002.

But in the long run, I-747 would mean a loss of much more. The 1 percent annual increase in property taxes will probably not keep up with the rising costs for running a city. The consumer price index, a measure of inflation, was at 3.9 percent last year.

Cohen said council members are left with few options for balancing the budget. “The city services we’re so accustomed to we’re going to have to cut back on,” she said.

Other options on the table, Cohen said, are cutting city employees’ cost of living increases, cutting employee health benefits, charging fees for the use of ball fields and other city facilities, and re-instituting the utility tax that expired at the beginning of the year.

There is little fat to cut. The city has been in financial straits since a $1 million hole in the budget was discovered five years ago. Then just as the city was coming out of the red, Initiative 695 struck and wiped out one of the city’s major funding sources.

Now after a round of a few lay offs and belt tightening under Mayor Patty Cohen, city leaders warn that there is very little budget wiggle room left. The belt can’t get much tighter around a budget that’s already cut to the bone, Merriman said.

In fact, the city is still under a “financial emergency” measure that the city council passed last year. Cohen said they’ll have to revisit it in December.

Yet while council member Sheilah Crider agrees that the fiscal projections are “bleak,” she believes the budget can be balanced with only cost cutting.

“I believe if we sharpen our pencils and really look, we can find the money,” she said.

Yet beyond simply balancing the budget, Cohen says she wants to rebuild the city’s reserve fund, which has declined to 4 percent of the budget. The state auditor suggests that cities keep the reserve at about 8 percent to cover emergencies and the flow-through of costs.

Also, the city has aging infrastructure, such as the antiquated city jail. Cohen said she hopes to start putting away a little capital improvement funding.

In the long run Cohen said the solution to the budget problem is to increase sales tax revenue, which means economic development. Cohen has taken some steps toward making the city a more business-friendly place, especially by beginning the process of streamlining development permitting. And she said she hopes to take some more aggressive steps in the future to make development quicker and less expensive.

Even with the problems, Cohen points out that Oak Harbor isn’t the only city in the state with a budget shortfall, and some are much worse.

“It’s tough to be an elected official nowadays,” she said. “It’s getting harder and harder to stay in the black.”