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San Juan County faces budget cuts amid sluggish market

A slowdown in the local real estate market has county officials seeing red.

That’s red, as in a blow to the bottom line of San Juan County’s budget for this year and presumably the next.

“It’s time to start worrying,” Auditor Milene Henley said at the conclusion of last week’s presentation to the County Council of second-quarter financial results.

County Administrator Pete Rose advocated putting cost-cutting moves in place right away to help buffer whatever ripple effects the drop in real estate sales are likely to create.

Rose suggested as immediate steps: moving departmental spending decisions “further up the food chain,” evaluating the need to fill vacant positions, encouraging teleconferencing rather than off-island travel, and asking department managers for ideas on reducing expenses.

“The easiest cuts to next year’s budget are the dollars we don’t spend this year,” Rose said.

In the first six months of the year, the county collected about one-third of the real estate excise tax revenue expected by the end of 2008, Henley said. That’s compared to 53 percent and 66 percent produced over the same time frame in 2007 and 2006, respectively.

In raw numbers, nearly $1.5 million was generated by the end of June; that’s less than half the $4.4 million projected by the end of the year.

A total of 1.25 percent in real estate excise tax is collected from each real estate transaction in the county. One percent helps the San Juan County Land Bank to acquire and preserve land that has agricultural, aesthetic, cultural, environmental, historic or recreational value. One-quarter of a percent goes to the county’s capital improvement account.

The number of pending real estate sales in San Juan County dipped in June by 37.93 percent compared to June 2007, according to the Northwest Multiple Listing Service, which tracks real estate data in 19 Western Washington counties. The median sales price dipped 1.11 percent during that same period.

On San Juan Island alone, the dollar volume of real estate transactions dropped more than 50 percent during the second quarter of the year — from 89 transactions worth $47.4 million in second quarter 2007 to 48 transactions worth $22.9 million in the second quarter of 2008. That’s according to Merri Ann Simonson, associate broker of Coldwell Banker San Juan Islands.

Countywide, the market bumped up a bit in July, with a 9.09 percent increase in pending sales compared to July 2007, the Northwest MLS reported.

Without a significant turnaround, the Land Bank and the capital improvement account will be hardest hit. In fact, Henley noted, revenue projections for the capital improvement account, which is supported almost entirely by the 1/4-percent real estate excise tax, have already been scaled back by $310,000. Several “unavoidable” expenses, such as new accounting software, forced the county to dip into the account’s 2009 budget.

“We’re already spending 2009 dollars,” she said. “That’s not good.”

Land Bank Director Lincoln Bormann said his agency will trim this year’s revenue projections by roughly $600,000 — down to $2.5 million — to account for the drop in local real estate sales. The Land Bank is also pursuing a greater number of state and federal grants to fund purchases or recoup costs of prior acquisitions. The Land Bank is also relying on reserves to help cover $2.1 million in annual loan and bond payments.

“The big issue for us is if there isn’t a rebound in the REET by 2009 or 2010, we will have spent down our reserves significantly,” Bormann said. “We can get by, but it could be a very lean time in terms of future acquisitions.”

The mid-year financial results do contain several bright spots. Henley said property and sales tax receipts are stable, in line with previous years and on course to meet budget projections. Still, she cautioned, construction historically drops off following any downturn in real estate and that sales-tax totals have depended heavily in the past on local building projects.

Construction contributed by far the greatest percentage in 2006 and 2007, accounting for 37 percent of the total; retail sales trailed at 26 percent.

Henley said cost-cutting moves could prove more painful than in the past. In the past, she said numerous departments ended the year without spending the entirety of their budgets, frequently up to 6 percent. Those cushions were eliminated during the past two budget cycles, she said.

“We’ve excised as much of the fat out of the budget as we could,” she said.

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