The cumulative impact of voter-approved Initiative 747 and other tax-cutting initiatives caught up to the city of Oak Harbor in a big way.

There’s a gaping $1 million hole in the general fund budget, which means substantial cuts in services or tax increases may be ahead.

They have already started pointing fingers. Mayor Patty Cohen said the situation should not be a surprise to council members, who she said have been on a “spending spree.” She said they were warned, but relied on false assumptions that the healthy economy would cover all the new costs.

“They gave very little thought about whether long-term sustainability of a program was there before it was approved,” she said.

Councilwomen Sheilah Crider and Sue Karahalios blame former City Administrator Thom Myers for the predicament.

“We were told we were fine when we were not,” Crider said. “We just continue to overspend, overspend, overspend and we’re going to have to pay the piper.”

Cohen agreed that Myers, who she fired last year, misled the council, but she said the finance department gave them the real story.

The problem is so dire that Cohen wants to ask the voters to approve tax increases or new taxes. Examples she cited include asking voters to lift the lid on the property tax increase or pass a levy to fund street repairs.

“It’s time to get real and look at identifying some new revenue sources,” she said. Without new revenue, the mayor said the city will have to cut programs and lower the level of service beyond what the community wants.

City officials are also considering passing two property tax levies at the Nov. 21 council meeting. One ordinance would go into effect if the state Supreme Court throws out Initiative 747. The other would be in effect if the initiative remains.

It’s a complicated proposition. One ordinance would raise taxes by the 1 percent limit set by Initiative 747. The other would raise property taxes by the rate of inflation, 3.419 percent, and “bank” the remaining percentage up to 6 percent for future years.

A King County Superior Court judge recently ruled I-747 unconstitutional and a Supreme Court decision on the appeal is expected this winter. The initiative limits property tax increases to 1 percent without a vote of the people.

For city officials, the money crunch became painfully obvious last month when department heads turned in their budget requests for 2007. The requests, if they were all granted, would put the general fund budget out of balance by a whopping $2.6 million.

The general fund pays for police, fire, development services, parks, finance and the legal department, as well as elected officials’ salaries. The general fund in 2006 is about $12.3 million.

Finance Director Doug Merriman said he worked with department heads and was able to pare the $2.6 million deficit down to $650,000.

An additional $400,000 will have to be cut from the budget, Merriman said, in order to retain capacity for councilmanic bonds, which are loans the council can obtain without a vote of the people.

The council needs bonding capacity to fund the many capital projects on the proverbial drawing board, from highway widening to marina redevelopment to downtown redevelopment to construction of a pier.

That brings the projected deficit to $1.05 million.

Merriman said the cause of the budget problems is clear: “The accumulative effect of five years of Initiative 747.”

The first initiative to affect Oak Harbor was Initiative 695, the car tab initiative, which resulted in a loss of about $1 million for the city. It was thrown out by the courts, but made into law by the Legislature. I-695 was followed up by more tax cutting in I-747, the so-called “Son of 695.”

Passed by voters in 2001, I-747 limits increases in property tax, the city’s primary source of general funds, by the lower of the rate of inflation or 1 percent. But over the same period, expenses have increased by at least 3 percent a year.

One of the main causes, Merriman said, was construction costs, which rose up to 60 percent. This impacted the general fund, which pays for parks and supplemental street overlay projects.

Merriman gave a presentation to the council years ago predicting exactly the deficit that the city is facing today. He’s not pleased that he was right.

Merriman said he’s also keeping an eye on the sales tax, another important city revenue source. The city’s overall sales tax collection is up by 4 percent, he said, but auto sales are down 10 percent.

So far, the fire department has taken the brunt of the cuts. The fire department’s 2006 budget is $1.9 million, but Chief Mark Soptich turned in a budget request of $3.03 million for 2007, or a 60 percent increase. The budget request, which was based on the new strategic plan for the fire department, included new positions and new fire engines.

So where could the rest of the $1 million in cuts come from?

Merriman said some projects can be delayed and other areas trimmed, but some tough decisions lie ahead.