The city of Kirkland is facing a large deficit in upcoming budgets as city staff searches for ways to patch a $10 million projected shortfall beginning in 2021.

A recent budget forecast presented at the Kirkland City Council retreat projected a $10.3 million deficit beginning in the next biennium, which stems from state law barring significant increases in property taxes as well as a state annexation sales tax credit expiring halfway through 2021. The city was awarded the credit, allowing it to keep about $4 million annually, after it annexed the Finn Hill, Kingsgate and North Juanita neighborhoods in 2011, nearly doubling the city’s population from 48,000 to 81,000.

While the budget gap is significant, as is the loss of the $4 million annually that the city essentially keeps in sales tax within its borders instead of sending it to the state. Assistant city manager Tracey Dunlap said staff has already accounted for $2 million of that deficit and has been thinking of ways to bridge the remaining $2 million and fill in the rest of the deficit.

“We’ve know from the beginning that it was 10 years or so, what we did at the beginning when annexation took place was we took some steps to address half of it right off the bat,” she said.

Following the Recession, the city dipped into its reserves too, which has been built back up. Dunlap said the city is on track to have a full reserve budget of around $21 million by 2021. It currently has around $20 million. The reserve budget is used as a rainy day fund to see the city through economic downturns or emergencies and Dunlap said she has a goal of not using reserves to bridge the projected deficit.

The city is also betting on future sales tax stemming from redevelopments at Totem Lake and the downtown Kirkland Urban project to increase sales tax revenue to boost the city’s budget. Additionally, Dunlap said the city has started its budgeting process for the 2021-22 biennium early. Normally the planning process would start next summer, but city staff are already developing proposals to send to council this fall.

Council has also set aside $1.5 million to help ease the transition when the $4 million in annexation funding runs out in the summer of 2021.

“We’re talking to the departments about ideas they have about either efficiency gains or programs, which may have outlived their usefulness,” she said.

Dunlap said it was too early to know if or whether there would be cuts or reductions in service, and that those discussions would likely come in the fall.

Part of the budget shortfall is anticipated every cycle, Dunlap said, and will always require cities to make active changes to balance their budgets. Under state law, municipalities are not allowed to raise property taxes more than one percent annually after voters approved I-747 in 2001, a Tim Eyman-backed initiative.

Local governments across the state have been struggling to find ways to balance their budgets since, especially in the wake of the Recession when both property and sales tax revenues dropped.