CVIndependent

Fri09182020

Last updateMon, 24 Aug 2020 12pm

Ever since the end of the Great Recession, Rancho Cucamonga has been on a tear.

New retailers and restaurants have sprung up to serve the residents of its gated ‘burbs. The city’s population has swelled with Angelenos in search of cheaper housing. And at last count, its unemployment rate sat at just 4 percent. The city earned an upgraded credit rating earlier this year.

But now that shopping and dining have been deemed non-essential activities, the good times are gone, said Rancho Mayor Dennis Michael.

“Since we recovered from the Great Recession, we generated about $9 million in new sales tax revenue,” he said. “We’ve lost all of that gain. We’re basically starting from square one.”

For local governments still sporting the budgetary scars of the last “once in a generation” recession, this downturn is at once familiar—forcing elected leaders to cut, furlough and delay—and entirely new. Never before in state history has so much economic activity ground to a halt so quickly.

“When we came through the Great Recession, we were able to use reserves to have a softer landing over a period of years,” said Michael. “This is worse than the Great Recession, because everything happened all at once.”

Rancho has it better than most cities. It has healthy reserves, low debts and a relatively wealthy population.

In San Pablo, a city just north of Richmond in the Bay Area with a median income just more than half of Rancho Cucamonga’s, City Manager Matt Rodriguez “is bracing for a ‘Worse Case Budget Scenario,’” he said in an email.

San Pablo relies on the local casino run by the Lytton Band of Pomo Indians for 60 percent of its discretionary funds. Since state and county officials declaredshelter-in-placeorders in mid-March, the city has been hemorrhaging $2.3 million every month, said Rodriguez. That’s about 5 percent of the city’s annual general fund every 30 days.

City managers aren’t known for their colorful language, but municipal leaders across the state are now facing economic conditions that seem to define hyperbole.

“Staff estimates that the COVID-19 pandemic will devastate the city’s general fund,” wrote Monterey’s City Manager Hans Uslar last month. The city then voted to ax up to 84 jobs.

Down the coast in Anaheim, home to Disneyland, Mayor Harry Sidhu offered a sober reminder to his colleagues on the council last month: The Magic Kingdom and its ancillary hotels and shops provide half of the city’s jobs and half of the city government’s revenue.

“As to when Disneyland Resort will open, I don’t know. I don’t believe anyone knows,” he said.

And in Yountville, the town of roughly 3,000 in the heart of the Napa Valley wine country, the decline in hotel and sales tax revenue has resulted “in about a 74 percent loss in revenue,” said Mayor John Dunbar, who is also president of the League of California Cities, in a live-streamed discussion with CalMatters.

That’s 3 out of 4 of the city’s expected tax dollars now gone.

“Yes, unfortunately you heard me correctly,” he added. 

Cities without much fiscal wiggle room heading into the pandemic will do particularly poorly, said Bill Statler, a municipal finance consultant who spent decades working for the city of San Luis Obispo.

“The roots of fiscal trouble are in the good times,” he said. “If you have strong revenues during the good times, build reserves, pay down unfunded liabilities, and invest in capital projects, then when the inevitable bad times come, you’ll have more resilience and flexibility.”

Still, in ways that highlight just how unusual the current economic downturn is, there are clear exceptions.

With a strong tourism and hospitality sector, “I would have used Santa Monica as a poster child for how some cities have really good financial DNA,” said Statler.

Last month, Santa Monica’s city manager was pushed out of his job after his proposed budget cuts elicited massive public outcry. Now the city is considering laying off 337 workers.

If there is any type of California city best suited to weather the current recession, it’s bedroom communities.

“Those cities that are highly reliant on property taxes and not sales—it’s not to say that they won’t suffer, but their treasuries won’t get depleted immediately,” said Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago.

That’s because while sales taxes and tourism-dependent revenue sources like hotel taxes are paid into local coffers with each transaction, property taxes are paid twice a year. Property-tax revenues tend to be stable from year to year, too, because California law assesses residential or commercial buildings based on purchase price rather than current market value.

“For cities that rely on sales,” said Pagano, “it’s not like a downturn that we’ve ever experienced before. This is just an immediate shutting off of the spigot.”

The divide between municipalities that rely heavily on property values versus those that do not is a Tale of Two Cities. According to a CalMatters analysis of municipal tax revenue data from 2018, the cities that rely most on property taxes are Mountain View, Pleasanton, Newport Beach and San Clemente—all wealthy.

Cities that are dependent on sales and hotel taxes are more of a mixed bag, with some well-to-do tourism destinations, but also many working- and middle-class towns with below-average incomes or cooler housing markets: South Gate, Hemet, Merced, Redding.

And for cities hoping for a helping hand, very few have been extended.

The state, for one, has its own financial troubles. Gov. Gavin Newsom’s Finance Department is now projecting a $54.3 billion deficit for the coming fiscal year. That’s twice the size of the state’s “rainy day” reserve fund. 

“I’m going to do everything I can to work with these cities and counties,” Newsom said at a press conference last week before the deficit projection was announced. “But I can assure you this: We are not going to be in a position, even as the nation’s fifth-largest economy, to provide for the needs of all the cities and the counties without federal support.”

The federal government has already directed $150 billion to cash-strapped state and local governments through the CARES Act, the financial-relief bill signed into law last month. About $9.5 billion of that went directly to the state government, with another $5.8 billion for cities or counties—though only to those with populations of more than 500,000.

Even for the lucky six California cities that qualify for the help, the funding comes with strings attached, said San Diego Mayor Kevin Faulconer, who was also in the CalMatters live-streamed conversation.

“It has to be COVID-related; it’s not supposed to be used for revenue replacement,” he said. It’s not entirely clear how those guidelines will be enforced, but the intent is clear: the funding is not to be used to plug budgetary holes. While city leaders “try to get clarity” from the federal government, said Faulconer, San Diego is projecting a $300 million deficit.

Though Democrats in Washington, D.C., are clamoring for more federal assistance to state and local governments, Republicans remain divided. Last month, Senate Majority Leader Mitch McConnell of Kentucky likened providing additional aid to a “bail out” for state and local governments and their underfunded pension systems. McConnell has since softened his rhetoric.

Another possible benefactor for desperate cities: the voters.

The California constitution generally requires cities, counties and school districts to receive voter approval to raise taxes or borrow. And while the state electorate has historically been inclined to back most revenue-raisers, it may be feeling less generous this year.

In the March 3 primary, only 40 percent of local fiscal measures—bonds and taxes—were approved by voters, according to an analysis by Michael Coleman, who maintains the California Local Government Finance Almanac. That’s compared to a 77 percent passage rate in 2018, and 81 percent in 2016.

There were many more measures on the ballot this year overall—including a record-breaking $15 billion school construction bond—which may have given voters sticker shock. A recent change in state law governing how ballot measures are described could have also turned some voters off. The coronavirus pandemic was only beginning to register as a national concern on primary Election Day, but that, too, could have diminished the public’s appetite for new costs.

Whatever the reasons, said Coleman, it does not bode well for cities hoping to patch up their budgets via the ballot box this November.

“I think we’re going to continue to have this malaise about what’s going on in the economy, about job security, about how the world is changing. That’s the sort of psyche that causes people to wonder if this is the right time for a tax increase,” he said.

Many in local government—and the campaign staff they hire—are hoping that local budget cuts will have the opposite effect.

In a conference call this week, San Francisco Mayor London Breed championed a statewide ballot measure by framing it as a conflict between necessary government services during a pandemic and commercial property owners.

“Any local official will have a tough time explaining to their constituents why in the midst of this crisis they didn’t support closing corporate tax loopholes,” she said.

Sometimes known as the “split roll” initiative, the measure would change the way that many commercial properties are assessed, resulting in much higher property taxes on some businesses and much higher tax revenue for cities, counties and school districts.

Industry groups and low tax advocates argue—and will likely continue to argue until November—that now is precisely the wrong time to raise taxes on businesses.

Jared Boigon of TBWB Strategies, a consulting firm that helps to pass local bond and tax measures in California, said he’s optimistic that “most voters don’t want to see their community services be completely gutted.” Despite the economic climate, if a local government is thinking of going to voters for money this November, “they shouldn’t just automatically rule it out,” he said.

Not many have yet, said Curtis Below, a partner at the Oakland polling outfit FM3 Research.

“There have been a few more clients who said they want to sit out the cycle, but the vast majority still want to explore this year,” he said. “A lot of our clients are going full steam ahead.”

But both Dunbar of Yountville and Faulconer of San Diego are skeptical that the funds that could be raised at the ballot box would be even remotely enough to fit the pandemic’s fiscal bill.

“We’re not going to be able to tax our way out of this recession,” said Faulconer.

CalMatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.

Published in Local Issues

California Republicans say that drivers can have smoother roads, more reliable public transit—and lower taxes.

In November, voters will get the chance to repeal a recent increase in the state gas tax and assorted vehicle fees. That tax hike—an extra 12 cents per gallon of gasoline, 20 cents per gallon of diesel, and two new vehicle registration fees—was signed into state law last year, part of a Democratic-led transportation package that directs an extra $5 billion per year toward the state’s dilapidated roads and highways.

Making voters pay more at the pump is a tough political sell, but Democrats and other defenders of the law argue that our infrastructure is long overdue for an upgrade. The gas tax hadn’t been increased in more than 20 years, while the cost of highway construction has tripled. You can’t get something for nothing, they say.

Not so, say supporters of the repeal, Proposition 6. Chief among them is John Cox, the Republican running to be California’s next governor.

“The Democrats decided to do the easy thing in their view, and that is just keep sticking their hands in the pockets of Californians,” he said, “instead of doing the hard work, which would have been standing up to the donors, standing up to the special interests, and using our money effectively and wisely.”

California, he added, “spends multiples of what other states spend on a mile of road.” In trying to sell voters on Prop. 6, which would also require voter approval for all future driving-related tax hikes, supporters like Cox make the following arguments:

• California transportation spending is out of whack compared to most other states.

• Bloated transportation agencies, public sector unions and red tape are to blame for those higher costs.

• Political leaders could cut that wasteful spending—saving taxpayers billions and rendering higher taxes unnecessary—if only they had the will and the courage.

These add up to a potentially enticing argument. The question is: Should voters believe it?

Prop. 6 skeptics are right to say that repealing the new taxes and fees will necessarily mean cutting back on something. Supporters have so far been a little vague on what that something is. Wasteful spending or vital public services? It’s entirely in the eye of the taxpayer.


The Cost of a California Highway

When asked for evidence that California can’t manage its transportation budget, the Cox campaign points to a recent report published by the libertarian Reason Foundation. According to its findings, the state government spends more than $471,000 per mile of road that it maintains. That’s nearly triple the national average of about $178,000. By this measure, California has the eighth-most-expensive state road system in the country.

Given that our roads are in such rough shape, and California also has among the highest gas taxes in the country, one might reasonably wonder whether drivers and taxpayers here are getting a raw deal.

The California Department of Transportation (Caltrans) argues that the report inflates the state’s true costs by measuring each state’s highway system simply by totaling its length. According to Caltrans, California highways have an average width of more than 3.4 lanes, compared to a national average of 2.4, which makes the same length of highway more expensive to maintain. In effect, the report treats a two-lane highway in Oklahoma the same as an equally long stretch of California’s Interstate 405—all 14 lanes of it.

The Reason report is a rare effort to compare across state agencies—because it’s difficult to do. Different state agencies are responsible for different aspects of the highway system, subject to different rules, and operate in vastly different climates, terrains and economies.

“More than 40 percent of the nation’s freight is moved through California, which has three of the nation’s top five busiest ports in Los Angeles, Long Beach and Oakland,” a spokesperson for Caltrans said in an email. That extra wear and tear adds to the state’s overall maintenance tab.

Asked if the federal government compares transportation spending across states, Doug Hecox, spokesman for the Federal Highway Administration, said different methodologies will produce wildly different estimates.

“There are many ways to bake a cookie, and everyone has a different recipe,” he said. “Welcome to my personal hell.”


What Drives the Cost?

Baruch Feigenbaum, author of the Reason report, agrees there are many reasons California roads might cost more—some within the state’s control, and some not.

Falling into the latter category: It’s more expensive to build and maintain roads in high-density urban areas, and California has some of the biggest in the country. The Sierra Nevada and a constantly eroding coastline require challenging and expensive engineering. And, yes, this is California, where wages and land values make everything cost more, transportation related or not.

“Obviously, it’s going to be more expensive to build a mile of roadway in California with labor than it is in Mississippi, regardless of some of the union issues,” said Feigenbaum.

But the high cost of labor is exacerbated by the higher levels of unionization in California, he said. Likewise, the state has tighter environmental regulations than most, which can saddle projects with delays and extra costs.

But where some see inefficiency, others see the preservation of the state’s most cherished values. And for every propeller of higher costs, there is a powerful constituency ready to defend it.

“One of the things that Californians love, that is part of our birthright, is our beautiful state with our beautiful environment,” said Russell Snyder, executive director of the California Asphalt Pavement Association, a trade group that represents road pavers and asphalt producers, and which opposes Prop. 6. “Environmental rules are easy to demonize, but they’re there for a reason.”

Other factors pushing up costs are less obvious, though no less fiercely guarded. In California, much of the major road work is done during off hours to limit the impact on commuters, said Margot Yapp, vice president at Nichols Consulting Engineers, a firm that works on transportation projects across the American West.

“Go travel in the summer in any other state, and construction—even on the interstate—happens in the daytime,” she said. But given the amount of congestion in California, shutting down highways at rush hour would spell certain gridlock and political backlash.

“As soon as you do pavings at night, every (cost) goes up—I would say, easily, by 30 percent,” said Yapp.

Feigenbaum, the Reason Foundation author, still insists Caltrans can cut costs. His suggestions: Caltrans should enter into more partnerships with private companies or take on some of the responsibilities now delegated to local and county organizations, reducing duplicative bureaucracies. In theory, he concluded, passing Proposition 6 would force the state to find those efficiencies.

But maybe only in theory.

“From a mathematical perspective, the state can do it, but from a political perspective, the state probably won’t,” he said.


Can We Cut the Fat?

Carl DeMaio begs to differ. This fall, the conservative talk-radio host—who chairs the political action committee pushing for the repeal—plans to file papers for a 2020 ballot measure, which he says would recoup the state’s budgetary losses from passing Prop 6 … without raising taxes.

The details have yet to be hashed out, but DeMaio proposes three savings: Dedicate all gas-tax revenue solely to road maintenance and improvement (right now, some goes to public-transportation projects and debt repayments); divert all car-sales-tax revenue to state transportation (now that money is treated like other sales tax and goes to general government expenses); and enact “efficiency reforms,” such as mandating that Caltrans employ more independent contractors.

But many state finance experts say finding savings is not that easy.

“It’s nonsense to the suggest that’s just money that’s laying there not being used,” said Michael Coleman, fiscal policy advisor to the League of California Cities, which opposes Prop 6. “If you’re going to be honest with the proposal, then you have to look at what the consequences of this are.”

A little more than half of sales-tax revenue from auto purchases goes to the state’s general fund, for example. If voters decide to divert that money to highway repairs, what could lawmakers cut to make up the difference?

Past ballot measures have placed spending requirements on K-12 education and budget reserves. Court orders and federal funding requirements put more restrictions on many health and social programs and corrections spending. Left on the chopping block are higher education, parks and recreation, public resources, and certain unprotected social welfare programs.

“You’re talking about a fairly small part of the budget,” said Coleman. “It’s remarkable how little discretion the Legislature actually has.”

The remaining sales-tax money that goes to cities and counties—a little less than half of the total haul—mostly goes toward local law enforcement and emergency services, jails, welfare payments and local transportation.

Those fighting against the new gas tax argue that because sales taxes on automobiles are levied on drivers, they should be spent solely on transportation.

As for the savings that DeMaio proposes to unearth by forcing state agencies to rely more on contractors, the state’s nonpartisan fiscal analyst is skeptical.

“When we’ve looked at the cost of contract versus state staff, we haven’t really been able to identify significant differences between the two,” said Paul Golaszewski, a transportation expert with the Legislative Analyst’s Office.

But DeMaio dismisses the idea that there isn’t at least $5 billion to be found somewhere in the state’s $139 billion general fund.

“I don’t think any voter out there is going to accept the notion that government is in prime efficient condition and can’t figure out how to do more with less,” he said.

He, John Cox, and the entire national Republican Party are counting on it. With many political pundits and data points projecting an electoral “blue wave” this November, opposition to the gas tax may be one of the GOP’s last breakwaters. In June, Democratic state Sen. Josh Newman was recalled from his north Orange County seat by a 16-point margin—a recall fueled by anger over his vote for the gas-tax bill. If voters turn out against Newman’s fellow Democrats in equal measure this fall, that could keep Democrats from flipping some of the most vulnerable GOP-held congressional seats in California, allowing Republicans to keep control of the House of Representatives.

“From a turnout and motivation perspective, this is a huge winner for Republicans,” said Jack Pandol, spokesperson for the National Republican Congressional Committee. “We’re going to make every Democrat in November own this tax.”

CALmatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.

Published in Politics