On November 6, more than 100 California and counties are asking voters to increase sales, hotel and other taxes to bolster their general fund budgets.
The local governments in many cases say the new revenues are needed to pay for city services such as public safety, roads and other general services. But the tax increases also come at a time when they’re facing increasing pension costs that are contributing significantly to budget shortfalls.
In Orange County, Santa Ana is one of seven cities seeking higher sales tax rates. Santa Ana is proposing a 1.5% hike that the city says would go towards police and fire, addressing homelessness, fixing streets, maintaining parks and other general expenditures.
For its 2018-2019 general fund budget, the city had to dip into its reserves to fill a $10.2 million shortfall. Santa Ana continues to face a structural deficit that will grow to $38.3 million over the next three years, according to a city budget report.
Jorge Garcia, assistant to the city manager, said the council decided in July to ask for the tax increase to maintain and improve city services.
“We’re not immune to the labor cost increases that are occurring throughout the state of California and throughout the country,” he said. “We need to be able to provide additional services to the community. The question before the voters is what level of services do they want from their government?”
The tax increase would bring an additional $60 million a year into city coffers through 2029. After that, the tax rate would go down .5% and provide $40 million a year.
One of the biggest cost increases the city is facing is for pension contributions which are anticipated to go up an average of 13.7% a year from $45.1 million in 2017-2018 to $81.2 million by 2022-2023, according to a February report to the City Council.
Santa Ana’s contributions to the California Public Employees' Retirement System made up 14% of its budget, the report said.
Although the city will face higher pension costs, it’s not included among the expenditures that city officials have highlighted in the information on the measure.
“It’s a component of it but we don’t look at pension costs as a singular item,” Garcia said of the city’s budget problems. “Pension costs are part of our overall labor costs.”
A January 2018
“With local pension costs outstripping revenue growth, many cites face difficult choices that will be compounded in the next recession,” the report said. “Under current law, cities have two choices — attempt to increase revenue or reduce services.”
The report estimated that from fiscal year 2018-2019 to 2024-2025 cities' contributions will go up more than 50%.
That’s part of an increase that has been happening over a decade. In 2006-2007, the average city spent 8.3% of its general fund budget on CalPERS costs, the report said. That average rose to 11.2% in 2017-2018 and is expected to go to 15.8% in 2024-2025, according to the league.
Cities and counties were hit with increased costs after CalPERS last year
A city council member in the northern California city of Lodi was blunt about the cause of the city’s budget problems and its reasons for seeking a half-cent sales tax increase in November.
“The cause of this point-blank is CalPERS and our pension fund,” Councilwoman JoAnne Mounce said at the June meeting where the council voted to place the ballot on the measure.
“What they’re asking of cities is completely unsustainable,” Mounce added.
A five-year budget forecast shows a widening gulf between expenditures and revenues to where Lodi will be “nearly $6 million out of whack” by 2023-2024, City Manager Steve Schwabauer told the council. That’s despite revenue growth that has been set aside for pension costs, he said.
The city expects to run out of reserves by 2021-2022 and on the “brink of financial insolvency” by 2023-2024, he said.
The city resolution states that the tax proceeds will be spent to “protect the city’s essential services.”
CalPERS members can be grateful for some relief for now. The agency reported in July that it saw an 8.6% return on investments for one-year period ending in June.
Thomas Aaron, a senior analyst and public pension specialist with Moody’s Investors Service, said it’s the second consecutive year of growth for the investment fund and means some stability for CalPERS members.
“What that means is we are not going to have any unanticipated hikes in pension costs for most municipal governments at least through 2020,” he said.
While member agencies are still dealing with prior year losses, there’s no “piling on” for now, Aaron said.
Todd Tauzer, a director at S&P Global Ratings for municipal pensions, said CalPERS members are dealing with some growing pains but the gain from that pain is that will ultimately help stabilize the fund.
“In the long term it’s more likely that CalPERS plans will be better funded by taking on that pain now,” he said.
Chris Morgan, a director in S&P’s local governments group, said cities have turned to tax increase measures in recent years due to ongoing employee and service costs including pensions. How much of a dent these new revenues will make in reducing their unfunded liabilities remains to be seen.
“In abstract, more money means you have more budgetary flexibility but there’s always service demands,” he said.
California local governments must get voter approval for tax measures, and most of those measures have been successful in recent elections.
In June, there were 36 city and county general or special taxes on the ballot and most were approved, according to the California Local Government Finance Almanac.
All but one of 18 city taxes requiring a simple majority vote passed while 7 of the 10 county tax measures were approved.
The November 2016 election had an “unprecedented” number of tax measures placed by cities, counties, special districts and school districts that also passed in large numbers, according to the almanac, maintained by Michael Coleman, a fiscal policy analyst with the League of California Cities. They included 56 city and three county sales tax increases of which 51 were approved.
Coleman wrote that the strong passage rate suggested a “strong supportive responsive for local government” and a heightened concerned for public safety and other vital local services.
“Part of employee costs is of course pensions,” Coleman said in an email. “It should be no big surprise that local government revenues, including tax increases, are funding police officer, firefighter and other employee pensions. Those are costs of providing services.”
