HomeMy WebLinkAboutStaff Report 243-09TO: HONORABLE CITY COUNCIL
FROM: CITY MANAGER DEPARTMENT: CITY MANAGER'S OFFICE
DATE: MAY 11,2009 CMR: 243:09
SUBJECT: Adoption of a Resolution Opposing the State Department of Finance's
Proposal to "Borrow" Local Government Property Taxes to Reduce the
State's Budget Deficit for FY2010
RECOMMENDATION
Staff recommends that the Council adopt the attached resolution (Attachment A to be
distributed Monday, May 11) opposing the State Department of Finance proposal to "borrow"
8% of local government property tax revenues in FY2009 to reduce the State's budget deficit for
FY20IO.
DISCUSSION
On May 5, 2009, the State Department of Finance issued a proposal (Attachment B) to the
Governor that the State suspend Proposition IA (passed in 2004) and borrow 8% of local
governments' property tax revenues and the triple flip sales tax allocation. These revenues can
be borrowed by the state and repaid within three budget years with interest. The amount that can
be borrowed is determined by the amount of property taxes received by cities, counties, and
special districts in the preceding year. Borrowing from local government in FY2010 would
provide approximately $2 billion of local revenues to the State.
This one-time solution to the State's ongoing structural budget issues puts the burden on local
governments and citizens who will have to address this revenue shortfall in addition to the local
financial challenges already being faced. Cities throughout the State have already enacted
painful cuts to balance their own budgets-including layoffs, furloughs, reduction of services,
and project and maintenance delays. Palo Alto faces a budget deficit of $8 million in FY2009
and a deficit of $10 million in FY201O. A loss of additional property tax revenue could mean
even deeper cuts in services to our local residents.
The DOF proposal is fiscally irresponsible. Financing the State budget deficit with borrowing
from local governments will only deepen the State's structural deficit. The State is obligated to
repay the property taxes with interest within three years. However, borrowing does nothing to
CMR: 243:09 Page 1 of3
address the structural budget issues currently facing the State. The State must figure out a
method for balancing the budget using its own resources.
City staff have been coordinating with the League of California Cities on a resolution opposing
this proposal. Staff will provide this resolution and any additional information to the Council on
Monday. It is important to note that the proposal has not been endorsed by the Governor at this
point. Any resolution of the Council would make it known that the City opposes this proposal
and encourages the Governor to reject it. Additionally, staff will work with the League of
California Cities on other advocacy measures related to this issue and will keep the Council
apprised of upcoming actions.
RESOURCE IMPACT
The adoption of this resolution by the Council does not have a resource impact.
However, the proposal put forth by the State Department of Finance to "borrow" 8% of
local government property tax revenues could have a significant impact on the City of
Palo Alto. The proposal would take 8% of property VLF and the triple flip sales tax.
According to the 2010 budgeted revenues, the impact on the City of Palo Alto is:
Property Tax (includes VLF)
Triple Flip (114 of sales tax)
Total =
$2.00 million
$0.43 million
$2.43 million
Given that the City is already facing a budget deficit of $8 million in FY2009, this
proposal would have a dramatic impact on Palo Alto services. It would force the Council
and staff to reevaluate proposed cuts for FY2010 and determine which additional cuts to
public safety and community services would need to be made. This could force the City
to actually implement the worst case scenario Tier 2 cuts as identified in the City
Manager's April 27 and May 5 budget presentations and identify additional reductions if
the Council does not agree with the "bridge" recommendation. This could result in
additional proposed reductions, such as:
• Contracting out park and golf maintenance efforts
• Eliminating the City's Police traffic team
• Ending City shuttle service
• Elimination of the Police School Resource Officer program
• Eliminating the tree trimming contract
• Eliminate Office of Emergency Services (OES)
• Reduce Crime Analysis program
• Reduce Community Policing/Outreach program ----------------------------------------------CMR: 243:09 Page 2 of3
The City Manager is already proposing to reduce City staffing by 20.5 positions for
FY2010. These additional reductions could result in elimination of another 21 positions
and employee layoffs. If the City's revenue outlook worsens, staff may need to identify
even further reductions to programs and staffing above and beyond those outlined. The
proposal by the State Department of Finance could have devastating impacts on the City
when we are already challenged by the current economic climate.
POLICY IMPLICATIONS
This action is consistent with the Council's priority of Economic Health and the Council
legislative guideline to protect local revenue sources.
ENVIRONMENTAL REVIEW
This report is not a project requiring review under the California Environmental Quality Act
(CEQA).
ATTACHMENTS
Attachment A: Resolution of the Council of the City of Palo Alto Opposing the State Department
of Finance's Proposal to "Borrow" Local Government Property Taxes to Reduce the State's
Budget Deficit for FY2010 (to be distributed on Monday, May 11).
Attachment B: State Department of Finance proposal outline
PREPARED BY:
CITY MANAGER APPROVAL:
CMR: 243:09
IL
KELL Y MORARIU
Assistant to the City Manager
Page 3 of3
Attachment B
May 5, 2009
FOR IMMEDIATE RELEASE
1400 K Street, Suite 400. Sacramento, California 95814
Phone: (916) 658-8200 Fax: (916) 658-8240
www.cacities.org
Contact: Eva Spiegel, (916) 658-8228
Cell, (530) 400-9068
Californians' Safety Threatened by Proposal to Borrow Local Property
Taxes
Sacramento, CA -Today the Department of Finance informed local officials they have
prepared a May Budget Revision option for the Governor to consider that borrows 8
percent of local governments' property tax revenues, estimated at just over $2 billion, to
help close the state's budget deficit. The proposal will threaten the safety of every
Californian. The League will strongly oppose any proposal that puts the funding of state
government ahead of the public safety of city residents.
"This proposal is irresponsible and would have disastrous and long-lasting impacts.
Cities are already redUCing services due to the recession and can't afford to cut public
safety and other essential services to bail the state out," said League President and
Rolling Hills Estates Mayor Judy Mitchell.
Chris McKenzie, League Executive Director, added: "For most cities police and fire
protection make up 60 -80% of their budgets." Californians know how important it is to
maintain public safety. According to a Field Poll released April 30, seventy-four percent
oppose cuts to law enforcement and police. DOF's proposal Significantly increases the
likelihood cities will have to cut the very public safety services the voters want protected.
The League called on the Governor to reject the DOF proposal. McKenzie said: 'The
Governor has said repeatedly that borrowing local property taxes and Prop. 42
transportation funds is irresponsible. It only deepens the state's structural deficit and
creates an obligation to repay. In the meantime, local services will be cut severely and
citizens' safety will be put at risk. This is precisely the type of budgeting that California
needs to avoid. The state needs to balance its budget within its own resources."
The League of California Cities is prepared to fight vigorously to protect city services to
the millions of Californians who live in cities.
Established in 1898, the League of California Cities is a nonprofit statewide association
that advocates for cities with the state and federal governments and provides education
and training services to elected and appointed city officials.
###
2nnQ·10
Workload
Budget
Reductions
Governor's
Budget
Program Description
2009-10 May Revision Option
(Dollars in Thousands)
Local Government Financing
Title: Borrowing from Local Government
GF 1 FF Other Total ! ! Reductions !
, ~ ; l
1
~.~'_"~m,_,~·w·~._,~,,~·_·_··'·~·_····~·_·_·H' _
$2,006,000 $2,00
'~'''''_'''''''~''_'ft,,,,,
PY
Reduction
_ '_'H'_"~'~'~'H'~"_'~'~'~"~'_'~'_"_'
._H' .. ' ...... ''''' .. ~.
The cDnstitutiDn allDws that up to. 8% Df local gDvernments' prDperty tax revenues can be
bDrrDwed by the state and repaid within three budget years with interest. The amDunt that
can be borrowed is determined by the amDunt Df property taxes received by cities,.cDunties,
and special districts in the preceding year. BDrrowing from IDcal gDvernment in the 2009-10
fiscal year wDuld prDvide $2.006 billiDn in sDlutiDns.
Program Reduction
An DptiDn to. address the pDtential budget shDrtfall wDuld be to. bDrrow property tax revenues
(PropDsitiDn 1A, 2004) from IDcal gDvernments.
LDcal gDvernments cDuld bDrrow against the state's constitutiDnal DbligatiDn to. repay, thereby
mitigating the impact Df this reductiDn. HDwever, in the current eCDnDmic landscape, IDcal
gDvernments are nDt easily finding available ShDrt term financing and could face difficulties
bDrrowing these funds from the market. If they bDrrow, IDcal gDvernment will incur substantial
bDrrowing CDStS.
If IDcal gDvernments are unable to. bDrrow Dr can bDrrow insufficient amDunts, IDcal
gDvernment may have to' make reductiDns to' IDcally funded services. Property tax revenues
are used by IDcal gDvernments fDr a variety Df services including pDlice and fire, waste
cDllectiDn, road maintenance, libraries and Dther services.
Reduction Impacts
Specific impacts Df this reductiDn will vary by IDcal jurisdictiDn and will in part depend Dn the
ability Df IDcal gDvernment to. Dbtain bDrrowing frDm the market. This reductiDn cDuld result in
cuts to. IDcaily funded services such as pDlice and fire, waste cDllectiDn, road maintenance,
libraries and Dther services.
1
2009-10 May Revision Option
(Dollars in Thousands)
Based on a survey of the top 15 California cities in terms of property tax revenue collection
estimates (based on 2006-07 collections), if adopted, this option could result in reductions to
their budgets, as follows:
Los Angeles
San Francisco
San Diego
San Jose
Sacramento
Long Beach
Oakland
Fresno
Newport Beach
Pleasanton
Bakersfield
Riverside
Fremont
Berkeley
Huntington Beach
$67,712,897
$61 ,833,541
$20,054,088
$12,810,380
$7,425,680
$6,604,224
$6,363,535
$4,607,868
$4,475,138
$3,202,884
$3,071,241
$3,051,165
$3,025,522
$2,951,759
$2,886,124
Reductions, if not replaced by local borrowing, would come on top of reductions most cities
and counties are considering or already budgeting to address shortfalls in local sales and
property tax revenues. Finance is estimating property taxes to decline by an average of 4
percent in 2009-10 after growing only about 2 percent 2008-09 and sales taxes are declining
by about15 percent from 2007-08.
Increases in layoffs of police, fire, public health, recreation and other tax supported workers
are likely. Due to federal and state laws, counties may have limited ability to reduce costs in
some programs where financial responsibility is shared, but they can make some employee
compensation reductions and implement other savings. Special districts and cities often have
other fees that could be raised to backfill reductions and maintain services. However, basic
public protection can generally not be fee supported. Districts that are only property tax
supported would face up to 8 percent budget reductions.
Timing of Implementation
The reduction could be legally effective on July 1, 2009, if enacted as an urgency statute.
The statute would provide for the timing and mechanism of payment to the state. Locals
receive property tax in December and April or shortly thereafter. Taking funds from them
before that could cause a local cash crunch and some may simply not pay timely.
Statutory and/or Regulatory Change
The Constitution requires the Governor to issue a proclamation of a severe state fiscal
hardship and passage of a separate two-thirds vote bill. The bill should specify how interest
will be paid since there is no provision in current law for this and the Constitution requires
there be payment of interest provided by law. It is likely locals will ask that their full cost of
borrowing be covered by state interest payments.
2