Claremont Insider: City Budget Woes on the Horizon

Wednesday, January 2, 2008

City Budget Woes on the Horizon

Welcome 2008!

As we indicated last week, we think the next big story for the city of Claremont in the next year and beyond will be the budget hits the city is going to take as the effects of the housing market downturn and the tightening of credit become clearer.

Stephanie Simon in Monday's Los Angeles Times had a front page article on the problems facing states, counties, and municipalities across the country. For a city like Claremont that depends on auto sales for 57-percent of its sales tax revenue, if consumers decide they can't afford to buy cars or are looking to buy less expensive cars, the city will be in for a big hurt.

Moreover, if state and federal programs end up being cutback, the city will have to pick up the slack for grant monies it had counted on for funding. At a time when the city may be looking at the purchase of the local water utility, building the $12 million Padua Sports Park, spending hundreds of thousands on lighting the city's sports fields, building a $25 million police station, and purchasing additional open space, this budget crunch could not come at a worse time.

The fallout began with the mortgage market crisis, but the effects spread through various revenue sources, as the Times article explained:

When the housing market is flat, governments also lose out on the many transaction fees tacked onto real estate sales. This revenue stream is down in several states, in a few cases by 20% or more.

Even more distressing to budget planners is the decline in sales tax revenue. If people aren't buying homes, they're not buying refrigerators and washing machines to furnish them. Nationwide, orders for durable goods have been flat for the last four months. (November saw the first slight uptick: 0.1%. Economists had been hoping for 2.2%.)

On average, states receive about a third of their revenue from sales taxes. So it hurts -- deeply -- when families don't have reason to splurge on the new sofa and coffee table that will make a just-purchased house look like home.

Jacqueline Byers, director of research for the National Assn. of Counties, said she had taken to wondering, as she drove past yet another vacant house: "Does that translate into the library's going to close at 6 p.m. instead of 9? Little things like that are all affected. It's a phenomenal impact."

The fallout has been most severe in California, where officials are grappling with a $14-billion gap. Gov. Arnold Schwarzenegger has ordered agencies to immediately trim spending by 10%. In Florida, the Legislature recently took emergency steps to close a budget shortfall estimated at $2.5billion over the next 18 months. Lawmakers raised tuition at state universities by 5%, sliced money for long-term nursing home care for the indigent, and requested that state law enforcement officers take their uniforms to be cleaned less frequently.

The article also noted that many cities' emergency funds are being depleted because the downturn is worse than anticipated:

What makes this all so painful is that up until a few months ago, many government officials felt certain they could weather the storm. They knew property values wouldn't soar forever. So they factored a downturn into budget calculations. They built up sizable emergency funds.

But the rainy day they prepared for turned out to be a monsoon.

"We had predicted a slowdown -- but not this much," said Tim Nash, finance director for Greeley (population 90,000), a college town in a heavily agricultural region of north-central Colorado. Nash thought he was being prudent when he budgeted for 200 new housing starts in the city this year, down from 310 last year.

Claremont's potential budget problems are exacerbated by the fact that the city unexpectedly had to spend $1 million extra on the Johnson's Pasture open space purchase last year after a state grant was denied because of faulty deed language.

Watch Claremont's City Council and commissions in the coming year. If you don't hear sober talk about this issue, that will be one sure sign something's being withheld from you.