Claremont Insider: Bad News Bearers

Friday, March 13, 2009

Bad News Bearers

We hate to be the bearers bad news on a Friday, but Claremont's new city council could be facing more financial problems than originally expected.

The Los Angeles Times reported Tuesday that, thanks to the plummeting real estate market, property tax revenues are falling for the first time in more than 10 years, making hash of a lot of fiscal assumptions local governments, including Claremont, had made coming into the year.

According to the article, San Bernardino County estimates its property tax base will fall 5.7% in 2009, and Los Angeles County Assessor Rick Auerbach was quoted in the Times as saying the county faces a 1.1% decline. That doesn't sound like much, but it amounts to a tax base reduction of $11 billion for LA County.

The article also said that the fall off is just beginning to ripple through the commercial real estate market as vacancies rise, so this decline in property tax revenue is likely just the tip of the iceberg. The Times article explained how this plays out on the local level:

This is bad news for local governments that have been relying on property tax proceeds to help make up the shortfall from reduced incomes and spending in their areas. Already, cities and counties across California have been freezing jobs, imposing work furloughs and pay cuts, postponing repairs and reducing some public services.

"Cities are calling us almost weekly now trying to find out where we are at and what kind of effects the reduced assessment will have on their budgets," said Larry Ward, Riverside County's assessor, clerk and recorder.

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Claremont's staff recently completed revisions to the city's budget for fiscal years 2008-09 and 2009-10 in order to cope with what had early this year been projected to be a $3.5 million budget deficit through June, 2010. In February, city staff balanced the FY 2008-09 budget, where they had projected the deficit to be around $1.5 million. That left $2 million for the next fiscal year.

The Claremont Courier reported on Wednesday that City Manager Jeff Parker announced that agreements had been reached with all of the city's employee associations to take pay and benefit cuts that will total $1,159,000 in FY 2009-10. (The article is not posted on the Courier's website, so you'll have to find a copy for yourself if you want to read it.)

The Courier's Tony Krickl reported that staff will not receive any cost of living adjustments for the remainder of their respective contract terms. Additionally, pay-for-performance bonuses (a legacy of the Glenn Southard-era in City Hall) and health and fitness reimbursements are things of the past. Police officers are also giving up a benefit called Compensatory Time Buy Back.

This all leaves the City still $841,000 short of balancing its budget. Parker was quoted as saying the remaining cuts would come through reduced operations expenses and a hiring freeze on "non-essential positions." (Hey, if they're non-essential, why do we have them in the first place?)

The City's emergency fiscal measures were needed primarily because of falling sales tax revenue. Recall that Claremont Toyota once accounted for something like 53% of the city's sale tax revenue, and you don't need to be told how car sales have fared in this recession.

The falling property tax revenues will surely force another round of adjustments, and we shouldn't forget that in June the city will hear from CalPERS about any increases in the amount the city's pays into its CalPERS employee pension account. Currently it's at around 13% of the city's payroll, but that could rise significantly if CalPERS investments continue to perform like every other investment asset class.

Given all these factors, there's really no reason to believe that the city's budget problems will end here.

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Claremont, like every other city in the nation, is salivating at the prospect of federal stimulus package money to help offset its budget crisis. However, the LA Times also reported that although the stimulus money coming to California figures to hit $31.5 billion through 2011, even that amount may not be enough to help the state in the short term:
Legislators had hoped to ease those new taxes and budgetary cuts with funds from the U.S. rescue package, but a fresh analysis of California's flagging fiscal situation suggests the state needs about $2 billion more than Washington is providing.

If he's right, the state will probably be unable to avert the $1.8-billion personal income tax boost and $1 billion in slashed spending that were part of the budget package Gov. Arnold Schwarzenegger signed into law in February.

[State Legislative Analyst Mac] Taylor's 48-page report comes one week before a meeting of Treasurer Bill Lockyer and Schwarzenegger's finance director, Mike Genest, who are empowered by the Legislature to decide by April 1 whether enough federal money is available to scale back the taxes and cuts. Schwarzenegger's finance experts have concluded so far that the available federal funds are insufficient.

So, even with that wad of federal cash, we should expect to wait until at least May 19 before we really know where we're going to end up with the state budget. That's when a number of the items approved in the recent state budget agreement go to the voters in a special election, and that's not figuring in the property tax decreases and other revenue shortfalls that might occur if the economy doesn't improve as quickly as the state assumes.