On May 18 of 2014, Councilmembers Lucas Frerichs and Brett Lee joined Elaine Roberts Musser, Dan Carson and Ken Wagstaff in an op-ed in support of Measure O. In that column they wrote, “We recognize that increased sales taxes are only a temporary (yet necessary) solution. The City Council and the city are focused on generating new revenue from new sources. As a longer-term solution to the city’s current challenges, Davis is aggressively moving forward with economic development to generate additional revenue.”
Later they add, “The state of California’s ongoing shift of responsibilities to local governments, concurrent with shifting property tax revenues away from cities through the abolition of redevelopment agencies, makes it crucial and necessary to increase local funding for core city functions through a temporary sales tax increase.”
Measure O was billed to the community as a temporary tax increase to close the general fund’s structural deficit. The economy has improved, and revenues came in higher than expected in the last fiscal year. However – as Councilmember Brett Lee noted during the budget discussion last week – while the revenues and fund balance appear to be healthy, in part they are due to the sales tax revenues which are set to expire, according to staff, after the 2020-21 Fiscal Year.
As Kelly Fletcher pointed out, “Right now we look great, but when you move into that the forecast model shows that sales tax not be renewed then we would see a very significant loss of revenue.”
Councilmember Lee stated, “I’m a little concerned that we have this trajectory that we graph” where we see the 15 percent reserve over the next six years increasing up to 25 percent. He noted if the voters reject the renewal of the sales tax, “I don’t want to say we fall off a cliff, but there’s a significant drop. It just so happens to be just outside the window of the graph that we’re showing…”
But wait, renewal?
As Councilmember Rochelle Swanson said, “It’s great and we’re optimistic that we’re seeing these projections.” But she pointed out that, with the sales tax, “we told people that was going to be temporary to get us out of the recession.” She argued that the forecasts should have the revenues “without the sales tax so that we’re not assuming it’s going to pass.”
The problem here is that it is not a matter of pass/no pass. The problem is that, once again, we have told the voters that a tax measure is temporary and now it looks – at least in these early stages – that the council would be fully prepared to ask the voters to renew the tax measure.
At the risk of sounding like an anti-tax Howard Jarvis member, we have to be careful here about promising tax measures be temporary when we need to pass them in a crisis – and then when it becomes clear that the need exists beyond the immediate six year window, we ask the voters to extend them.
That is what happened in 2004, in fact. We passed the first half cent sales tax because we were facing a shortfall of state funding – which apparently never really materialized because we turned around and gave the firefighters a 36 percent pay increase and everyone else got at least a 15 percent increase over a four-year period.
Magically we renewed the sales tax measure in 2010, and now we extended it to sunset in 2020. That means that it is not $3.7 million on the line but twice that. In 2020, the city will have to decide whether to renew both taxes at 1 percent, renew only the original half-cent sales tax, or allow both to expire.
And, while we are working on that, we should remember that we have not yet passed a tax to fund roads, parks, buildings, bikepaths, greenbelts, swimming pools and the sports complex.
One of the questions likely to come up is the point raised by Dan Carson who believes that the city has understated the revenue by a good measure. He argued, “Last year’s budget understated the money coming from two key General Fund revenue sources, the property tax and sales tax by $1.4 million.”
He continued, “The actual revenues the city is likely to receive would probably be about $750,000 more from both sources combined in 2015-16 than budgeted and $4 million more by 2020-21.”
If he’s correct, that would mean we have a modest $1.4 million surplus for the current year, but that increases to just under $6 million by 2020-21, just in time for the sales tax to expire.
Mr. Carson’s argument is based on the budget forecast’s revenue projections being “out of line with the city’s past revenue success, other statewide economic projections, and data from various sources about local economic activity.” With the reserve in place, “there’s no reason I can see to budget revenues too low again.”
There are several points I would like to make here.
First, if the city’s conservative projections are correct, the city is still running a deficit in 2020-21, were there to be no sales tax. And yet, the city makes no plans for budget cuts this year for the first time in 13 years, despite the fact that the city is not actually running a surplus. The sales tax measure should be seen as a bridge to avoid deep cuts, but the city should take active steps to wean off it.
Second, what if Dan Carson is right? Does it make sense to understate the city’s revenues, especially early on in a recovery when money is tight? The larger the projected revenue, the harder it will be get additional concessions from bargaining groups. I would rather see the city forecast for modest revenue increases and then adjust it upward than the reverse.
Moreover, are we really expecting sustained economic growth at the rate that Dan Carson cites, that will increase revenues by $750,000 this year and $4 million by 2020-21? That would be more than ten consecutive years of economic growth by that point – and while the early growth was very slow, the economy really has been growing.
Third, do we have a real surplus? In addition to the “temporary” taxes, we have the huge infrastructure hits coming. Right now we are funding $4 million out of general fund just for roads – an amount the city manager on Tuesday acknowledged was insufficient to meet our needs. Once again, though, we have left infrastructure costs off-budget, despite the motion passed by the council in 2011 to specifically include all liabilities within the budget.
Finally, with the changes in the projections on the innovation parks, the future prospect for new revenue is now diminished. There is a lot more certainty around the economic development future of the city now than there was a few months ago. We lost one project and the other one is uncertain at this point.
Council should be very mindful that the current budget assumes no increases in employee compensation over the entire five-year period. The problem is that there will be not one but two MOUs rounds during that time and, even if the council holds the line this time, if revenues increase, at some point total compensation to employees will increase as well.
Moreover, there are uncertainties. CalPERS keeps increasing its rates, which cuts into the budget. Health care costs are likely to rise affecting current employees and retirees. There is a legal challenge to the impasse imposed on DCEA employees that could result in a $1 to $2 million hit to the city.
In short, things are fragile, the council promised these to be temporary taxes, and there is a good deal of uncertainty about the budget picture going forward. It is natural to be optimistic, looking at the city in the black right now, but that is based on a temporary $3.7 million increase in annual revenue.
—David M. Greenwald reporting