State’s cities hit with a perfect storm of low revenue, high costs and ‘tax fatigue’
California’s nearly 500 cities had been hurting financially even before the COVID-19 pandemic clobbered the state’s economy and triggered a downward spiral of tax revenues.
Although their revenues had climbed sharply during the previous decade, cities had seen even sharper increases in spending for employee pensions and health care and an epidemic of homelessness.
With a pandemic-induced recession, California’s city officials are now hastily revising their budgets for the current fiscal year, which ends on June 30, and drafting new plans for 202021 that anticipate severe drops in revenues.
The state’s largest city, Los Angeles, typifies the syndrome. Mayor Eric Garcetti last week proposed a $10.5 billion 202021 budget that slashes appropriations throughout city government and would furlough 16,000 workers.
Los Angeles and the five other California cities with populations of more than 500,000 will get some relief from Washington. The $2 trillion CARES Act contains aid for large cities, but it must pay for COVID-19 costs, not offset lost revenues, and must be spent by Dec. 31.
Big city officials, therefore, are looking for creative ways to spend their windfalls that satisfy the law and still provide some fiscal relief.
Sacramento is the smallest of the six and Mayor Darrell Steinberg expects to receive $89.6 million from CARES, almost exactly the city’s estimate of its projected shortfall from revenue losses related to COVID-19.
“This $89,623,427 stimulus check from the federal government starts our economic recovery,” Steinberg tweeted last week. He intends to use the CARES money to jump-start economic enhancement and housing projects promised from a sales tax increase approved by city voters last year, thus freeing up the sales tax money to plug the state’s budget deficit.
Five-hundred miles to the south, in San Diego, Mayor Kevin Faulconer is also seeking creative uses of the $249 million his city expects to receive from CARES, a sum that, as in Sacramento, almost exactly matches its projected budget shortfall.
“We expect to hear more on that and how you can spend those dollars soon,” Faulconer told the city council. “They will likely be restricted to Covidrelated costs, but there may be some flexibility in that. That is something my entire team has been working on.”
While CARES may help big cities to avoid fiscal meltdowns, it does nothing for California’s other 400-plus municipal governments, which are coping with many of the same issues, especially big drops in sales tax from shutdowns of retail businesses.
Prior to COVID-19 rearing its ugly head, many cities, as well as counties and school districts, were planning to place tax increases on the November ballot. However, the surprisingly negative results of the March 3 election on local tax and bond measures have raised doubt about the political wisdom of such proposals.
When the election’s ballots were finally tallied this month, just 96 of the 239 tax and bond measures had passed, Michael Coleman, who tracks local government finances in California, calculated.
Coleman’s detailed account includes results of post-election probing by Fairbank, Maslin, Maullin, Metz & Associates, a leading California polling firm, about why the measures fared so poorly. It ascribed the losses to several factors, including voter pessimism, “tax fatigue,” early reports of the COVID-19 pandemic, logistical problems in voting and a sharp drop in support for taxes outside major urban areas.
With the pandemic now in full bloom, erasing millions of jobs, asking Californians to pay higher taxes would be a fool’s errand. Cities will have to weather, as best they can, the perfect storm of rising demands for spending, plummeting revenues and hostility to new taxes.