HomeMy WebLinkAboutSupplemental - The Fiscal Condition of California Cities, Institute of Local Self Governmenta� SEA1 'B .
��OMEV t.P��
PLANNING
DEPARTMENT
Memorandum
To: Mayor Doane and Members of the City Council
Attention: John B. Bahorski, City Manager
Department Heads f��
From: Lee Whittembeig, Director of Development ServicesJl/
Date: March 14, 2002 (/ //�
SUBJECr: "THE FISCAL CONDITION OF CALIFORNIA
CITIES", INSTITUTE OF LOCAL SELF
GOVERNMENT
Provided for your information is a copy of "The Fiscal Condition of California Cities",
prepared by the Institute of Local Self Government. The Institute of Local Self Government
(ILSG) is the nonprofit research arm of the League of California Cities.
The "Executive Summary- provides a quick overview of the findings of the statewide survey
conducted by ILSG to provide a snapshot of city perceptions of their financial situation in the
spring of 2001. The document is based upon responses received from 276 of the 475 cities
within California. -
Attachment: "The Fiscal Condition Of California Cities", prepared by the Institute of Local
Self Government
C:U, maumm6 ty'CounoR t Fecal Codition of Citis M.A..�W,03-1402
INSTITUTE for LOCAL
SELF GOVERNMENT
The Fiscal Condition of
California Cities 2001
Executive Summary
The Fiscal Condition of California Cities report is an effort to document the impact that the
centralization of state government power over local finances has had on the economic health of
local communities in California. To achieve this goal, the Institute for Local Self Government
conducted a statewide mail survey of 475 cities. The Institute for Local Self Government is the
nonprofit research arm of the League of California Cities.
The Institute received 276 responses prepared by city fiscal officers, city managers, budget
analysts, and others responsible for financial administration. Key findings based on these
responses include the following:
• Cities Pessimistic About Fiscal Picture for 2002. The Institute's survey asked cities to
describe their ability to finance community service needs in 2002 as compared to 2001.
Statewide, 38 percent of cities expect their financial situation to decline. Thirty-five percent
expect their financial situation to stay the same, and 27 percent expect their situation to
improve.
• Uncertainty Over 2002 Economy Ends Positive Fiscal Trend. Local official responded in
the fiscal condition of cities survey as California concluded a period of unprecedented
economic growth. The survey suggests that cities recognized a looming decline in the state's
famines.
Cities Lag Nationwide. According to the National League of Cities' 2001 survey of city
fiscal conditions, 56 percent of cities described their financial situation as better in 2001 than
in 2000. Forty-four .percent said that their financial situation had declined since 2000.
Although the overall result is positive, this represents the first major drop in a nationwide
eight -year trend of cities reporting that they are better off financially.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 12
• Small Cities' Expectations Shift Down. Among small cities (population under 50,000), the
percentage that describe themselves as better able to meet community financial needs drops
from 45 percent for 2001 to 30 percent for 2002. Those that see themselves as less able to
meet local financial needs increases ftom 18 percent for 2001 to 36 percent for 2002.
• Steeper Decline for Medium -Sized Cities. For medium -sized cities (population 50,000 to
200,000), 51 percent describe themselves as better able to meet community financial needs in
2001 as compared to 2000. Only 21 percent expect an improved financial picture in 2002.
Twelve percent of medium -sized cities report that they are less able to meet financial needs in
2001 than in 2000. Forty-five percent predict a decline in ability to meet community
financial needs in 2002.
• ERAF Property Tax Transfer Continues to Hurt Cities. Statewide, 90 percent of
responding cities indicate that the ERAF property tax transfer of the early 1990's had at least
an important impact on their fiscal health, based on the following range of responses: "no
impact," "minor impact," "important impact," "major impact" and "grave impact" Sixty-
five percent describe the impact as either "major" (44 percent) or "grave" (21 percent).
• ERAF Impact Felt in All Regions. The survey results indicate that the ERAF transfer had a
sizeable negative impact on communities throughout the state. For example, among Central
Valley cities, 65 percent call the impact `major" (45 percent) or "grave" (20 percent).
Among San Francisco Bay Area cities, 69 percent rate the impact of ERAF as "major" (47
percent) or "grave" (22 percent).
• Large Cities Hard Hit The loss of property tax revenues resulting from the ERAF transfer
was felt by all cities, large and small. All large cities (population over 200,000) descnbe the
impact of lost property tax revenues as "major" (67 percent) or "grave" (33 percent).
• Unfunded State Mandates Further Burden City Finances. Over 60 percent of cities
describe the impact of unfunded state mandates on local finances as "important" (38 percent),
"major" (20 percent) or "grave" (3 percent).
• Unfunded State Mandates Affect Cities of All Sizes. Seventy-six percent of large cities
(population over 200,000) rate the impact of unfunded mandates as "important" (63 percent)
or "grave" (13 percent). Among medium -sized cities (population from 50,000 to 200,000),
66 percent rate the impact of unfunded state mandates as "important" (39 percent), "major"
(25 percent) or "grave" (2 percent). Fifty -seven percent of small cities (population under
50,000) say the impact of unfunded state mandates is "important" (36 percent), "major" (18
percent), or "grave" (3 percent).
• Public Safety Salary/Retirement Costs a Key Concem. Statewide, 65 percent of cities
report that the cost of public safety salaries has a "major" (50 percent) or "grave" (15 percent)
impact on city finances. Fifty -seven percent say the cost of enhanced public safety retirement
benefits ( "3 percent at 50155 ") has a "major" (38 percent) or "grave" (19 percent) impact on
their fiscal situation.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT I }
• Mandatory Binding Arbitration Further Strains City Budgets. Sixty-eight percent of
cities indicate that the system of mandatory binding arbitration for public safety employees
imposed by SB 402 represents a "grave" (16 percent), "major "(28 percent) or "important" (24
percent) impact on city finances.
• Increasing Discretionary Revenues such as Sales Tax a High Priority. Seventy-two
percent of cities describe the goal of increasing sales tax revenues as a high priority. Less
than 5 percent of cities say that the goal of increasing sales tax revenue is not a priority. For
many cities, sales tax provides a critical source of revenue that is not restricted to a specific
purpose. Increased local control over spending priorities enhances cities' ability to respond
to changing conditions and community needs.
• Fiscal Stress Prompts Investment in Local Economic Development The pressure to
provide essential public services in the face of constraints on city finances has led over 50
percent of cities to fund a department or organization, other than a redevelopment agency, to
attract business investment in their communities. Promoting local economic development
adds to sales tax, transient occupancy tax, and other revenues. Almost 90 percent of city-
funded economic development agencies we credited with increasing city revenues.
The Institute hopes to repeat this survey in early 2003 to begin a process of tracking cities' fiscal
health over time.
I. CITIES IN THE SHADOW OF
THE STATE
The purpose of this report is to analyze the impact that the centralization of
state power over local finances has had on the economic health of local
communities in California. The report features results of a statewide
survey of 475 California cities conducted in May 2001, before the current
state budget crisis. The Institute received 276 responses prepared by city
fiscal officers, city managers, budget analysts, and others responsible for
financial administration. To enhance the aggregate data from the statewide
survey, the report includes additional information provided by a group of
12 randomly selected "case study" cities. The project's advisors felt
strongly that individual city data is necessary to avoid the tendency of
statewide and even regional data to mask dramatic differences in individual
city circumstances.
LOSS OF LOCAL CONTROL OF FISCAL DECISIONS
Over the past 20 years, state legislation and voter - approved revenue
limitations have diminished local agencies' fiscal powers.
Loss of Local Control of Fiscal
Conditions ................................. _.. 7
• Impact of Educational Revenue Augmentation Fund
(ERAF Transfer. Beginning in fiscal year 1992 -93, the state
Demographic Concerns ............ _.a
has reallocated property tax revenues that have historically
funded local services and facilities. language added to the
The Economic Contest. ... ............ 9
state constitution in 1978 as pact of Proposition 13 has had the
unintended effect of giving the state substantial control over
Signs of Economic weakness
Evident Before September .............9
this historically local revenue source.' Results of the histitute's
survey indicate that the ERAF transfer continues to have a
State Budget Crisis Threatens
serious negative impact on cities' fiscal health.
Local Communities ................... 11
• Unfunded State Mandates. Cities find their fiscal affair
further complicated by state requirements to provide programs
and services that must be funded by local revenues. The
survey indicates that unfunded mandates also impose a
substantial burden on local finances.
• Public Safety Retirement Issues. The availability of
enhanced retirement benefits for public safety personnel
represents a significant challenge to local agencies throughout
' See genoolly. County ofSenoma v. Commission on Sum Mandate; 84 GI. App. mb 12M, 101 Cal
Rpm 2d 784 (1n ber Dim, Novem 21, 2000), revdenied February 28,200 1
8 I CITIES IN THE SHADOW OF THE STATE
the state. Cities report that enhanced public safety retirement
benefits will have a major negative impact on thew finances.
DEMOGRAPHIC CONCERNS
California's continued strong population growth can be expected to have
implications for city finances for many years to come. Fueled by job
growth, California's population increased 611,000 in the year 2000 to a
total of 34,818,000 residents on January 1, 2001. The new data reflects a
1.8 percent population increase for the year.'
The state's data reflects a notable increase in the amount and pace in the
state's growth compared to the prior calendar year, when California added
an estimated 547,000 people and grew at a rate of 1.6 percent.
The Department of Finance estimates that, by 2005, the state's population
will reach 37.5 million, and by 2010, over 40 million.'
• New Demands On Infrastructure. This growth will strain
city physical and environmental infrastructure, and place
increasing demands on public safety, parks, libraries, and other
local facilities and services.
• Younger Population Imposes New Challenges. Growth in
the young -adult population will place greater demands on
programs for at -risk youth and delinquency prevention. .
• Serving a Diverse Population. The increasing ethnic
diversity of the state's population will also mean that many
local agencies will serve communities that speak a multitude of
languages and have a wide range of cultural backgrounds.
THE ECONOMIC CONTEXT
' Sure ofCclifomia, Depamnem ofFirea a. Caftl rnia'r Annml Population Growth 6 ceeda Half l
Million Far SumM Y. , Sscmmcma, Canfamia May 9, 2001.
' Smm of Califamu, lxyarhnrntof Finance, lnrerim Counry Population Pr jeaiars. Sacrammro,
California, June 200E
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT r9
Local officials responded to the Institute's survey at the close of a period of
unprecedented economic growth' Declines in business investment
evidenced a weakening economy.' California faced rolling blackouts and
near record high gasoline prices.` The September 11, 2001 terrorist attacks
and their aftermath have cast more uncertainty over an already cloudy
economic picture.
SIGNS OF ECONOMIC WEAKNESS EVIDENT BEFORE
SEPTEMBER
Warnings of weakness in the national and state economies signaled the
beginning of a nationwide downtum even before the September 11 terrorist
attacks. California had already begun to feel the effects of this downturn
early in 2001.'
Economic growth in the U.S. fell close to zero in the second
quarter of 2001° after reaching a high of 8 percent at the end of
1999.'
U.S. employment growth slowed to an annual rate of 1.6
percent at the close of 2000 after beginning the year at 2.3
percent.1°
• The consumer confidence index dropped from a level of over
140 for most of 2000 to 106 in February 2001. Consumer
spending accounts for about two - thirds of U.S. output, making
consumer confidence an important indicator of economic
health."
° D n h, M Jaffa and C,fln. A. Itroll," @e Bubble rlm B. —How Will California Far,"
Research A port, Fisher Cemer for Real E^=o and Urban Emmmmi University of Cnlifomi,ia
nakelry, SMng 2001.
' Strybm lavy, "Ecanamic Outlook After Scpambm I Itq" C.. for Continuing Stns, offt
California Economynnstima of Regioml and Ukan Studies, 2001.
s Sma of Gliforn, Dopmrmcnt ofFinanc, Chronology m Sign fcam Economic Evmv, 19562001,
2001.
'U,, supra.
°V., Tamowi,; U.S. Economy Bcfine and After tie Tcrnci9 Armck s,- Business Cycle
lndicmon, the Con! nce BOard, Ocmbes 2001.
'Jaffee a,d Kroll, supra.
to Id.
ll ld.
10 I CITIES IN THE SHADOW OF THE STATE
• Job creation in California slowed to 55,000 from December
2000 to July 2001, down from 374,000 jobs generated during
the corresponding period one year earlier.°
• The Silicon Valley lost an estimated 27,000 jobs between
December 2000 and July 2001. The San Francisco
metropolitan area also experienced a sharp deceleration as the
dot.com boom collapsed. Los Angeles saw declines in its
economic vitality with a sharp drop in motion picture industry
jobs."
• In the agricultural sector, higher labor and energy costs hurt
many producers. High costs and low prices convinced many
producers to leave more land fallow."
• California tourism suffered due to concerns about possible
blackouts and high gasoline prices. 'Theme park attendance
and conference center business both declined."
• The manufacturing sector faced sizable job losses in the high -
tech, manufacturing, and aircraft production sectors.16
• National spending in the high -tech sector, one of the key
engines of the state's economic expansion, declined from a
growth rate of 24.2 percent in 1999 -2000 to a 9.1 percent
growth rate in the first quarter of 20M." Foreign purchases of
information technology have also slowed due to weakening
economic growth in Asian markets."
The slowdown in technology purchases and the general
weakness in the economies of the state's major trading partners
contributed to a decline in exports. These spending declines
"Calitmmie Chamber orCommerce, Economic Advlaory Council Repo,,'Condnued Economic
Slowdown Pushes Rebaand Ffedictiotu inm Ncat Year;' Sa nember 7, 2001.
n rd.
California Teoboology, Tnde & Cammerce Allauy, Fact Shen: Calms is Z noru- -2001, Fimt
Quaner, 2001.
" Stela of Celif is, Legislative Analyst's Office, The 2 001 -02 Bulger Ferspanivnandlaues,
Febnmry 21, 2001.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT I H
had a negative impact on California's technology sector and its
ports throughout 2001."
STATE BUDGET CRISIS THREATENS LOCAL
COMMUNITIES
The budget surplus that the state enjoyed at the outset of 2001 has
evaporated and deficits loom.
• September 2001 revenues fell $468 million short of the level
predicted in the Governor's May budget revision.-
• State revenues are off $1.1 billion from projections since May,
including a $466 million drop in May and June - -the last two
months of fiscal year 2000 -01?'
• On October 11, Governor Davis ordered state agencies to
reduce 2002 -03 budget proposals by 15 percent."
• the Legislative Analyst predicts that the state will end fiscal
year 2001 -02 with a $4.5 billion deficit The 2001 -02 Budget
Act assumed a reserve of $2.6 billion. The state faces a
shortfall of at least $12.4 billion for 2002 -03 even if the
economy recovers by spring 2002.-
Mindful of the state's mid on local property tax revenues in the early
1990s, city officials close the year nervous that the effects of California's
downturn on their revenue picture will be exacerbated by some form of
further state takeaway of local revenues.
By one recent estimate, the national economy began to contract in March
2001?' The September 11 terrorist attack may have been an important
factor in turtling the contraction into a recession. Recovery is not expected
°a California Budget Pwjcc4'SiOc's Economic Outlook bas Ch ged Dramatically,' Budget WawA.
Vol. ), No. 4, Ocwtnr 2001.
1.1d.
'c /d
"Batt ofCaaforniy Legulauvc AOalyn'a Onice, Caljmida Fvml Oudook L10 Profeadow
2001 -02 Through 200602, Novembtt 2001.
14 Nmional Bwwu of E[000mlc Rearamh, "ThC Bwiaas Cydc Pwk of March 2001;' November 26,
2001.
12 I CITIES IN THE SHADOW OF THE STATE
to begin until at least July 2002." The history of earlier recessions suggests
that California will share the effects of any national economic setback"
The uncertain future of the California economy further evidences the
importance of reliable revenue sources for cities. These factors determine
the continued ability of cities to provide services and infrastructure that we
key elements of the business environment necessary to help California
recover from the recession.
11,
36 Jaffa and K-11, aupro.
II. SHIFTS IN CITIES'
PERCEPTION OF THEIR
FISCAL CONDITION
Local officials responded to the Institute's survey as California concluded a
period of unprecedented economic growth.- The booming economy helped
cities with the ability to benefit from sales tax and other revenues that
increase in good times. For some cities, these revenues softened the impact
of the ERAF transfer and unfunded mandates. For others in less
prosperous regions of the state, their struggle to make ends meet only
continued. The survey suggests that cities recognized a looming downturn
in California's economic fortunes before others. Cities' experience with
the recession of the 1990s showed that they faced the dual threat of
decreased sales tax revenues and possible efforts by the state to divert local
revenues to balance the state's budget.
2000 -01 FINANCIAL ABILITY TO MEET COMMUNITY
NEEDS
2000 -01 Financial Ability to Meet
Community Needs ............. - ....... 13
The institute's survey asked cities to rate themselves on a scale from 1 to 5
as being "less able" or "better able" to meet their financial needs in 2001 as
Pessimism Reigns About 2001 -02
compared to 2000. A rating of 1 means "less able" and a rating of 5 means
Financial Abilities to Meet
"better able." With 36.7 percent ranked at 3 and 40.2 percent ranked at 4,
Community Needs. ....................... IS
most cities viewed 2000 -01 as a year of being equally, if not moderately,
better able to meet their communities' financial needs than they had in
State Policy Choices Make Cities
Vulnerable m Economic
1999 -2000 (see Figure 1).
Downturns ............. - .................... 22
About the Vehicle License Fee .... 22
Cities of AII Sizes Share Negative
Outlook far 2002 .......................... 23
City Growth Patterns and Ability
to Meet Community Service
Needs................... - ....... - .............. 26
�JeRcc andKroll, suyra.
14 I SHIFTS IN CITIES' PERCEPTION OF THEIR FISCAL CONDITIONS
Figure 1. Financial Ability to Meet Community Needs
Percentage of California Cities that View Themselves as
"Less Able" or "Better Able" to Meet Their Financial Needs in 2001
Compared with 2000 [n =265]
0% 10% 20% 30% 40% 50% 60a /o 70% 80% 90% 100%
0(1) Less Abie 13(2) Somewhat Less Able 17(3) Little or No Change
O(4) Somewhat Better Able ■(5)BetterAble
Not all cities shared in California's economic good times this past year.
More than half of cities (52.6 percent) reported either no change or a
decline in their ability to meet their communities' financial needs in 2001.
For some 36.7 percent of cities, 2000 -01 was a year of just staying even.
Some 16 percent of cities statewide found themselves losing ground.
Cities Lag Nationwide. According to the National League of Cities' 2001
survey of city fiscal conditions, 56 percent of cities described their
financial situation as better in 2001 than in 2000.' Forty -four percent said
that their financial situation had declined since 2000. Although the overall
result is positive, this represents the first major drop in a nationwide eight -
yew trend of cities reporting that they are better off financially.
' Mxh l A. Pagan, 0,Fisca1 Condai..x in 1001, Nviawl Ua,u .M ia, Jury 201.
6
t4.4%
:67Y.
40.2 -7
0(1) Less Abie 13(2) Somewhat Less Able 17(3) Little or No Change
O(4) Somewhat Better Able ■(5)BetterAble
Not all cities shared in California's economic good times this past year.
More than half of cities (52.6 percent) reported either no change or a
decline in their ability to meet their communities' financial needs in 2001.
For some 36.7 percent of cities, 2000 -01 was a year of just staying even.
Some 16 percent of cities statewide found themselves losing ground.
Cities Lag Nationwide. According to the National League of Cities' 2001
survey of city fiscal conditions, 56 percent of cities described their
financial situation as better in 2001 than in 2000.' Forty -four percent said
that their financial situation had declined since 2000. Although the overall
result is positive, this represents the first major drop in a nationwide eight -
yew trend of cities reporting that they are better off financially.
' Mxh l A. Pagan, 0,Fisca1 Condai..x in 1001, Nviawl Ua,u .M ia, Jury 201.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT I is—
These are a few of the events that shaped cities' perception of their fiscal situation in the spring
of 2001' -
January 17
Organization of Petroleum Exporting Countries (OPEC) to cut oil
production by 1.5 million barrels a day, or 5.6 percent of current
output
March 19
OPEC to cut oil production by another I million barrels a day.
March 19 -20
California suffered rolling blackouts.
March 27
California regulators approved retail electric rate increase.
March 29 -
Gross Domestic Product (GDP) grew at an annual rate of 1 percent in
the fourth quarter - -the lowest in more than 5 years.
April 6
PG &E utility unit flux for bankruptcy.
April 23
A Tosco refinery explosion pushed gasoline prices to near record highs.
April 24
Standard & Pooi s lowered California's bond rating from .AA to A +.
May 7 -8
California hit by rolling blackouts.
' Swte o[ GGfomla. Depvmmem v[Fivmce, Chronology of5lgn�mne Eionamic Evenu. 1956-2001,
zuoi.
16 I SHIFTS IN CITIES' PERCEPTION OF THEIR FISCAL CONDITIONS —
REGIONAL DIFFERENCES
To compare city responses by geographic region, cities were divided into
five regional categories:
• Central Valley
• North/Central Coast
• San Francisco Bay Area
• Southern California Metro
• Southern California Outlying
A map showing the boundaries of each region is provided in Appendix C.
Bay Area in Best Shape. Bay Area cities had the highest percentage of
cities that found themselves "better able" to meet their financial needs.
Over 52 percent of cities in this region reported that they were better off in
the current fiscal year than they had been in the previous year.
Urban/Inland Cities Struggling. At the other end of the spectrum, more
Central Valley and Southern California Outlying cities found themselves
"less able" to meet their communities' financial needs. In both regions,
some 18 percent of cities indicated their revenue pictures were such that
they lost ground in the effort to meet their communities' needs.
The responses for each region are summarized in Figure 2 on the next
page.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 117—
Figure 2. Percentage of California Cities that View Themselves as
"Less Able" or "Better Able" to Meet Their Financial Needs
in 2001 Compared with 2000 (by region)
45%
40
35%
±t
30%
25%
20%
15%
—
10%
5%
—
0%
(1) Less (3) Little or
(5) Better
Somewhat Somewhat
Able No Change
Able
Less Able Better Able
O Central Valley
1.7%
18.3%
36.7%
38.3%
5.0%
(nfi0)
ONorth &Central Coast
0.0%
12.9%
41.9%
38.7%
6.5%
(n =31)
O San Francisco Bay Area
1.6%
13.1%
32.8%
42.6%
9.8%
(n =61)
O Southern California Metro
2.4%
11.9%
36.9%
41.7%
7.1%
(n=84)
■ Southern California Outlying
0.0%
17.9%
39.3%
35.7%
7.1%
(n =28)
18 I SHIFTS IN CITIES' PERCEPTION OF THEIR FISCAL CONDITIONS
PESSIMISM REIGNS ABOUT 2001 -02 FINANCIAL
ABILITIES TO MEET COMMUNITY NEEDS
Figure 3 shows that cities saw clouds on the horizon as early as late spring
of 2001.
Cities' Expectations Decline Statewide. When asked to describe next
year's fiscal picture, only 27.2 percent said they would be better off in
terns of their ability to meet their communities' needs.
Pessimism Increases. The number of cities that expected to be "less able"
to meet their financial needs in 2002, a rating of I or 2, jumps to 38.2
percent, more than twice the number who said they were worse off in 2001
than 2000.
California Response Consistent with National Trend. Less than half of
U.S. cities (46 percent) responding to the 2001 National League of Cities
fiscal conditions survey expect to be in a better financial situation in 2002
than in 2001. The authors of the national survey study report that this is
the lowest percentage since 1993 and it is the fast time since 1994 that less
than a majority of cities expect to be better off financially in the next year.'
Pagm , ssvm.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 119—
Figure 3. Comparative Percentages of California Cities that View
themselves as "Less Able" or "Better Able" to Meet Their Financial Needs
in 2002 Compared with 2001 [n =265]
0% 10% 20% 30% 40% 50% 60% 70"A 80% 90% 100%
O (1) Less Able 13 (2) Somewhat Less Able O (3) Little or No Change
O (4) Somewhat Better Able ■ (5) Better Able
20 1 SHIFTS IN CITIES' PERCEPTION OF THEIR FISCAL CONDITIONS
Global Business 'Trends Liflueoce Locul Rercvucs. One Buy Arc. city's sales
tax revenues depend on the ebb and flow of economic trends in Japan and other
Asian markets. in fiscal year 1998 -99, for example, the city's high -tech industry
suffered a slowdown in demand for computer hardware even as other sectors of
the local economy flourished. Many companies laid off workers, and the city's
sales tax revenues dropped due to lower business -to- business sales.
Dependence on Auto Sales Spells Trouble. A Southern California city emerged
from the Past recession with the help of increased auto sales. Good economic
times helped the city keep pace with growing demand for local services. In early
2001, the warning signs of weakness in the state's economy put the city on notice
of trouble ahead. Faced with continued vulnerability to fluctuations in the auto
sales market, the city expects to be worse off in 2002.
State Fiscal Policy Puts City at Risk. One Central Valley city depends on sales
tae revenues for 40 percent of its general fund budget. The city has enjoyed
consistent economic growth through fiscal year 2000 -01. Sales taxes increased,
with significant increases in vehicle sales leading the way. In the current
economic climate, the city expects its ability to meet its communities' service
needs to be challenged.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 1 21
Perception of Fiscal Health Consistent Across Regions. Regardless of
region, most cities regard themselves as "somewhat better able" to meet
their financial needs in 2001. Figure 2 shows that most cities across the
state chose 3 or 4 in the 'less able/better able" range. Consistent with the
statewide trend, it appears many cities in each region see themselves losing
ground in 2002. Figure 4 shows cities shifting their expectations
downward, with most selecting 2 or 3.
Figure 4. Percentage ofCalifomia Cities Out View Themselves as 'Lass Able" or'Betur Able" in Men
Their Financial Needs in 2002 Compared with 2001 (by region)
50%
45%
40%
35%
30%
25%
20%
-
15%
e°§
10%
0°
(1) Les. Able
(2) Somewhat Less
(3) Little or No
(4) Somewhat (5)
Bener Able
Able
Change
Better Able
OCeotral Valley
5.0%
30.0%
43.3%
18.3%
3.3%
(n=60)
ONoah & Cannot Coast
OA%
32.3%
35.5%
29.0%
3.2%
(.r-31)
O San Fmncisco Hay Arta
6.6%
32.8%
29.5%
23.0%
82%
(n^61)
OSouthem California Meno
9.5%
31.0%
31.0%
23.8%
4.8%
('84)
Ysouthem California Chalying
7.1 °6
35.7%
M.7%
129%
(,28)
22 I SHIFTS IN CITIES' PERCEPTION OF THEIR FISCAL CONDITIONS
STATE POLICY CHOICES MAKE CITIES
VULNERABLE TO ECONOMIC DOWNTURNS
For many cities, the ability to finance local services depends on their level
of sales tax revenues. The state's reallocation of property taxes in fiscal
year 1992 -93 has given sales taxes greater prominence as a source of local
general food revenues. In reallocating property taxes, the state took away a
stable revenue source that cities can rely on when tough economic times
cause sales tax revenues to decline. Even in good times, fluctuations in
sales tax revenues challenge cities' ability to fund police, fire fighters, and
other important services. City flounces will become even more vulnerable
if a recession prompts the state to renege on its promise to compensate
cities for cuts in vehicle license fees.
ABOUT THE VEHICLE LICENSE FEE
A LOCAL TAx
The vehicle license fee (VLF) is really a local tax, originally collected as a
personal property tax. In 1935, the legislature provided for a statewide
collection and remittance process. The fee was then 1.75 percent of a
vehicle's value, approximately equal to the local property tax rate in 1935.'
The VLF presently equals approximately two percent of a vehicle's value.
The value is determined based on a depreciation schedule.'
THE FIRST RAID
In the early 1980's, the state found itself strapped for cash. To help solve
its problem, the state withheld over $700 million in VLF revenues
(approximately one - third) that otherwise would have funded local services
during the three years between 1981 and 19832 To prevent such raids,
voters approved Proposition 47, on the March 1986 primary ballot Adding
article 11, section 15 to the state constitution, Proposition 47 said all
revenues from the VLF (besides fees on trailer coaches and mobile homes,
costs of collection or refund allowed by law) must be allocated to counties
and cities according to statute.°
°sm¢of Cslifomia, Ullda Amlyat's ORce, 'A Perspective mi the Vehicle U.n Fee;'May
1998.
° Smm of CAd.ia, LegWaive AwIW's OfT , "A Primer.n 0m Vehide Licemc Fee ;' lucre 17,
1998.
' Sp of CAff mia LegislwK A alym's Office, "A Perspective on We Vehicle Licrn Fee ;' May
1998.
° Cal. Rev. & Tax Ccae 4 11005
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 123-
THE STATE CUT AND PROMISE TO BACKFILL
Good times returned and in the mid- 1990's, the state enjoyed a multi-
billion dollar surplus. Some California legislators were taking note of the
successful campaign waged by the winning Virginia gubernatorial
candidate to abolish Virginia's "car tax." Although polls at the time
showed no burning public support for a VLF cut, the state passed
legislation to offset the VLF by 25 percent, beginning in 1999, and
allowing for further reductions in future years. These further reductions
were tied in the health of the general fund. In 1999 the VLF law was
amended to increase the reduction to 35 percent beginning in 2000. The
current reduction is now 67.5 percent' In essence, the state had cut a local
tax, used to fund important local services.
The agreement reached in 1998 provided that the state would "make up" or
provide a backfill in the reductions so that cities and counties would
receive the share they would have received absent a reduction. The
"backfill" is provided by state general fund money. Thus, approximately
sixty -seven percent of the amount of VLF revenue local governments now
receive is from this backfill.10 When the VLF reduction was originally
passed, legislators were emphatic that thew commitment to the VLF
backfill would be honored in good times and in bad. They were highly
critical of the League and other opponents of the VLF reduction"
The VLF backfill for cities and counties is now $3.7 billion. 12 As the state
struggles to overcome its budget deficit and, among other things, address
critical public safety needs in the aftermath of the September 11' terrorist
attacks, VLF backfill funds will be competing with other budgetary items
this year and quite possibly for the next few years. Fortunately, Governor
Davis has pledged that he will not use funds slated in reimburse local
agencies for vehicle license fee cuts to balance the state budget.
CITIES OF ALL SIZES SHARE NEGATIVE OUTLOOK
FOR 2002
Many cities that saw improvement in their fiscal situation over the past
year expect a downturn in the year to come. This perception is shared by
'Cal. Re . & Tau Code § 10754.2.
10 Cnlrmm AMie Services, "The New VLF: A M.. d,e M.. Vehicle In -Lieu Tax, Ne Car
Tax Cm s Ba filt- May 14, 2001.
" J. Matthews, "End car lx.n fees, GOP legialabr urges';' Sacramrnao Bee, February 19, 1998
°m.
24 I SHIFTS IN CITIES' PERCEPTION OF THEIR FISCAL CONDITIONS —
cities in each of the size categories used in the survey, small (population
under 50,000), medium (20,000 to 50,000) and large (over 200,000).
Small Cities' Expectations Shift Down. Among small cities, the
percentage that described themselves as "somewhat better able" to meet
their financial needs drops from almost 40 percent for 2001 to almost 26
percent for 2002. Those that see themselves as "somewhat less able" to
meet their financial needs increases from about 16 percent for 2001 to
almost 29 percent for 2002 (see Figure 5).
Figure 5. Percentages of Small Cities that View Themselves as
"Less Able" or "Better Able" to Meet Their Financial Needs [n =166]
(5) Better Able
(4) Somewhat Belter.461e
(3) Little or No Ch.,
(2) Somewhat Less Able
(I) Leas Able
0% 10% 20% 30% 40% 50% 60% 70% 80%
2001 Compered with 2000 ■ 2002 Compared with 2001
4b % 4.3
139.N%
25.9Y.
x .37.3 %
34�%
is
'�. Ifi.3%
38.9 °.
LR %
6.6
Steeper Decline for Medium Cities. For medium -sized cities, 40 percent
saw themselves as "somewhat better able" to meet their financial needs in
2001 as compared to 2000. Only about 16 percent expect to be somewhat
better off in 2002. About 11 percent of meditan -sized cities thought that
they were "somewhat less able" to meet their financial needs in 2001.
Thirty -eight percent expect to be "somewhat less able" to meet their
financial needs in 2002 (see Figure 6).
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 25—
Figure 6. Percentage of Medium -Sized Cities that View Themselves
as "Less Able" or "Better Able" to Meet Their Financial Needs [n=90]
(3) Bober .Able
141 Somewhat Better Able
(31 Linle ar No Cl a ,
(2) Somewhat Less Able
(1) Less Able
11.1% 5.6%
40.0% 15.61%
36.7%
34A%
37.9%
6.7%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Large Cities Concerned for Future. Large cities' expectations show a
decline as well. Fifty percent said they were somewhat better off in 2001
as compared with 2000. For 2002, large cities that see themselves as
"somewhat better able" to meet their filumcial needs slips to 25 percent
(see Figure 7).
Figure 7. Percentages of Large Cities that View Themselves as
"Less Able" or "Better Able" to Meet Their Financial Needs [n =8]
(5) Better Able
(4) Somewhat Bener Able
(3) Little or No Choose
(2) Somewhat Less Able
(1) Las Able
0%
l0% 20% 30% 40% 30% 60.4 70% 80%
26 I SHIFTS IN CITIES' PERCEPTION OF THEIR FISCAL CONDITIONS —
CITY GROWTH PATTERNS AND ABILITY TO MEET
COMMUNITY SERVICE NEEDS
Cities that experienced five to ten percent growth from 1995 to 2000 show
the largest drop in fiscal expectations for 2002. Cities with less than five
percent growth also expect to lose ground in 2002. Cities that grew over
ten percent are more optimistic than those in other growth categories, but
also predict declines in ability to meet financial needs in 2002.
DECLINING EXPECTATIONS IN FIVE TO 10 PERCENT GROWTH CITIES
Almost 46 percent of cities that grew between five and ten percent from
1995 to 2000 expect to be "less able" or "somewhat less able" to finance
community service needs in 2002. Only about 17 percent of cities report
being "somewhat less able" to meet service needs in 2001 as compared to
2000. The number of cities that expect to be "somewhat less able" to meet
Service needs in 2002 jumps to almost 38 percent. Less than one percent
of cities report being `less able" to meet service needs in 2001 as compared
to 2000. The percentage of cities that expect to be "less able" to meet
service needs in 2002 rises to 8 percent.
Figure 8 below illustrates the downward shift in cities' expectations for
2002.
Figure 8. Percentage of Cities that View Themselves as "Less Able' or "Better
Able" to Meet Their Financial Needs, 1995 -2000 (population growth 5 to 10
percent) [n =136]
(5) Better Able
(4) Somewhat Bcme Able
(3) Little or No Change
(2) Somewhat Less Able
(1) Less Able
0%
10°/ 20% 30% 40% 50% 60% 70%
PESSIMISM ALSO RISES IN LOW /ND GROWTH CITIES
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 127—
Over half of cities with less than five percent population growth from 1995
to 2000 experienced improvement in their financial situation in 2001. The
figure below shows that almost 46 percent expect to see "little of no
change" in their financial picture in 2002. The number of cities that expect
to be "somewhat less able" to meet community service needs in 2002
jumps from 9 percent for 2000 -01 to over 27 percent for 2001 -02 (see
Figure 9).
Figure 9. Percentage of Cities that View Themselves as "Less Able" or "Better
Able" to Meet Their Financial Needs, 1995 -2000 (population growth under 5
percent) [n =33]-
o%
(5) Better Able 91%
(4) Somewhat Better Able �4L %
(3) Little or No Cbune_c 33.3
yam, I
(2) SomeWbat Less Able 293
6.1%
(1) Less Able
0 °/ 10% 20% 30% 40% 50% 60% 70% 80%
13 2001 Compared with 2000 ■2002 Compared with 2001
HIGH GROWTH CITIES WARY OF FISCAL TRENDS
Cities with population growth above 10 percent from 1995 to 2000 show
declining confidence in their fiscal prospects for 2002. The percentage of
cities that expect to be "somewhat better able" to meet financial needs
drops from almost 48 percent for 2000 -01 to about 31 percent for 2001 -02.
The figure below shows that twice as many cities predict being "somewhat
less able' to meet financial needs in 2001 -02 as report being "somewhat
less able" to meet financial needs in 2000 -01 (see Figure 10).
28 I SHIFTS IN CITIES' PERCEPTION OF THEIR FISCAL CONDITIONS _
Figure 10. Percentage of Cities that View Themselves as "Less Able" or "Better
Able" to Meet Their Financial Needs, 1995 -2000 (population growth over 10
percent) [n =61
(5) Better Able 1.6%
(4) Somewhat Better Able 47.5% ' 31J%
(3) Little or No Change 393% 37Ax
(2) Somewhat Less Able - 13.1x- 26.2%
(])Less Able 33%
0% 10% 20% 30% 40% 50% 60% 70% 80%
02001 Compared with 2000 ■ 2002 Compared with 2001
III. Loss OF LOCAL
CONTROL OF FISCAL
DECISIONS
Prior to 1978, cities enjoyed relative autonomy from state interference in
their local fiscal affairs. The passage of Proposition 13 and a number of
other statewide policy developments have significantly eroded that
autonomy.
This chapter explores some of those developments. The Institute asked
cities to report an the impacts of the shifts of property tax revenues to fund
education in the early 1990s (known as the ERAF shift) and unfunded
mandates.
IMPACT OF THE EDUCATION REVENUE
AUGMENTATION FUND (ERAF) TRANSFER
In 1992, California found itself in a serious deficit position To meet its
obligations to fund education, the state enacted legislation that shifted
partial financial responsibility for funding education to local agencies
(cities, counties and special districts) under Proposition 98. The state did
this by shifting the allocation of local property tax revenues from local
agencies in "educational revenue augmentation funds" (ERAFs) and
directing that specified amounts of local agency property taxes be
deposited into these funds to support schools.
In fiscal yew 2000 -01, the ERAF shift diverted $4.2 billion from local
agencies and the citizens those entities serve. Since its inception, the
ERAF shift has deprived local agencies of more than $30 billion. Counties
have home some 76 percent of this shift; cities have bome 16 percent The
Institute's survey asked California cities w assess the current impact of the
ERAF transfer on their fiscal health. Responding cities indicated the
degree of impact on a range from "no impact" to "grave impact." Figure
11 summarizes the responses of cities statewide.
Impact of the Education Revenue
Augmentation Fund (ERAF)
Transfer ..... ........_ ................ ...... 29
The Unfunded Mandates Issue.... 35
The Impact of Uofuoded Mandates
oa City Finances .... _ ....... _........... 36
Cities of All Sizes Experience
Impact......... .. .................... _.._..... 38
30 1 Loss of LOCAL CONTROL of FISCAL DECISIONS
Statewide, 90 percent of responding cities indicated that the ERAF shift
had at least an "important impact' on their fiscal health. Some 65 percent
described the impact as either "major" or "grave 11
Figure 11. Impact of ERAF Transfer
[n =265]
50% 44.2%
40%-
30% 24.6% 21.2%
20%
8.5
10% 1.5%
0%
No Impact Minor Important Major Grave
Impact Impact Impact Impact
No significant state and local fiscal reform took place in 2001. The following
measures were considered but not enacted . prior to passage of the 2001 -02
California budget:
• AB (Ashburn) -would have limited the amount of local agency revenues
shifted to the Educational Revenue Augmentation Fund (ERAF) at the
2000 -01 level beginning in fiscal year 2001-01
• AB 100 (Simnian) would have phased in a cap on growth oflocal agency
property tax revenues shifted to ERAF over a three -year period, eventually
limiting growth at the fiscal year 2003 -04 level.
• AB 859 (Wiggins) - would have also provided a phased in cap on the
amount of property revenues shined annually to ERAF by local
agencies to an unspecified revenue shift limit.
• ACA 10 (Cogdill) - would have amended the state constitution to provide
a phased -in cap on the amount of property tax revenues shifted annually to
ERAF by local agencies. The phased cap would have gradually
eliminated the ERAF transfer by 2010.
• SB 536 (Oiler) - would have provided ERAF relief in the same manner as
AB 3.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT I 37
REGIONAL IMPACT
Figure 12, on the next page, shows the differences across regions, with the
shift seeming to impact Northern and Central California most severely.
• Central Valley. Among Central Valley cities, 92.8 percent
In February .2001, the
reported the impact as "important" or more severe, with 64.2
California Supreme Court
percent calling the impact "major' or "grave."
let stand a ruling that
rejected local agencies'
• North and Central Coast Of the North and Central Coast
claims that the FRAY
cities, 93.4 percent ranked the impact of ERAF as "important"
shift was constitutionally
or greater, with 66.7 percent reporting the impact as "major" or
infirm as a "shift of
" gave."
financial responsibility"
to local agencies to fiord
the state's obligation to
• Bay Area. San Francisco Bay Area cities rated the impact of
education.' Local
ERAF as "important" or greater in 96.7 percent of their
agencies argued- -with the
responses, and "major" or "grave" in 68.4 percent
support of the Howard
Jarvis Taxpayers
• Southern California Metro. Of the cities in the Southern
Association- -that the
California Metro region, 84.4 percent said the impact of ERAF
ERAF shift constituted a
was "important" or greater, while 67.5 percent described the
reimbursable state
impact as "major' or "grave."
mandated program.
• Southern California Outlying. Cities in the Southern
California Outlying region ranked the impact of ERAF as
"important" or greater in 82.8 percent of their responses, and
"major" or "grave" in 55.2 percent.
See Cowry of Sonoma v. Commission on State Mandmrs, Sa Cel. App. 41h 1264, 101 Cal. Rpv. 2d
784 (1st Dist. Nov=m 21,2000),m denied Fcbtuxy 28, 2001.
32 I Loss oe Loin. Corvrxoc oe Fisc.,c Deusions
Despite the reports of more severe ERAF shift impacts in Northern
and Central California, the survey results indicate that the ERAF
transfer has had a sizeable negative impact on the fiscal health of
cities throughout the state, regardless of region.
Figure 12. Impact of ERAF Shift (by region)
so%
45%
40%
35%
30%
25
. 20%
--
15
10%
—
5%
—
0%
mportant
No Impact
Minor Impact
Major Impact
Grave Impact
Impact
OCentral Valley
0.0%
7.1%
28.6%
44.6%
19.6%
(n-56)
ONorth & Central Coast
0.0°/
6.7%
26.7%
36.7%
30.0%
(n =30)
O San Francisco Bay Area
0.0%
3.3%
28.3%
46.7%
21.7%
(n=60)
O Southem California Metro
3.6%
12.0%
16.9%
45.8%
21.7%
(n=83)
■ Southern California Outlying
3.4%
13.8%
27.6%
41.4%
13.8%
(n =29)
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 39
ERAF AND CITY SIZE
The loss of property tax revenues resulting from the ERAF transfer was felt
by all cities, large and small. As Figure 13 shows, only a handful of cities
of any size indicated that the ERAF transfer had "no impact" on their fiscal
health. Some responses in this category may have come from recently
incorporated cities that receive very little property tax. Interestingly, large
cities were the most consistent in reporting that ERAF has had a "major" or
"grave" impact.
Figure 13. Impact of ERAF
Shift (by city size)
70%
60%
50%
40%
30%
20%
-
10%
0%
Grave Impact Major Impact
important
Minor Impact
No Impact
Impact
0 Small (under 50,000)
18.5%
40.7%
29.6%
9.3%
1.2%
(n =162)
0Medium(50,000 to 200,000)
24.4%
48.9%
16.7%
8.9%
1.1%
(n=90)
G Large (over 200,000)
37.5%
62.5%
0.0%
0.0%
0.0%
(n =8)
34 1 Loss oe Loce, Conraol or Fisug Dacis�ons
By the same token, Figure 14 provides a breakdown of responses according
to population growth categories. Once again, most cities report that the
ERAF transfer had a negative impact on their fiscal health. In terms of
more growth versus less growth, those cities with less growth reported
more severe impacts associated with the ERAF shift. This correlation
presents interesting questions, inasmuch as some studies have suggested
that residential growth does not pay for itself- -before or after ERAFP In
any event, those communities that are either built out or are otherwise non-
growing perceive a more severe impact associated with the ERAF shift.
Figure 14.
Impact of ERAF Shift by Population Growth Rate [n =136]
609%
i
50-11
309%
—
Q
20%
+,
10%
0%
—
Gmve.hnpam
Major Impact
Imp flat
Minor Impact
No Impact
GNo Growth (under l %)
33.3%
33.3%
22.2%
11.19/b
0.0%
O Slow wth(1 to 5 0%)
19.7%
39.4%
32.4%
8.5%
0.0%
M Average growth (6 to 140/6)
22.1%
50.0%
1211%
1.4%
1.5%
M ilighgrowth(l5 %ormore)
15.0%
40.0°/
27.5%
15.0%
2.5%
Paal G. lxw am Elisa Barb., "City Compeunonfa Sales T.: Symptomda lags Pmblcm ?,"
Wuu —City Magazine, N.vcmbv 1999.
Id.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 13-
THE UNFUNDED MANDATES ISSUE
h1 1979, the voters responded to the financial consequences of Proposition
13's reduction of property tax revenues by adding an important provision
to California's constitution that limited the state's power to impose new
programs on local agencies without providing adequate funding to support
them. Proposition 4 requires that, whenever the legislature or any state
agency mandates a new program or higher level of service on any local
agency, the state most provide a subvention of funds to reimburse local
agencies for the costs of such a program or increased level of servicz.'
• "Costs mandated by the state" means any increased costs
which a local agency is required to incur as a result of any
statute that mandates a new program or a higber level of
service of an existing program!
• The courts have limited the definition of "mandate" by
determining that the state most reimburse only for costs of
mandated programs which provide services to the public or
which impose unique requirements on local agencies. There is
no reimbursement for laws that apply generally to all state
residents or entities.'
Local agencies that attempt to recover "costs mandated by the state" face
other obstacles as well.,
• Local agencies cannot recover costs to implement a state
statute or executive order that implements a federal law or
regulation unless the costs imposed by the state exceed those
imposed by the federal government.
Local agencies cannot obtain reimbursement for a state
mandate if they have the authority to levy service charges,
fees, or assessments to pay for the mandated program or
increased level of service.
'no survey Baked mica to liar in ordRofimportance nnranded sum mandams ma lotve the steam
impart on dots .]feed.
' See Cal. Cons. tut %1118, 16.
`See Cal. Gov't Code § 17514.
'see co., of Los A.,av v. Smie of Calf rnia, 43 Col. M 46, 233 Cal. Rpn. 38 (1987).
' See Co]. Gov't Cade § 17556.
Responding cities expressed
concern over a wide variety
of state and federal r
programs requiringh
expenditure of local funds.'
Those mentioned most
frequently include:
• The ERAF shift;
• Binding arbitration;
• Enbanced public
safety retirement'
benefits;
• Water and sewer
requirements; and
• Animal control
aws.
36 1 Loss or Lou, CoRt 0.0L or FIs CJ1, Decisions
Of course, these legislative and judicial exceptions to the mandate
reimbursement requirement merely broaden the scope of the term
"unfunded mandate."
Many local agencies perceive the claims process as too cumbersome to be
worthwhile. An interesting issue that surfaced during this research is the
extent to which the perception of the process as cumbersome may deter
cities from pursuing mandate claims.
THE IMPACT OF UNFUNDED MANDATES ON
CITY FINANCES
Figure 15 shows that over 60 percent of responding cities describe the
impact of unfunded mandates on local finances as "important' (37.8
percent), "major" (20.1 percent) or "grave" (2.8 percent).
REGIONAL IMPACT
.• Central Valley Cities Hardest Hit Among Central Valley
cities, 63.6 percent rank the impact of unfunded mandates as
"important" (52.7 percent) or "major" (10.9 percent) (see
Figure 15).
• Strong Impact on Southern California Metro Cities. Over
62 percent of Southern California Metro cities rate the impact
of unfunded mandates as "important' (30 percent), `major"
(28.8 percent), or "gave" (3.8 percent).
• Unfunded Mandates Concern in Bay Area Cities. Sixty
percent of Bay Area cities describe the impact of unfunded
mandates as "important' (38.3 percent) or "major" (21.7
percent).
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 137
Figure 15. Impact
of Unfunded Mandates on City Finances (by region)
60%
50%
40%
30%
20%
- --
10%
0%
No Impact
Minor Impact
Irn ant
Pa
Major Impact
Grave Impact
OCentral Valley
0.0%
36.4%
52.7%
10.9%
0.0%
(n =55)
ONorth &Central Coast
3.2%
38.7%
32.3%
16.1%
9.7%
(n =31)
OSFHay Area
1.7%
38.3%
38.3%
21.7%
0.0%
(n =60)
O Southern California Metro
1.3%
36.3%
30.0%
28.8%
3.8%
(n=80)
S Southern California Outlying
7.1%
39.3%
35.7%
14.3%
3.6%
(n =28)
OCalifornla Statewide
2.0%
37.4%
37.8%
20.1%
2.8%
(n =254)
CITIES OF ALL SIZES EXPERIENCE IMPACT
38 I Loss of LOCAL CONTROL of FISCAL Decisions
Regardless of size, nearly all cities feel the impact of unfunded mandates.
Although larger cities report greater impact, over half of all cities in each
size category describe the impact of unfunded mandates as "important," if
not more severe (see Figure 16).
• Large Cities (Population over 200,000). Seventy-five
percent of large cities rate the impact of unfunded mandates as
"important" (62.5 percent) or "grave" (12.5 percent).
• Medium Cities (Population from 50,000 to 200,000).
Among medium -sized cities, 66.7 percent describe the impact
of unfunded mandates as "important" (39.1 percent), "major"
(25.3 percent), or "grave" (2.3 percent).
• Small Cities (Population under 50,000). Over 56 percent of
small cities say the impact of unfunded mandates is
"important" (35.8 percent), "major' (18.2 percent), or "grave'
(2.5 percent).
Figure
16. Impact of Unfunded
Mandates (by city size)
70
60%
■ Small (under
50,000)
50 %
13Medium (50,000 to
200,000)
40%
❑ Large (over
200,000)
30%
i
20
10%
I
i
0%
Major Grave
Impact Impact
-dE
No Impact
Minor
Impact
Important
impact
Sun]] (under 50,000)
3.1%
40.3%
35.8%
18.2%
2.5%
Medium (50,000 to
0.0%
33.3%
39.1%
25.3%
2.3%
zoo,000)
Large(over 200,000)
0.0".
25.0%
62.5%
0.0%
12.5%
N. COPING STRATEGIES
How do cities cope with the ongoing loss of property tax revenues and the
impact of unfunded mandates? The Institute's survey asked cities whether
they took budget actions to increase or decrease any of the following in the
past three years:
• Taxes
• Fees
• Reserves
• Debt Financing
• Deferred Maintenance Backlog
TAXES
Taxes are funds paid by the public to a public agency for the support of
services that the public values, such as education, parks, roads, and public
safety. Statewide, thirty -one percent of city revenues come from taxes.' Taxes ..................... 39
Fees: Widespread Increases
One strategy cities may employ when confronted by fiscal constraints is to Necessary .... ._ ........................ _.... 43
raise taxes. Most cities responding to the Institute's survey chose not to
pursue this option. Statewide, only 31 percent stated that they increased Reserves: Planning for a Rainy Day
taxes in the past three years (see Figure 17). ................................... _ ...... _._.... 44
Debt Financing ........ _ ... _ ...... _... 46
Deferred Maintenance Backlog:
Progress Being Made ............ _..... 47
Availability of Discredonary
Revenue ........... ............ ........... 49
Califomia S. Caoo-olly, Caiuennunl Reyov. Fvca/ Year 1997 -98.
40 1 COPING STRATEGIES
Figure 17. Percentage of Cities Statewide That Increased or
Reduced Taxes in the Past Three Years [n =216]
').0 D Increased Taxes
® Reduced Taxes
❑ Not Applicable
63.40o
i6 -n
VOTER APPROVAL AND TAXES
The statistics relating to increased taxes may reflect the fact that approval
of new or increased taxes requires voter approval. General taxes- -taxes
imposed for general governmental purposes' -- require a majority approval'
Moreover, the election to approve a general tax must be consolidated with
a regularly scheduled general election for members of the governing body
of the local agency.'
Special taxes - -taxes imposed for specific purposes, including taxes
imposed for specific purposes and placed into a general fund' -- require a
two-thirds vote of approval.` While a city may provide even - handed and
objective informational material relating to a proposed tax or tax increase,
the city may not use public resources to advocate public approval of the tax
measure.
Co., art. Mile, § 1(a}
'See Cal. Cons, a X111C, § 2(b).
`See CaL Const on XInC, § 2(b) (euept in aces of emergency declared by unannnous vine of We
governing body).
' See Cal. Conn ea XInC, § 1(d).
` See Cal. Corn, art XI11C, § 2(b). See uW U. Corm. art. XIIL . § 4.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT I H
Thus, those agencies that increased their taxes did so with the support of
their communities.
REGIONAL IMPACT
• Central Valley. Central Valley cities followed the Bay Area
with 29.3 percent reporting that they increased taxes, while
less than 3 percent reduced them (see Figure 18).
• North and Central Coast Cities Require Taxes. In the
North and Central Coast region, 36 percent of responding cities
said they increased taxes and 8 percent reduced them.
• Bay Area Cities Also Find Increases Necessary. Thirty -four
percent of responding San Francisco Bay Area cities reported
that they increased taxes while less than 2 percent reduced
them.
• Southern California Metro Mostly Stable. In the Southern
California Metro region, 70 percent of cities took no action on
taxes, while over 25 percent increased taxes and 4.3 percent
ieduced them
• Southern California Outlying Most Active. Among
responding cities from the Southern California Outlying
region, 37 percent raised taxes within the past three years and
18.5 percent reduced them.
Figure 18. Percentage. of Cities by Region that Increased
or Reduced Taxes in thePast Three Years
42 1 COPING STRATEGIES
In early June of 2001, a court ruling placed a potential cloud on some local agency taxes.' The California
Supreme Court ruled that taxes adopted in violation of Proposition 62's voter approval requirements are
subject to legal challenge each time the tax is collected. Cities had argued that a three -year time limit for
tiling suit applied, calculated from the date the taxwas originally enacted.
The decision was the result of a lawsuit filed by the Howard Jarvis Taxpayers Association (H1TA) against
the City of La Habra. HJTA sought to stop the city from collecting a utility users tax that HJTA contended
violated the voter approval requirements of Proposition 62. Proposition 62 was a statutory initiative enacted
in 1986 that required local agencies to submit new or increased general taxes to the voters.
La Habra imposed its tax in 1993 in reliance upon appellate court mines that declared Proposition 62's voter
approval requirement unconstitutional.' However, in 1995 the California Supreme Court revived the voter
approval requirement and found that Proposition b2 is constitutional.' In 1996, the Howard Jarvis Taxpayers
Association challenged La Habra's utility users tax, demanding that the city cease collecting the tax until it
had been approved by a majority of voters.
This decision is particularly frustrating to city officials given that one of the Legislature's purported
justifications for the ERAF shift was that cities could make up lost property tax revenues with this very kind
oflocal general tax.' -
' See HoxnrdJorvu Ta.yayers Association v. City ofLer Habm, 25 Cal. 46 809,107 Cal. Rpa. 2d 369
0ve. 4, 2001.
t See, e.g. Ciry ofWoodlake e. Logan, 230 CO. App, 3d 1058, 282 Cal. Rpm 24 (1991).
See Sanm Chec County Local Transportation Autboriry v. Guardino, 11 CO. 4th 220,45 Cal, RM.
2d 207(1995).
Central
Valley
(n=41)
North/Central
Coast (n=25)
San
Francisco
Bay Area
(n =53)
Southern
California
Metro
(n =70)
Southern
California
Outlying
(n =27)
Increased Taxes
29.3%
36.0%
34.0%
25.7%
37.0%
Reduced Taxes
2.4%
8.0%
1.9%
4.3%
18.5%
Not Applicable
68.3 %
56.0 %
64.2%
70.0%
In early June of 2001, a court ruling placed a potential cloud on some local agency taxes.' The California
Supreme Court ruled that taxes adopted in violation of Proposition 62's voter approval requirements are
subject to legal challenge each time the tax is collected. Cities had argued that a three -year time limit for
tiling suit applied, calculated from the date the taxwas originally enacted.
The decision was the result of a lawsuit filed by the Howard Jarvis Taxpayers Association (H1TA) against
the City of La Habra. HJTA sought to stop the city from collecting a utility users tax that HJTA contended
violated the voter approval requirements of Proposition 62. Proposition 62 was a statutory initiative enacted
in 1986 that required local agencies to submit new or increased general taxes to the voters.
La Habra imposed its tax in 1993 in reliance upon appellate court mines that declared Proposition 62's voter
approval requirement unconstitutional.' However, in 1995 the California Supreme Court revived the voter
approval requirement and found that Proposition b2 is constitutional.' In 1996, the Howard Jarvis Taxpayers
Association challenged La Habra's utility users tax, demanding that the city cease collecting the tax until it
had been approved by a majority of voters.
This decision is particularly frustrating to city officials given that one of the Legislature's purported
justifications for the ERAF shift was that cities could make up lost property tax revenues with this very kind
oflocal general tax.' -
' See HoxnrdJorvu Ta.yayers Association v. City ofLer Habm, 25 Cal. 46 809,107 Cal. Rpa. 2d 369
0ve. 4, 2001.
t See, e.g. Ciry ofWoodlake e. Logan, 230 CO. App, 3d 1058, 282 Cal. Rpm 24 (1991).
See Sanm Chec County Local Transportation Autboriry v. Guardino, 11 CO. 4th 220,45 Cal, RM.
2d 207(1995).
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 143
Proposition 13. Enacted by the voters in 1978, Proposition 13 limits the muxienom amount of any ad
valorem tax on real property .10 Proposition 13 also requires a two- thirds voter approval for special
taxes."
Proposition 62. Enacted as a statutory initiative in 1986, Proposition 62 requires majority voter
approval for general taxes." Proposition 62 also prohibits local transaction taxes or sales taxes on the
sale of real property within the city, county, or district." -
Proposition 218. Proposition 218 moved the majority voter approval requirement for general taxes to
the state constitution. in 1996. It also made other changes in the law relating to taxes and property-
related fees and assessments."
FEES: WIDESPREAD INCREASES NECESSARY
Cities statewide and in each region showed an inclination to increase fees.
Statewide, 72 percent of responding cities found it necessary to increase
fees in the past three years. Only 1.3 percent reduced them (see Figure 19).
Figure 19. Percentage of Cities Statewide that Increased or
Reduced Fees in the Past Three Years [n =236]
REGIONAL DIFFERENCES
10 See CaL Cave• m X[IIA § 1(e).
"See U. Cont. an. MIIA, § 4.
"See U. Gov't Code §§ 53]20 erseq.
See Cd. Gov't Code 153725. A eariauan on door «eviction %alm contained in Proposition 13, sm
Cal. Cones m XIIIA, 14. However, tlat section applies only to special p , See Cry aM Couno, f
San Franai.. v. Farrell. 32 Cal. 3d 47,184 Cal. R,m. 713 (1982).
14 See GI. Const arse. MIIC and XIIIB.
44 1 COPING STRATEGIES
• Fee Reductions Rare. Among cities statewide, no city in the
San Francisco Bay Area or Southern California region reported
reducing fees (see Figure 20).
• Where Did Fee Reductions Take Place? Those cities that
did reduce fees were in the Central Valley (2.1 percent) and
North and Central Coast regions (7.4 percent).
• Increases Ranked by Region- Among the regions, the San
Francisco Bay Area had the highest percentage of cities that
increased fees (76.7 percent), followed by the Central Valley
(75 percent), Southern California Outlying (71.4 percent),
North and Cenral Coast (70.4) percent, and Southern
California Metro (67.1 percent) regions.
Figure 20. Percentage of Cities by Region that Increased
or Reduced Fees in the Past Three Years
San
Southern
Southern
Central
Francisco
California
California
Valley
North/Central
Bay Area
Metro
Outlying
(n=48)
Coast (n=27)
(n =60)
(n =73)
(n =28)
Increased Fees
75.0%
70.4%
76.7%
67.1%
71.4%
Reduced Fees
2.1%
7.4%
0.0%
1
0.0%
0.0%
Not Applicable
22.9%
22.2%
1 23.3%
32.9 %
28.6%
RESERVES: PLANNING FOR A RAINY DAY
Budgetary reserves enable cities and their communities to protect
themselves from:
• revenue shortfalls that might result from an economic
slowdown;
• other unforeseen events; or
extraordinary expenses.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT I LT
The majority of responding cities -over 66 percent -- reported that they
increased reserves over the past three years, while less than 27 percent of
cities reduced reserves (see Figure 21).
Figure 21. Percentage of Cities Statewide that
increased or Reduced Reserves in the Past Three Years
[n =243]
6 6 �o
267% ❑ Increased Reserves
E3 Reduced Reserves
❑ Not Applicable
66.7
REGIONAL IMPACT
California's recent period of prosperity may have given many cities an
opportunity to build reserves. However, not all cities shared this
opportunity. Many cities in the Southern California Outlying and Central
Valley regions report reduced reserves (see Figure 22).
• Depletion of Reserves Highest in Southern California
Outlying Areas. Over 39 percent of Southern California
Outlying cities reported that they reduced reserves.
Nevertheless, over 57 percent reported increased reserves.
• Reduced Reserves Also Common in Central Valley.
Among Central Valley cities, almost 40 percent reported that
they reduced reserves in the past three years. However, not all
the news was bad -- almost 55 percent reported increases.
• Reserves Up in North and Central Coast About 78 percent
of North and Central Coast cities reported increased reserves,
while almost 15 percent reported no change.
• Most, But Not All, Bay Area Cities Report Increases.
Almost 75 percent reported increased reserves, while over 20
percent said reserves went down.
• Southern California Metro Region Increases Reserves,
With Exceptions. Overall, nearly 70 percent of Southern
46 I COPING STRATEGIES
California Metro cities reported increased reserves, while 25
percent said reserves declined.
Figure 22. Percentage of Cities by Region that Increased
'.' or Reduced Reserves in the Past Three Years
San
Southern
Southern
Central
Francisco
California
California
Valley
North/Central
Bay Area
Metro
Outlying
(n=53)
Coast (n=27)
(n =59)
(n =76)
(n =28)
Increased Reserves
54.7%
77.8%
74.6%
68.4%
57.1%
Reduced Reserves
39.6%
7.4%
20.3%
25.0%
39.3%
Not Applicable
5.7%
14.8%
5.1%
DEBT FINANCING
Over half of responding cities increased debt financing. Thirty-seven
percent made no change, and only a handful (8.5 percent) reduced debt
financing (see Figure 23).
Figure 23. Percentage of Cities Statewide that Increased
or Reduced Budget for Debt Financing in the Past Three
Years [n =235]
REGIONAL DIFFERENCES
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 14T
In general, regional responses track the statewide results. Debt financing
levels increased or stayed the same. Few cities repotted reducing them.
Highest Percentage Increase in Central Valley. Over 67
percent of Cenral Valley cities increased debt financing, as
opposed to over 6 percent that reduced it (see Figure 24).
• Lowest Percentage Increase in Southern California Metro
Cities. Almost 43 percent of Southern California Metro cities
increased debt financing, while 48 percent took no action.
Figure 24. Percentage of Cities by Region that Increased
'. or Reduced Debt Financing in the Past Three Years
San
Southern
Central
Francisco
California
Southern
Valley
North/Central
Bay Area
Metro
Califomia
(n=49)
Coast (n =27)
(n =56)
(n=75)
Outlying (n =28)
Increased Debt Financing
67.3%
48.1%
58.9%
42.7%
60.7%
Reduced Debt Financing
6.1%
11.1%
8.9%
9.3%
7.1%
Not Applicable
26.5%
40.7%
32.1%
48.0%
32.1%
DEFERRED MAINTENANCE BACKLOG:
PROGRESS BEING MADE
Over half of responding cities indicate that they have increased their budget
for reducing backlogged deferred maintenance projects during the past
three years. "Deferred maintenance' means the deferral of spending to
maintain reads, buildings, equipment and other physical assets in response
to budgetary stress. The ERAF shift provides an example of a fiscal
trauma that forced many cities to delay important maintenance projects in
order to meet current service demands in their communities.
The Institute's survey asked cities to identify budget actions they have
taken with respect to deferred maintenance backlogs.
48 I COPING STRATEGIES
• Maintenance Budgets Increase. Over 54 percent of cities
said that they have increased funding to reduce deferred
maintenance backlogs over the past time years (see Figure 25).
• Other Cities Cut Back, or Hold Steady. Statewide, 25
percent of responding cities reduced funds budgeted for
deferred maintenance. Another 21 percent took no budget
action on deferred maintenance.
Figure 25. Percentage of Cities Statewide that
Increased or Reduced Budget for Deferred
Maintenance [0 =235]
REGIONAL IMPACT
• Budgets Up In Central Valley. Over 67 percent of Central
Valley cities reported budget increases to address deferred
maintenance. About 14 percent reduced thew budgets and over
18 percent took no action (see Figure 26).
• Higher Percentage of Budget Reductions in North/Central
Coast. Many North and Central Coast cities (40.7 percent)
reported increased funding for deferred maintenance, but a
considerable number (37 percent) reported cuts. The rest (22.2
percent) took no action.
• Bay Area Mixed. Among San Francisco Bay Area cities,
about 49 percent said they increased deferred maintenance
budgets, but almost 32 percent reduced them. The rest (19.3
percent) took no action.
• Southern California Cities Boost Budgets. More than 67
percent of Southern California Outlying cities reported
increased funding for deferred maintenance. Almost 11
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT I 49
percent reported reduced funding. Of Southern California
Metro cities, 47.3 percent reported increased funding, while
over 28 percent reported reduced funding and 24.3 percent
took no action.
Figure 26. Percentage of Cities by Region that Increased
or Reduced Budget for Deferred Maintenance in the Past Three Years
Southern
Central
San Francisco
Southern
California
Valley
North/Central
Bay Area
California
Outlying
(n=49)
Coast (n =27)
(n =57)
Metro (n =74)
(n =28)
Increased Deferred
67.3%
40.7%
49.1%
47.3%
67.9%
Maintenance
Reduced Deferred
14.3%
37.0%
31.6%
28.4%
10.7%
Maintenance
Not Applicable
18.4%
22.2%
19.3%
24.3%
AVAILABILITY OF DISCRETIONARY
REVENUE
Statewide, cities report an increase in the availability of discretionary
revenue in the past three years. Discretionary revenue provides funds that
local agencies may spend on local priorities as they see fit. Restricted
funds, on the other hand, are earmarked for a specific use by state law,
bond covenant, or grant requirement For example, California requires that
local agencies use gas tax revenue only for street maintenance or
construction.
Increased reliance on restricted revenues limits the ability of local agencies
to respond to changing conditions and community needs. A growing
percentage of restricted revenue in a local agency budget may indicate
over - dependence on external revenues and future inability to maintain
service levels.
50 I COPING STRATEGIES
Over 54 percent of cities reported an increase in the amount of
discretionary funds. Thirty -two percent reported that levels of
discretionary finding have declined and almost 14 percent reported no
change (see Figure 27).
REGIONAL IMPACT
• Highest Percentages of Discretionary Funds. The
Nordt/Central Coast and San Francisco Bay Area boasted the
highest percentages of cities reporting increases in
discretionary funds at or above 61 percent each (see Figure
28).
Lowest Percentages of Discretionary Funds. Central Valley
cities fared less well than other cities statewide. Over 46
percent reported increases in discretionary fonds and about 39
percent reported decreases. Over 14 percent reported no
change.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 15_I
Figure 28. Percentage of Cities by Region Reporting Chanees in Amount of
Discretionary Funds Since 1997 as Increased, Decreased or No Change
San Francisco
Southern
Southern
Central
North/Central
Bay Area
California
California
Valley (n=56)
Coast (n =31)
(n=59)
Metro (n =83)
Outlying (n =28)
Increased
46.4%
61.3%
61.0%
55.4%
60.7%
Discretionary
Funds
Decreased
39.3%
32.3%
20.3%
25.3%
39.3%
Discretionary
Funds
No Change
14.3%
6.5%
18.6%
19.3%
0.0%
V. CHANGES IN SERVICE
LEVELS
The majority of cities report that non - public safety service levels increased
since 1997. Less than 20 percent report decreased non- public safety
service levels. Over 25 percent reported that non - public safety service
levels stayed the same (see Figure 29).
Figure 29. Percentage of Cities Statewide Reporting
Changes in Non - Public Safety Service Levels Since 1997
as increased, Decreased or No Change [n =258]
25.2%
❑ Increased
® Decreased
❑ No Change
18.6 % 56.2%
Reliance on Service Charges ....... 54
REGIONAL IMPACT
• Bigh Percentage of Bay Area Cities Report Increases. Over
75 percent of San Francisco Bay Area cities reported increases
in non- public safety service levels (see Figure 30).
• Increases Much Weaker in Southern California Outlying
Cities. Southern California Outlying cities were evenly split —
37 .9 percent reported increased service levels, and 37.9 percent
reported decreased service levels.
• Central Valley Also Behind Other Regions. Less than 40
percent of Central Valley cities reported increased non - public
safety service levels. Over 50 percent of cities in the Bay
Area, North and Central Coast and Southern California Metro
regions reported increases in service levels.
54 I CHANCES IN SERVICE LEVELS
Figure 30. Regional Changes in Non - Public Safety Service Levels Since 1997
Southern California
Outlying (n-29)
Southern California Metro
(u =83)
San Francisco Bay Area
(n =57)
Nor0dCennal Coast
(n =31)
Cennal Valley (n =58)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
RELIANCE ON SERVICE CHARGES
Statewide, reliance on service charges to fund non - public safety services
has increased in just under half of responding cities. A similar percentage
reports no change. Only a handful report decreased reliance on service
charges.
• Reliance Increased or Stayed The Same for Most Cities.
Over 47 percent of cities reported that reliance on service
charges to fund non - public safety service has increased Over
48 percent reported no change in reliance on service charges
(see Figure 31).
• Very Few Report Declining Reliance. Less than 5 percent
indicated that reliance on service charges has declined since
1997.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 15.5
Figure 31. Percentage of Cities Statewide Reporting
Changes in Reliance on Service Charges to Fund Non - Public
Safety Services Since 1997 as Increased, Decreased or No
Change [n=258]
REGIONAL IMPACT
• Bay Area Cities Report Increased Reliance. Among Bay
Area cities, 61.7 percent reported increased reliance on service
charges, and 36.7 percent reported no change (see Figure 32).
• Reliance on Service Charges Increases in South. Fifty -nine
percent of Southern California Outlying cities reported
increased reliance on service charges. Thirty-five percent
reported no change.
Figure 32. Regional Changes in Reliance on Service Charges
6'9%
Southern California
Outlying (n =29)
1158.6%1 134.5%F.�
Southern Califomia
4'91
=34.6 % 5 % —�
Metro (n=8])
L7%
San Francisco Bay Area
�%
61 36.7 1 -=
O 1
(.=60)
0)
1,33
North/Central Coast
�4L9 %, 54s %0
(n -31)
5.3 %1
Central Valley (n =57)
47.4 % 1 47.4%
I�
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
13 Increased ®Decreased ❑Nc Change
VI. SALES TAX
The sales and use tax is the second largest tax levied in California and is
assessed at both the state and local levels. In 1999 -2000, California sales
and use tax revenues totaled about S32 billion, with about 75 percent going
to the state and 25 percent to localities. The sales and use tax comprises,
on average, about one -third of general purpose city tax revenues.'
Cities in all regions have increased revenues through investment in
agencies that promote economic development. The recession of the 1990s
prompted many cities to fund efforts to attract new businesses and keep
existing ones. With the current recession likely to persist well into 2002,
declines in sales in may increase pressure on cities to attract new
investment. Development of new sales in sources would acquire greater
urgency in the event of further state diversion of other local revenues.
WHAT IS THE SALES AND USE TAX?
The sales tax is collected by retailers selling tangible personal property in
California, such as clothing, household furnishings, appliances, and motor
vehicles. Sales tax constitutes most of the revenues raised by the sales and
What is the Sales and Use Tax?._ 57
use tax. Sales tax is collected and remitted by sellers to the California State
Board of Equalization. The use tax is imposed on the users of a product
A vital Revenue Soufcc ............ 57
purchased out of state but brought into California for use (such as a mail
order item from another state).'
Sales Tax Revenue a Priority for
Large aad Small Cities Alike....... SS
A VITAL REVENUE SOURCE
Sales Tax Important in All Regions,
Especially Southern California ... 60
Large majorities of responding cities, regardless of size or region, report Sales Tax and the Interne........... 62
that increasing sales tax revenue is a high priority. The responses illustrate
how important sales tax revenue has become as the continuing ERAF Encouraging Economic
property tax shift and the growing burden of unfimded mandates constrict Development .................. _.._....... 62
city finances.
Many Programs Launched Su to
10 Years Ago ............................... 63
The Institute's survey asked cities to identify, on a scale from 1 to 5, to
what extent the goal of increasing sales in revenue was a priority for them. Impact of City Investment in
Economic Development ............... 63
'Sian of California, lcgidmt Amlyn's Ofnca, Caas,m }T 5}rsmm- A Primer, room, 2001.
'Id.
58 I SALES TAX
The basic combined state and
local sales and use tax rate is
7.25 percent'. Out of this rate,
1.25 percent is allocated to cities
and counties as follows: (1) 0.25
percent to the county in which a
sale occurs to fund
tmnsponation projects, and (2) 1
percent for general purposestu
-
the city in which the sale occurs,
or the county if the sale was in
an unincorporated area.
Special district taxes are
allocated to the appropriate local
district Local agencies may
also levy optional sales and use
taxes. These average 0.67
percent on a statewide basis and
are levied in 24 of California's
58 counties. They `, can. -be
adopted by counties, cities, or
special taxing jurisdictions or
districts. The latter are formed
to fund local programs such as
transportation projects, hospital
services, public libraries, and
schools.
Optional sales and use taxes
require two-thirds voter
approval if the revenues are to
be dedicated to a specific
purpose. A majority vote is
required for an additional
general purpose local sales M.
Statewide, these optional taxes
currently range from 0.125
percent to 1.25 percent'
A rating of
1 means "not a priority"
and a rating of 5
means "high
priority"
• Increased Sales Tax Revenue a High Priority. Over 72
percent of responding cities ranked the goal of increasing sales
tax revenue as a 4 or 5 on a scale of 1 to 5. Almost 40 percent
rated it as a 5, compared with almost 29 percent that rated it 1,
2, or 3 (see Figure 33).
Few Cities Give Sales Tax a Low Priority. Less than 5
percent of cities gave the goal of increasing sales tax revenue
the lowest priority rating. Less than 14 percent gave it the
lowest two ratings.
SALES TAX REVENUE A PRIORITY FOR LARGE AND
SMALL CITIES ALIKE
Large and small cities give a similar priority to increasing sales tax
revenues.
• Small Cities. Almost 66 percent of small cities gave
increasing sales tax revenue the two highest priority ratings
(see Figure 33).
• Medium Cities. Forty-six percent of medium -sized cities
gave increasing sales tax revenue the highest priority rating.
• Large Cities. Seventy -five percent of large cities gave
increasing sales tax revenues the two highest priority rankings.
3 SUCe of Califo no, Board ol'Equalinrion, California Chy and County Sales and Use Tax Renee,
January 2002.
'Sete ofCali(omia, LegislativeAmlyn's Of{ Calfmia's Tax System -A Primer, January2001.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT I SA
Figure
33. Priority of Increasing
Sales Tax Revenue
(by city size)
Statewide (n 260)
41 1
Large
12.5%
15.0%
❑ (2)
(pop.200k +)
Medium
8.8%
1 Nori
6.7 /
1.1%
0.0%
4.6%
(pop. 50 to 200k)
(n =87)
Small
(pop. under 50k)
(n =165)
0%
10% 20%
30% 40% 50%
609/6 70%
80% 90% 100%
Small
(pop. under SOk)
(¢ =165)
Medium
(pop. 50 to 200k)
(n =87)
Large
(pop. 200k+)
(n =8)
Statewide (n =260)
(5) High Priority
36.4%
46.0%
37.5%
39.6%
0(4)Priority
29.1%
36.8%
37.5%
31.9%
D(3)Average Priori
17.6%
10.3 %
12.5%
15.0%
❑ (2)
0.3 %
5.7 %
8.8%
1 Nori
6.7 /
1.1%
0.0%
4.6%
60 I SALES TAX
The 2001 -02 budget package approved by the California legislature
includes a proposed constitutional amendment, ACA 4 (Duna), to
permanently dedicate the sales tax on gasoline to transportation beginning.
in 2003-04. The am= will be submitted for approval by the electorate
on the March 2002 ballot. If approved, 40 percent of these revenues will go
to the State Highway Account, 20 percent to public transit, and 20 percent
each to cities and counties for streets and roads. The revenue stream is
expected to exceed $1 billion in 2001!
A Central Coast city's recent fiscal history illustrates the hazards many
cities face when forced to depend on sales tax revenues. From fiscal year
1991 to fiscal year 1993 the city struggled through California's recession as
sales tax revenues declined Then, the city began to enjoy steady growth in
sales laic revenues beginning in fiscal year 1995, when the local economy
began to recover. Now, the city expects to enter another period of slower
growth if sales tax revenues respond to the predicted recession as they did
in the early 1990s.
SALES TAX IMPORTANT IN ALL REGIONS,
ESPECIALLY SOUTHERN CALIFORNIA
Cities in all regions gave the goal of increasing sales tax revenues high
priority ratings. This is especially true of the Southern California Outlying
region, where over 65 percent gave increasing sales tax the highest priority
rating. In contrast, 30 percent of San Francisco Bay Area cities selected
the highest rating (see Figure 34).
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT I H
Figure 34. Priority of Increasing Sales Tax Revenue
(by region)
41.5%
3.2
3.4°
Southern California
30.0•/.
Outlying
LLII °5�
65.5'' /.
19.4
(n =29)
323•/.
6.1 % 9.8
32.8 % "
�a ,
379•/.
Southern California
Metro
17
(o-2)
San Francisco Bay
Area
(n�0)
Noah and CCnhal.
coati
(n =31)
Central Valley
(n -58)
0% M. 20% 30% 40% 50°1. 60% 70%
80% 90°1.
100%
00) Not a Priority 0(2) Law Priority G(3) Average Priority 0(4) Priority ■(5) High Priority
41.5%
3.2
30.0•/.
19.4
323•/.
15.5• /. j
32.8 % "
�a ,
379•/.
California's rural cities face
a new fiscal challenge with
the Legislature's recent
approval of AB 426.
(Cardona); a measure that
suspends state and local
sales tax on liquefied
petroleum gas for
residential use. The
revenue loss is expected to
'- be about $4 million
statewide. The same bill .
also exempts the purchase
of farm and forestry
machinery from state sales
tax. Fortunately for cities;
this aspect ofthe bill does
not affect the local share of 7.
sales tax revenues.
SALES TAX AND THE INTERNET
California collects sales tax only on sales where the seller has a physical
presence in the state. Many Internet sellers do not have such a presence.
Purchasers of remote -sale taxable items are liable for the use tax, but as a
practical matter this obligation is difficult to enforce. Thus, in many cases,
the purchase of a tangible item through the Internet will not result in
payment of sales tax.
The current volume of Internet sales activity is unknown. Neither is the
portion of Internet transactions that is subject to sales tax, nor the amount
of sakes tax that is not collected. The California Legislative Analyst's
Office has estimated that sales tax revenue losses may reach up to $200
million per year statewide. The amount of lost revenue could grow
substantially as Internet commerce evolves.
An important factor contributing to these losses is the capability of Internet
technology to transform information products from physical to digital
form. Examples of this process include digitization of music, software,
books, and movies. The ability to transform tangible products that are
subject to sales tax into intangible products that are not has serious
implications for both interstate and intrastate sales?
ENCOURAGING ECONOMIC DEVELOPMENT
The pressure to provide essential public services in the face of constraints
on city finances has led cities in some regions to take an active role in
promoting local economic development. Since 1990, over 300 cities have
created or partnered with local agencies dedicated to attracting new
businesses and facilitating the retention and expansion of existing
businesses.` Promoting local economic development adds to sales tax,
transient occupancy tax, and other revenues. Creating local job
opportunities for community residents can also enhance the quality of life
and sense of community in cities where residents most commute long
distances to work
MANY PROGRAMS LAUNCHED SIX TO 10 YEARS AGO
'SweafCenfomiz, Lnislarve Melyss'sORce, California Tat Polity and the Internet, Laday31,
2000.
Collfmaie acwciasion far Loml Ecanamic Davelapmrnt Whim Paper Updme, Decamber 3 1, 2000.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT I H
The Institute's survey asked cities whether they fund a department or
organization, other than a redevelopment agency, that works to attract new
businesses and investment. The survey also asks what year funding began.
Just over half of responding cities (51 percent) indicated that they fund an
economic development agency (see Figure 35).
Figure 35. Percentage of Cities Statewide that Fund an
Economic Development Organization (other than a
redevelopment agency)
[ n =273]
no
49.3% yes
50.7
Sixty -seven percent of the survey respondents that fund economic
development agencies began doing so in the early 1990s. During this
period, cities faced the combined effects of a severe recession and the
ERAF property tax transfer.
IMPACT OF CITY INVESTMENT IN ECONOMIC
DEVELOPMENT
Statewide, almost 90 percent of cities credit city- funded economic
development agencies with increasing city revenues (see Figure 36).
64 I SALES TAX
Figure 36. Percentage of Cities Statewide Reporting Degree To Which
City - Funded Economic Development Agencies Have Increased City
Revenues
32.1% 29.2%
21.9%
10.2% 6.6%
at (n =137)
rA
Little or No Very Large
Increase Increase
Range of Increases in City Revenues Reported by Cities Funding Economic Development
Agencies
Cities that have funded economic development agencies for more than 10
years perceive more success in gaining revenues than those with programs
launched in the past decade. Almost 14 percent of these cities attributed
"very large" increases in city revenue to the efforts of their economic
development agency (see Figure 37).
But an economic development program does not have to be about
increasing local revenues. For example, 10.8 percent of cities that have
funded economic development agencies for more than 10 years reported
achieving "little or no increase' in revenues. Among cities that have
funded an economic development agency for 10 years or less, 11 percent
reported `little or no increase' in revenues.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT I f-g
Figure 37. Extent to Which City- Funded Economic Development
Agencies Have Increased City Revenues
24.3% 24.3% 27%
Little or no Very large
increase increase
Range of Increases in City Revenues Reported by
Cities Funding Economic Development Agencies
REGIONAL PERSPECTIVE
Economic Development Agencies
Funded by City Mote dun 10 Years
(n=37)
Economic Development Agencies
Funded by City 10 years or less
(n=73)
Economic Development Long a Concern for Central
Valley. Compared with other regions, Central Valley cities
reported the highest proportion of city- funded economic
development organizations over 10 years old. Over 45 percent
of cities in the region funded economic development efforts
before 1991 (see Figure 38). However, they reported less
success in securing additional revenues through economic
development than cities in other regions. About 16 percent of
Central Valley cities reported `little or no increase' in
revenues. None reported a `very large increase' in revenues
(see Figure 39).
North/Central Coast Cities Respond to Fiscal Pressure.
Among North and Central Coast cities, 60 percent began
funding an economic development department or organization
between 1991 and 1996 (see Figure 38). Cities in these
regions reported moderate success in gaining new revenue
through economic development. None reported "very large"
revenue increases. At the opposite end of the spectrum, none
reported little or no increase" (see Figure 39).
• Economic Development Pays Off for Bay Area Cities.
Almost 70 percent of San Francisco Bay Area cities began
66 I SALES TAX
funding an economic development department or organization
within the past 10 years (see Figure 38). Compared with cities
in other regions, a higher percentage of cities in the Bay Area
reported positive results from their economic development
efforts. Over 18 percent experienced "very large" increases in
revenue. Nevertheless, the success of these cities did not
extend to all of their neighbors. About 12 percent of Bay Area
cities reported "little or no increase" in revenues (see Figure
39).
Southern California Metro Region Active During
Recession. Over 41 percent of Southem California Metro
cities began funding an economic development department or
organization from 1991 to 1995 (see Figure 38). Few cities in
the region reported receiving "very large" increases in
revenues through their economic development agencies.
Likewise, few indicated experiencing `little or no increase."
Most placed themselves along the middle range of the
continuum of responses (see Figure 39).
Southern California Outlying Cities Have Newer
Programs. Over 52 percent of Southern California Outlying
cities reported funding an economic development department .
or organization within the past five year; (see Figure 38). The
newer agencies have achieved moderate results. The cities that
reported "very large" increases in revenue have agencies that
we ten or more years old. The cities that reported `little or no
increase" in revenue have funded their economic development
agencies for at least five years (see Figure 39).
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 160
Figure 38. Most City- Funded, Non -RDA Economic Development Organizations
Were Created in the Last
10 Years
Southern California
�-
Outlying (n =19)
Southern California Metro
(n=24)
SF Bay Area (n =23)
1
North /Central Coast (n-10)
Central Valley (n =35) '
0% 10% 20% 30% 40%
50% 60% 70% 80% 90% 100%
Southern Southern
Central Valley North /Central
SF Bay Area
California California
(n =75) Coast (v =10)
(n =23)
Metro (n =24) Outlying
❑Createdmore than l0 earsao
45.7%
-10.0%
30.4%
29.2%
31.6%
®Created iv the last 6 to 10, ears
28.6%
60.0%
34.8%
41.7Ye
15.8
❑Ckated in the last 5 years
25.7%
1 30.0%
34.8%
29.2%
52.M
Figure 39. Percentage of Cities By Region Reporting Degree To Which City-
Funded Economic Development Agencies Have Increased City Revenues
Lime or Very
No large
Increase l a:rease
Range of Increases Reported by Cities Funding
Economic Development Agencies
Central Valley (n =38)
North/Central Cc= (a -11)
San Francisco Bay (n =33)
Southern California Metro (n =35)
Southern California Outlying (n =20)
68 I SALES TAX
The majority of cities in all regions report success in gaining new revenues
through investment in economic development. Higher percentages of cities
in the San Francisco Bay Area and the Southern California Outlying region
describe themselves as receiving a stronger return on their investment than
cities in other regions. Central Valley and North and Central Coast cities
perceive fewer revenue benefits flowing from their economic development
initiatives. Nevertheless, the experience of the early 1990s indicates that
California's slowing economy will increase pressure on cities to attract
new investment. The pressure will come in part from a decline in sales tax
and other revenues that are sensitive to economic trends. Additional
pressure will come from the prospect of further state appropriation of local
agency revenues.
LARGER CITIES SEE GREATER BENEFITS
Figure 40 indicates that large cities perceive more benefits from their
investment in economic development than small cities. Fifty percent of
large cities place themselves in the middle of the continuum between the
lowest and highest revenue increases achieved through economic
development Thirty-eight percent report larger revenue increases.
Thirteen percent report smaller increases. Medium -sized cities come out
almost evenly divided in their assessment of revenue increases. About 36
percent report larger increases (27.3 and 9.1 percent at the highest levels).
Thirty -five percent report lower increases (3.6 percent at little or no
increase in revenue, 30.9 percent at the next lowest level). Small cities that
report large increases in revenue (16.2 percent and 5.4 percent at the
highest level) are overshadowed by those that report lesser increases (16.2
percent at little or no increase, 35.1 percent at the next lowest level).
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT d'9
Figure 40. To What Extent Have City- Funded Economic Development
Organizations Increased Revenues in Small, Medium and Large Cities?
Little or Na Very Large
barman, In.
Range of Increases in City Revenues Reported by Cities
Funding Economic Development Agencies
Large - population over 200,000 (ni
Medium - population 50,000 to
200,000(n =55)
Small - population under 50,000
(n =74)
VII. BUDGET TRENDS FOR
CITY SERVICES
The recent period of prosperity that generated budget surpluses for state
government also allowed some cities to restore at least a portion of the
services lost to the ERAF transfer and the recession of the 1990s. Now, with
the future of the California economy in question, cities must again confront
the impact that a recession will have on sales taxes and other revenue sources
that me sensitive to fluctuations in the economy. Another source of
uncertainty for city finances will be the ask of further state diversion of local
agency revenues.
Although the survey responses indicate areas where cities increased or
reduced investment in services, they do not indicate the amount of increases
or reductions. Also, changes in spending levels do not necessarily reflect
improvement or decline in service levels. A city may spend more for a given
service and yet fail to meet community demands or keep up with population
growth.. Thus, the conclusions that can be drawn from the 2001 survey
results are limited. However, they can provide a baseline for comparison in
future years.
POLICE
Consistent with their reports of increased levels of public safety services,
almost 90 percent of responding cities said that they have increased their
budgets for police in the past three years (see Figure 41).
Figure 41. Percentage of Cities Statewide that Increased or
Reduced Budget for Police Services in the Past Three Years
(n =247)
Police ... ............... _.._.._._._...... 71
73
Public Safety Szlzries..._....._._..
74
Public Safety Retirement... ........
77
Impart of Binding Arbitration..._
79
Parks/Recreation _ ...... _ ............
_ 83
Planning .................. _.._...............
85
Delinquency Prevention Programs
......... _ ............................ _ .........
_. 86
Cultural Programs .......................
88
City Dtililies ....... _._._.............
_.. 89
Library Services ....... _.............
__ 91
TRENDS FOR CITY SERVICES
Increases m sales tax
revenues allowed a Central
Valley city to fill positions in `.
the police department that had
been frozen in leaner times.
Nevertheless, expenditures
for existing services continue
to outpace revenues as the
city's population increases.
As a result, the city has had to
dip into its reserves to make
up for the shortfall in
revenue.
REGIONAL IMPACT
• Highest Percentages Found Among Southern California
Outlying Cities. Almost 93 percent of Southern California
Outlying cities increased their budgets for police, while about 7
percent reduced them.
• North and Central Coast: Lowest Percentage Reporting
Increases. Among North and Central Coast cities, almost 87
percent reported increased budgets for police.
• Southern California Metro Cities Report Lowest Percentage
of Reduced Budgets. Almost 3 percent of Southern California
Metro Cities reported reduced budgets for police. Over 89
percent reported increases, while 8 percent took no action (see
Figure 42).
Figure 42. Percentage of Cities by Region that Increased or
Reduced Budget for Police Services in the Past Three Years
Southern California Outlying (n =28)
91.9%
2.7%j 18.
Southern California Metro (n =75)
89.31/6
3.3 %,4.
San Francisco Bay Area (n =61)
91.8% ':.
—
6.7 % 6.
North/Central Coast (n =30)
16.7%
.7% S.
Central Valley (n =53)
��i 88.7 %'
�
0% 20% 40% 60% 80% 100%
17 Increased Budget C9 Reduced Budget C7 Not Applicable
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT r73
FIRE
Although many cities also reported budget increases for the and emergency
medical services (59.4 percent), a large proportion (38.1 percent) reported no
action to increase or decrease funding. Few cities (2.5 percent) reported
reducing budgets for fire services. Most of the cities that reported "not
applicable" receive fire services through other agencies (see Figure 43).
Figure 43. Percentage of Cities that Increased or
Reduced Budget for Fire Services in the Past Three
Years [n =244]
38.1% 0Increased Budget
B Reduced Budget
❑ Not Applicable
59.4%
2.5%
REGIONAL IMPACT
• Southern California Outlying Region Ranks Highest Figure
44 shows that the Southern California Outlying region reported
the highest percentage of budget increases for fire services (67.9
percent). It also reported the highest percentage of budget
reductions (7.1 percent) and the lowest percentage of "not
applicable" responses (25 percent).
• No Budget Reductions in Bay Area or Southern California
Metro Regions. No cities in the San Francisco Bay Area and
the Southern California Metro region reported budget reductions
for fire services.
• North/Central Coast Reports Fewest Budget Increases.
North/Central Coast cities reported the lowest incidence of
budget increases for fire services (48.3 percent) and the highest
incidence of "not applicable" responses (also 48.3 percent).
One San Francisco Bay Area
city : reported that the
economy's upturn in the late
1990s allowed it to add 31
positions and increase general
fund contributions for
maintenance and capital.
projects. However, these
gains did not compensate for
the E8 million per year that
the state's ERAF transfer
took from the city's general
fund. The diversion of local
property 'tax revenues
amounted to over 10 percent
of the .city's general imd
revenue. Loss of this revenue
forced the city to eliminate
more : than 130 permanent
..positions and reduce funding
for maintenance and capital
projects.
74 I BUDGET TRENDS FOR CITY SERVICES
Figure 44. Percentage of Cities by Region that Increased or
Reduced Budget for Fire Services in the Past Three Years
F7.7
Southern California
Outlying (n =28)
Southern California Metro
(n=76)
San Fmncisco Bay Area
(n=60)
North/Central Coast (n -29)
Central Valley (n =51)
0% 105% 20% 30% 40% 5V1. 60% 70% 80% 90% 100%
PUBLIC SAFETY SALARIES
! e For many cities, increases in salaries for public safety employees have
contributed to increased spending for police and fire services. The Institute's
survey asked California cities to assess the impact that public safety salaries
have had on their fiscal situation.
Despite strong sales tax
growth through fiscal year
2000 -01, a Southern LARGE IMPACT STATEWIDE
California Outlying city
reports deterioration in its Figure 45 shows that statewide, 90.5 percent of responding cities indicate
ability to meet increasing
service demands. A decline that public safety salaries have at least an "important impact" on their fiscal
in the economy is projected to health, based on the following range of responses: "grave impact" (15.1
reduce the city's general fund percent), "major impact" (50 percent), "important impact" (25.4 percent),
revenue base.' Service cuts' "minor impact" (4.4 percent) and "no impact" (5.1 percent).
will be required if the city .
cannot expand revenues.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT �75
Figure 45. Impact of Public Safety Salaries Reported by Cities
Statewide [n =272]
50.0%
5.1% 4.4% 15.1%
No Impact Minor Impact Important Major Impact Grave Impact
Impact
REGIONAL IMPACT
Among the regions, Southern California Outlying and North/Cennal Coast
cities expressed the highest degree of concern over the impact of public
safety salaries on their finances (see Figure 46).
• Southern California Outlying. The impact of public safety
salaries is also severe in the Southern California Outlying region,
where 60.7 percent of cities described it as "major" and 17.9
percent describe it as "grave ", for a total of 78.6 percent.
• North/Central Coast. Over 78 percent of North/Central Coast
cities regard the impact of public safety salaries as "major" (53.1
percent) or "grave" (25 percent).
• Central Valley. Among Central Valley cities, 63.9 percent
described the impact of public safety salaries on their finances as
"major" (45.9 percent) or "grave' (18 percent). Another 27.9
percent describe the impact of public safety salaries as
"important.„
• San Francisco Bay Area. Over 89 percent of San Francisco
Bay Area cities described the impact of public safety salaries on
their finances as "important" (22.7 percent), "major" (54.5
percent) or "grave' (12.1 percent).
76 I BUDGET TRENDS FOR CITY SERVICES
• Southern California Metro. A majority of Southern California
Metro cities rated the impact of public safety salaries as "major'
(44.7 percent) or "grave" (10.6 percent).
Figure 46. Impact of Public Safety Salaries (by region)
4i.9% 5
100
53.1
54.5%
44.7
60.7%
i
3? 9'i6
27.9% 2
22.7%
15.6% 1
90%
x
4.9% 6
6,3%
80%
70
60
50
40
30%
20%
10%
D%
Central Valley North/Central Coast Sao Francisco Bay Southern California Southern California
(n =61) (n =32) (n�6) Metro (0 =85) Outlying (n =28)
12 No Impact ® Minor Impact 0Important Impact 0 Major Impact ■ Grave Impact
• Large Cities. Among large cites, 77.8 percent described the
impact of public safety salaries as "major." The rest report
CITY SIZE
the
4i.9% 5
_ x
53.1
54.5%
44.7
60.7%
i
3? 9'i6
27.9% 2
22.7%
15.6% 1
143 "b
x
4.9% 6
6,3%
CITY SIZE
the
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT �77
impact as "grave" or "important" at 11.1 percent each (see
Figure 47).
• Medium Cities. Over half of medium -sized cities described the
impact of public safety salaries as "major" (53.1 percent).
Twenty-five percent described the impact of public safety
salaries as "important." Nearly 14 percent described it as
"grave."
• Small Cities. A combined 89.2 percent of small cities rate the
impact of public safety salaries as "grave" (16.2 percent),
"major" (46.7 percent), or "important" (26.3 percent).
Figure 47. Impact of Public Safety Salaries on Small, Medium and
Large Cities
77.8 %'
111.1%
It.l%
U.0 %
10.0 %
�
Large - over 200,000 (n=9)
125%
53.1%
_
%
I135 °/.
—
_3.1
Medium - 50,000 to 200,000 (n=96)
26.3%
5.4 °6
5.4%
66.7% 116.2%
Small - under 50,000 (n =167)
No Impact
Minor
Important
Major Grave
Impact
Impact
Impact Impact
PUBLIC SAFETY RETIREMENT
Sizeable increases in public safety retirement benefits will also add to local
agency costs for public safety services. These increases result from the
passage of a bill in the California Legislature called SB 400,1 which took
effect on January 1, 2000. This measure made it possible for local police and
fire bargaining units to negotiate for enhanced retirement benefits provided
though the California Public Employees' Retirement System (CalPERS).
1 Cal. Govt Cods § 21362 vW following.
78 I BUDGET TRENDS FOR CITY SERVICES
Before SB 400, CalPERS used a formula called "2- percent- at -50" to
calculate public safety retirement benefits. Under this formula. CaIPERS
multiplied two percent of the employee's final compensation (either the
single highest year or the average of the three highest years) times the
number of years of service when retiring at age 50. SB 400 made two new,
benefit structures available. These are known as "3- percent- at -50" and "3-
percent-at-55." SB 400 also increased the cap on the retirement benefit
public safety employees could receive from 75 to 85 percent of final
compensation.
The "3- percent- at -50" and "3- percent- at -55" benefits structures are projected
to become the prevalent retirement benefits throughout California within the
next three to five years.' The Institute's survey asked cities about the impact
of "3-percent-at-50" and "3- percent- at -55" on their finances.
The survey asked cities whether they have negotiated or plan to negotiate any
public safety contracts in 2001. Sixty-five percent of responding cities
answered yes. The survey then asked whether either "3- percent- at -50" or "3-
percent-at-55" had entered into negotiations. An overwhelming 85 percent
said they had. The survey went on to ask cities to estimate the cost to
provide enhanced retirement benefits over the next five years, and then over
the next ten years.
About half of responding cities estimate that paying enhanced retirement
benefits will cost them from $1 million to $19 million for the next five years.
Almost 74 percent of cities estimating costs for the next 10 years believe
their costs will range from $1 million to $45.5 million.
One technique for mitigating the impact of "3- percent- at -50" and "3- percent-
at-55" is to provide them in place of salary increases or other benefits. The
survey asked cities whether they had applied this technique. Slightly less
than half - 47.8 percent - -said that they had.
IMPACT OF BINDING ARBITRATION
Another major fiscal development affecting public safety costs during 2000-
01 was the enactment of SB 402. SB 402 allows local public safety
employees to submit disputes over compensation packages to private
arbitrators when collective bargaining negotiations reach an impasse. SB
402 is now codified as Code of Civil Procedure sections 1299 - 1299.9.
'Harz V. Commoveand J.M E B.v, "UWerstan ,Na Impact ofthe New CaIPEItS Public Safety
Bercnn," Western CiN Mngmine, January 3001.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT I T,
The reason SB 402 is a "fiscal development" is that it empowers private
arbitrators to impose decisions regarding the compensation of local
firefighters and law enforcement employees on local public entities and their
taxpayers. SB 402 thus gives private arbitrators the authority to control large
portions of most city and county budgets, even though the arbitrators are an-
elected and politically unaccountable, and even though the state constitution
reserves these critical decisions for local elected officials.
The Institute's survey asked California cities to assess the impact of state -
imposed binding arbitration on their fiscal situation. Figure 48 shows that
statewide, almost 68 percent of responding cities indicate that the system of
binding arbitration imposed by SB 402 has at least an "important impact" on
their fiscal health, based on the following range of responses: "no impact"
(17.4 percent) "minor impart" (14.7 percent), "important impact" (24.3
peroem), "major impact" (27.8 percent) and "grave impact" (15.8 percent).
Figure 48. Impact of Mandatory Binding Arbitration [n =259]
24.3% 27.8%
174% 14.7% 15.8%
A
is
No I�par`i"co)"fihlkli5429[t�4dc3 mm,pem4ifrFSr7fons. Jdl`Sfbr<!Pfi]'pcdgPe Ci3i'aVev14]i�SL §cc
11 a of article I of the C i omre Canshtuhon. That provision was a tied to
constitutwn to prohibit [he L }) dre from authonzmg private persons, who do
have to live with the financial consequences of their decisions, from crea
-- r_ra....:..,. ..a
80 I BUDGET TRENDS FOR CITY SERVICES
In evaluating the survey responses relating to the impact of binding arbitration on
California cities, it is important to note that several local jurisdictions in California have
adopted local charter provisions requiring them to submit disputed issues concerning
wages, hours and other terms and conditions of employment to binding arbitration.'
While general law cities had no power to adopt such procedures,' charter cities and
'counties could do so pursuant to their "home rule" power under the California
Constitution.' This kind of arbitration is (mown as "interest arbitration," in contrast to
"grievance" or "rights arbitration" where an arbitrator determines the rights of the parties
pursuant to an existing already- agreed -to contract/
Thus, prior to the enactment of SB 402, the electorates of charter cities and counties could
adopt binding arbitration by a vote of the people in charter cities. This approach has the
advantage of allowing voters who have adapted interest arbitration to dismantle or modify
it if they perceive that the system they adopted is not producing the desired results they -.
sought from it.,
Indeed, the voters in Sacramento County did just that in 1998, when they simultaneously
adopted a charter amendment providing for interest arbitration and then amended it to
provide that certain arbitration awards would have to be submitted to and approved by the
electorate before they became binding' The voters could also adopt an interest arbitration'
"scheme that expanded or restricted the scope of arbitrable issues in response to local
'. concerns." And they could also provide interest arbitration for some employees covered I.
by SB 402, but not others."
' Such jum,l,stiovs include she clue, of Ahrnda, Gilroy, lice -W, Madcua, Napa. Oakland Pilo Also,
Petaluma, Redwood City, Sacnmmta, S. Francisco, S. Jose, San Luis Obispo, Save Cma, Swsa Roes
and Vallejo.
' See Baal, v. Ciry ofManhmran Besch, 18 al. 3d 22,2546 (1976).
See Fire FigMenr Union, mwl 1186 e Ciry of Va(I j., 12 Cal. 3d 608, 611 (1970)
' See Co, fF .. v. People mrel. Fenno Fir f,glaera, 71 Cal. App. aw 82, %(1999).
' Alen C Davis and lam Schlieausu, Ii. Ar ft..: Legality, Reality & Value, CAL. PuO, ENil.
M., Dec. 1996, at 12.
' See Saanmemo Caunry Deputy Sherp'A.'n v County ojSacramenm. 85 Cal. App. 4th 960 (2000)
jOFer .pi., she tenants arbiustioo cbaner pmvisiw adc,,eM by San Rescue. largely exclude,
mfsemmsb 6,tsmdwth eH.vo.n, which areanandssosm pieseansso otherpmvisiowafshe
,bane. See S.F. City Chansr App. A §A&590,6. On the odrer land the San Fnonsw binding
atbivation pmvisiw is wt limited to monomk se, affecting Me wmpe.utian ofeity =ploy s, but
massed exsw& gene ally m all "wages, Iwm cod tans and wMio. afCitycod Cowry
anploymrnt..." at
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT PI
REGIONAL IMPACT
Among the regions, Central Valley and North/Central Coast cities expressed
the highest degree of concern over the impact of mandatory binding
arbitration on their finances (see Figure 49).
• Central Valley. Among Central Valley cities, 50.9 percent
described the impact of mandatory binding arbitration as "major"
(29.1 percent) or "grave" (21.8 percent).
• North/Central Coast Fifty percent of North/Central Coast
cities regard the impact of mandatory binding arbitration on their
finances as "major" (34.4 percent) or "grave" (15.6 percent).
• San Francisco Bay Area Over 42 percent of San Francisco
Bay Area cities described the impact of mandatory binding
arbitration on their fnances as "major" (27.9 percent) or "grave"
(14.8 percent).
• Southern California Metro. "Major" (24.1 percent) or "grave"
(15.7 percent) impacts were reported by 39.8 percent of Southern
California Metro cities.
• Southern California Outlying. Among Southern California
Outlying cities, 35.7 percent reported "major" (28.6 percent) or
"grave" (7.1 percent) impacts. Twenty -five percent reported "no
impact"
Figure 49. Impact of Mandatory Binding Arbitration (by region)
Grave Impact
100%
90%
Major Impact
80%
70%
60%
Important Impact
90%
40%
Minor Impact
30%
20%
10%
No Impact
0•/
Central North/Central San Francisco Southem Southern
Valley (n=55) Coast (nr 32) Bay (n=61) California California
Metro (n =83) Outlying
(n=28)
82 I BUDGET TRENDS FOR CITY SERVICES
CITY SIZE
Over 62 percent of large cities described the impact of mandatory binding
arbitration as "major." The rest described it as "important." About 26
percent of medium cities and 27 percent of small cities characterized the
impact of mandatory binding arbitration as "major." About 18 percent of
medium and fifteen percent of small cities described the impact of mandatory
binding arbitration as "grave" (see Figure 50).
Figure 50. Impact of Mandatory Binding Arbitration (SB 402) on Small, Medium
and Large Cities
Large - over 200,000 (nom)
Medium - 50,000 W 200,000
(n-93)
Small - under 50,000
(n =158)
0 No Impact 0 Minor Impact 0Important Impact 0 Major Impact 0 Grave lnpa
PARKS/RECREATION
Almost 73 percent of the cities that responded to the Institute's survey
indicated that they had increased their budget for parks and recreation in the
past three years (see Figure 51). Twelve percent said they reduced their
budgets, while 15 percent took no action.
.239%
[21.8-7
18.3%,.
.190 ".n
0 No Impact 0 Minor Impact 0Important Impact 0 Major Impact 0 Grave lnpa
PARKS/RECREATION
Almost 73 percent of the cities that responded to the Institute's survey
indicated that they had increased their budget for parks and recreation in the
past three years (see Figure 51). Twelve percent said they reduced their
budgets, while 15 percent took no action.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 1-83
Figure 51. Percentage of Cities Statewide that Increased
or Reduced Budget for Parks/Recreation Services in the
Past Three Years [n =240]
REGIONAL IMPACT
• Southern California Metro Cities Most Likely to Increase.
Almost 82 percent of Southern California Metro cities reported
increasing their parks and recreation budgets in the past three
years (see Figure 52).
• Smallest Likelihood of Increases in North/Central Coast.
Sixty percent of North and Central Coast cities reported
increasing their parks and recreation budgets. This region also
included the highest percentage of cities that decreased their
parks and recreation spending (26.7 percent).
Figure 52. Percentage of Cities by Region that Increased or
Reduced Budget for Parks /Recreation in the Past Three Years
buthem Cahfomia Outlying (n=27)
Southern California Mew (n=72)
San Fra nisco Bay Ama (n=59)
Nonh/Catmal Coast (n =30)
Cmtrel Valley (n�52)
0% 10% 20% 30% 40% 50% 60110 70% 80% 90% 100%
Dln=ucd Budget ®Reduced Budget E3 Not Applicable
84 I BUDGET TRENDS FOR CITY SERVICES
PLANNING
Statewide, over 76 percent of responding cities reported increasing their
budgets for planning in the past three years (see Figure 53).
REGIONAL IMPACT
From a regional perspective, a high percentage of budget increases for
planning occurred in the San Francisco Bay Area. A higher percentage of
Central Valley cities reduced planning budgets than did cities in other
regions (see Figure 54).
• Highest Likelihood of Increases in Bay Area. Almost 90
percent of San Francisco Bay Area cities increased their budgets
for planning.
• Bay Area Reports Lowest Likelihood of Reductions. Over 5
percent of San Francisco Bay Area cities reduced their planning
budgets - -the lowest percentage among the regions.
• Lowest Likelihood of Increases in Southern California
Outlying Cities. Among Southern California Outlying cities,
almost 68 percent increased planning budgets. Over 21 percent
reduced them
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT t85
• Highest Likelihood of Reductions Found in Central Valley.
Twenty-four percent of Central Valley cities reported reducing
Figure 54. Percentage of Cities by Region that Increased or
Reduced Budget for Planning in the Past Three Years
outhern California Outlying
(n =28)
Southern California Metro
(m68)
San Francisco Bay Area
(. =58)
North/Central Coast (.=30)
Central Valley (.=50)
0% 10% 20% 30°/. 40. 50% 60°6 70% 80% 90% 100%
xeaucea
budgets for planning, while 66 percent reported budget increases.
DELINQUENCY PREVENTION PROGRAMS
Over half of responding cities selected "not applicable" when asked whether
they increased or reduced budgets for at -risk youth/delinquency prevention
programs. These cities may not have such program, or if they do, may not
have changed budget levels for them. Among the other cities, 42.4 percent of
cities reported increased budgets for delinquency prevention. About 3
percent reported reduced budgets (see Figure 55).
Figure 55. Percentage of Cities Statewide that
Increased or Reduced Budget for At -Risk
Youth/Delinquency Prevention Programs in the Past
Three Years (n =238]
" 42.4% 1:1 El Budget
54.6
`~ El Reduced Budget
/ .� -'s� ?�
2.9% ❑ Not Applicable
86 I BUDGET TRENDS FOR CITY SERVICES
• Most "Not Applicable° Responses Come From Small Cities. -
Seventy-six percent of "not applicable" responses came from
small cities (population under 50,000). Nearly all the rest came
from medium cities (population 50,000 to 200,000).
REGIONAL IMPACT
• Most Increases Occur Among Bay Area and Southern
California Metro Cites. Just over 50 percent of cities in the San
Francisco Bay Area and Southern California Metro regions
increased budgets for at -risk youth/delinquency prevention
programs.
• Smallest Percentage of Increases Found in Central Valley.
Almost 22 percent of Central Valley cities reported budget
increases for at risk youth/delinquency prevention programs.
Most Central Valley cities (74.5 percent) selected "not
applicable." This is the highest percentage of "not applicable"
responses among all regions (see Figure 56).
Figure 56. Percentage of Cities by Region that Increased or Reduced Budget for
At -Risk Youth/Delinquency Prevention Programs in the Past Three Years
F-10
Southern California Owlyiae
(n=26)
Southern California Metro
(n=74)
San Francisco Bay Area
(n=57)
NortlVCenhvl Coast (n =-30)
Cmnal Valley (n=51)
0% 1 V 200% 30% 401A 50% 60% 7119/ 80% 90% 1009,
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 187
CULTURAL PROGRAMS
Most cities selected "not applicable" (47 percent) when asked whether they
increased or reduced budgets for cultural programs in the past three years.
Over 43 percent reported increased budgets. Almost 10 percent reported
reduced budgets (see Figure 57). A large number of responses by small cities
(64 percent) that may not have cultural programs could explain the high
percentage of "not applicable" responses.
Figure 57. Percentage of Cities Statewide that Increased or
Reduced Budget for Cultural Programs in the Past Three Years
[n =232]
13 Increased Budget
47.0 % �43.5 % ®Reduced Budget
❑ Not Applicable
9.5%
Small Cities Select "Not Applicable." Small cities comprise
82.6 percent of cities that selected "not applicable." Of all small
cities responding, 60 percent chose "not applicable."
REGIONAL IMPACT
• Budget Increases Higher in Bay Area and Southern
California. Figure 58 shows that the highest percentages of
cities reporting budget increases for cultural programs are found
in the San Francisco Bay Area (50 percent), the Southern
California Metro region (52.9 percent), and the Southern
California Outlying region (53.6 percent).
Few Budget Increases in Central Valley. About 23 percent of
Central Valley cities reported budget increases for cultural
programs. Sixty-three percent of Central Valley cities that
reported budget increases are medium (population 50,000 to
200,000) and large cities (population 200,000+).
88 I BUDGET TRENDS FOR CITY SERVICES
Figure 58. Percentage of Cities by Region that Increased or
Reduced Budget for Cultural Programs in the Past Three Years
Southern California
Outlying (n =28)
Southern California Metro
(n =70)
San Francisco Bay Area
(n =56)
NortWeatral Coast
(n =30)
Central Valley (n --48)
0% 10% 20% 30% 40% 50% 609% 70% 80% 90% 1009,
CITY UTILITIES
Statewide, over 61 percent of cities that responded to the Institute's survey
reported increased budgets for city utilities in the past three years. About 35
percent responded "not applicable," and less than 5 percent said that they had
reduced funding for city utilities (see Figure 59).
Figure 59. Percentage of Cities Statewide That Increased
or
Reduced Budget for City Utilities in the Past Three Years
[n =237]
34 6 / 13 Increased Budget
® Reduced Budget
61.2% 0Not Applicable
4.2%
IMPACT
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 1-89
• High Percentage of Central Valley Cities Increase Budgets.
Over 80 percent of Central Valley cities reported increasing
budgets for city utilities. In contrast, about 58 percent of San
Francisco Bay Area cities reported increased budgets for city
utilities (see Figure 60).
• "Not Applicable" Applies to More Southern California
Metro Cities. The Southern California Metro region had the
lowest percentage of cities to increase budgets (48.6 percent) and
the highest percentage of "not applicable" responses (45.8
percent).
Figure 60. Percentage of Cities by Region that Increased or
Reduced Budget for City Utilities in the Past Three Years
Southern Califonn
Outlying (n=-26)
Southern California Metn
(n =72)
San Francisco Bay Arc.
(n =59)
]orth/Centrel Coast (n=28
Central Valley (n =52
I ! I
61.5%
.....38.5%
48.6%
45.8%
87.6% 1 142.4%1
I07%
643 %1
25A%
!
�8%
iR0
0•A 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
13 Reduced Budeet []Not
LIBRARY SERVICES
90 I BUDGET TRENDS FOR CITY SERVICES
About 37 percent of cities statewide reported that they increased their budget
for library services in the past three years. About 3 percent reduced their
library budgets. The rest selected `hot applicable." For many city residents,
library services are provided by local agencies other than cities (see Figure
61).
Figure 61. Percentage of Cities Statewide that Increased
or Reduced Budget for Library Services in the Past
Three Years [n =24]]
36.9%
' D Increased Budget
60.251 ' ° ®Reduced Budget
2.9% ❑Not Applicable
REGIONAL IMPACT
• Largest Increases in Bay Area. Figure 62 shows that the San
Francisco Bay Area has the highest percentage of cities that
increased their budget for library services in the past three years
(52.5 percent).
• Smallest Increases in Central Valley. About 20 percent of
Central Valley cities reported increased budgets for library
services. Most Central Valley cities provided a "not applicable'
response.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT �91
Figure 62. Percentage of Cities by Region that
Increased or Reduced Budget for Library Services
outhem California Outlying (n =26)
Southern California Metm (n=76)
San Francisco Bay Area (n =59)
North/Central Coa n (n =29)
Central Valley (n =51)
(I% 10°/ 20% 30% 40% 50% 60°e 70% 90% 90% 100%
O Increased Budget 18 Reduced Budget ❑Not
VIII. CONCLUSION
The fiscal condition of cities survey provides a snapshot of city perceptions
of their financial situation in spring 2001. Cities' assessments of the
impact of the ERAF ttznsfer, unfunded state mandates and other fiscal
setbacks emphasize cities' declining ability to keep pace with growing
demand for city services. Fortunately for the millions of California
residents who live and work in cities, the state's recent burst of economic
growth helped many local agencies regain a measure of fiscal capability.
Now that the boom has gone bust, however, prosperity no longer masks the
diminished fiscal capacity of cities and importance of local control over
local fiscal resources.
THE N9w FiscAL ENVIRONMENT
The budget surplus that the state enjoyed at the outset of 2001 has The New Fiscal Environment...... 93
evaporated. Instead of a $2.6 billion budget reserve, the state will end
2001 -02 with a $4.5 billion deficit The 2002 -03 budget yew faces a Areas for Further Research ._...... 94
shortfall of at least $12.4 billion. The state's revenues me projected to fall
by 12 percent from the current year forecast' Past experience has shown Statewide Database ... ......... _...... 95
that state's fiscal problems increase the risk of state diversion of local
revenue sources. One critical some of local revenue at risk for diversion Reader Feedback Needed .......... 95
is the state backfill of the local vehicle license fee reduction a few years
ago. Another potential threat is a further diversion of property tax
revenues.
That most cities anticipated tough times ahead for 2002 as early as May of
2001 reflects their growing vulnerability to even mild economic
downturns. Increased state control over local finances has made many
cities more dependent on revenue sources that decline when consumer
spending slows down. The diversion of local property tax revenues has
increased the importance of sales taxes is a source of support for many
basic city services. Cyclical upswings in annual sales tax revenues
sometimes mitigate the impact of ERAF. But these upswings are difficult
to predict. Uncertainty frustrates long -term planning, and sudden declines
'Sure of alifania, Lcgisladve AValyst's Office, Catfmia s Final Oudaok: LAOP jenlo ®2001-
02Through2006- 07, Nov bm 2WI.
94 I CONCLUSION
in revenue undermine cities' ability to endure and recover from the effects
of recession.
AREAS FOR FURTHER RESEARCH
The Fiscal Condition of Cities Survey provides subjective perspectives an
city finances. Further research would be useful to provide objective
measures of fiscal condition that can be analyzed over time. Examples of
these measures include:
• Debt compared to annual revenues;
• Growth rate of primary revenue sources adjusted for
population and inflation;
• Estimated costs of unfunded mandates;
• Estimated costs of extending current service and facility
standards to growth expected in the state; and
• Comparisons of actual revenues to adopted budgets.
Any aggregation of information about city finances can overlook the
unique experiences of each individual city. This report attempts to address
the problem of aggregation by including examples of fiscal challenges
faced by randomly selected "case study" cities. A detailed objective
analysis of fiscal trends in individual cities could be the subject of a
separate report.
For example, the survey shows that investment in many important city
services has increased over the past three years. However, the survey
results do not indicate the amount of such increases. Further research
could indicate whether such increased investment in services is adequate to
meet community needs.
Cities' evaluation of the impact of the ERAF transfer could be reinforced
by linking levels of impact to comparable measures. For example, a
"grave" impact could represent a specific percentage impact on general
fund revenues. Such an approach would add to the information that could
be gained from survey questions addressing the impact of unfunded
mandates and other issues.
INSTITUTE FOR LOCAL SELF GOVERNMENT •2001 FISCAL CONDITION OF CITIES REPORT 19
STATEWIDE DATABASE
Efforts to obtain objective measures of city fiscal health will be challenged
by a lack of timely and comparable information. The State Controller's
Cities Annual Report offers valuable information on city revenues and
expenditures. However, the most recent edition covers 1997 -98. Other
surveys and reports may offer more current information, but they serve
different purposes and may not always support meaningful comparisons.'
One of the Institute's goals is to collaborate with other organizations to
explore creation of a database to inform the policy debate surrounding the
finance of local public agencies. We invite those who would like to
collaborate on this project to contact the Institute using the form at the end
of this publication.
READER FEEDBACK NEEDED
The Institute is very interested in feedback from readers. The form
provided at the end of the report can also be used to let the Institute know
how well this report promotes understanding of the fiscal condition of
California cities. Your suggestions are needed to ensure the usefulness of
future reports.
' &.,I. include Comp,ch.,ve Annual Financul Repone fm individual ciana, city budg
Depamment of F.n orU.S.C.. population nfi.ws, and the Naucrul L.,u ofCidcs fl.al
nwdiboos survey.
APPENDIX A: METHODOLOGY
The Fiscal Condition of Cities Report presents cities' perspectives on the
impact that the centralization of state government power over local
finances has had on local communities in California.
The Institute for Local Self Government conducted a statewide mail survey
of 475 city fiscal officers and other city officials responsible for financial
administration. The survey was conducted during May 2001.
The survey data for this report comes from the 276 cities that responded to
the mail survey - -a response rate of 58 percent.
SURVEY RESPONSES BY REGION
To compare city responses by geographic region, cities were divided
among five categories: Central Valley, North/Central Coast, San Francisco
Bay Area, Southern California Mena, and Southern California Outlying.
The breakdown of responding cities by region (see Appendix C) is as
follows:
Survey Responses by Region........ 97
Survey Responses by Population. 98
Case Study Cities ............ _ ....... _.. 98
Number of
Number
Region
Cities in
of
Number
Response
Region
Surveys
Returned
Rate
Sent
Central Valley
127
127
61
48.0%
North/Central
52
52
32
61.5%
Coast
San Francisco
101
101
66
65.3%
Bay
Southern
136
136
88
64.7%
California Metro
Southern
59
59
29
49.2%
California
Outlying
Survey Responses by Region........ 97
Survey Responses by Population. 98
Case Study Cities ............ _ ....... _.. 98
106 I APPENDIX A: METHODOLOGY
SURVEY RESPONSES BY POPULATION
To compare cities by population size, cities were divided into three
population categories: large (over 200,000), medium (50,000 to 200,000),
and small (under 50,000). The breakdown by size is as follows:
CASE STUDY CITIES
To enhance the aggregate data from the statewide survey, the report
includes additional information provided by a group of 12 randomly
selected "case study" cities. The case studies offer specific examples of
local experiences that can be compared with statewide and regional trends
identified in the survey.
SELECTION OF CASE STUDY CITIES
Case study cities were selected from a database using information from the
State Controller's annual report on city finances for fiscal yen 1997 -98.
The case study cities were selected at random to ensure that the report
presents objective information.
The selection process excluded cities that have unique characteristics that
set them apart from other cities. Examples include industrial centers with
few residents, cities that operate public utilities, and cities that are
unusually wealthy or poor. Also, cities at either extreme of wealth or
poverty relative to other cities would not reflect the experiences typical of
most cities.
Number.
Number of
of
Number
Response
City Population
Cities in
Surveys
Returned
Rate
Category
Sent
Large (over
15
15
9
60.0%
200,000)
Medium
133
133
96
72.2%
(50,000 to
200,000)
Small (under
327
327
171
52.3%
50,000)
CASE STUDY CITIES
To enhance the aggregate data from the statewide survey, the report
includes additional information provided by a group of 12 randomly
selected "case study" cities. The case studies offer specific examples of
local experiences that can be compared with statewide and regional trends
identified in the survey.
SELECTION OF CASE STUDY CITIES
Case study cities were selected from a database using information from the
State Controller's annual report on city finances for fiscal yen 1997 -98.
The case study cities were selected at random to ensure that the report
presents objective information.
The selection process excluded cities that have unique characteristics that
set them apart from other cities. Examples include industrial centers with
few residents, cities that operate public utilities, and cities that are
unusually wealthy or poor. Also, cities at either extreme of wealth or
poverty relative to other cities would not reflect the experiences typical of
most cities.
Another important consideration affecting the selection process was
differences in levels of service responsibility. For example, some cities use
general fund revenues to pay for services that in other cities are provided
by a special district. The case studies reflect a range of service provision
experiences.
To identify a group of representative cities, data was sorted using the
following variables:
• Region
• Population size
• Service responsibility
• Urban versus rural
• Growing versus built out
• Extra approved local taxes (for example, utility user tax, parcel
taxes, special assessments, etc.)
The sort produced a list of 12 randomly selected cities - -three each from the
San Francisco Bay Area and the Central Valley and two each from the
other regions. The case studies include additional cities from the Central
Valley and the San Francisco Bay Area to further explore preliminary
research that suggests important differences in the relative fiscal health of
these regions.
APPENDIX B: SURVEY INSTRUMENT
ny ¢ Na
LEAGUE OF CALIFORNIA CITIES &
INSTITUTE for LOCAL SELF GOVERNMENT
1400 K Street, Suite 400 • Sacramento, California 95814
www.cacities.org Phone: (916) 658-8200 Fax: (916) 658 -8240
NNW
LNSFITCTE Jar LOCAL
SELF GOVERNMENT
wwwalsg.org
The following survey is the foundation for the fast of a series of annual reports to be published by the
League of California Cities. The purpose of the report is to evaluate the fiscal condition of California
cities over time. The survey, combined with information from other sources, will provide baseline
data that will enable the League to explain to the legislature, the governor, the media and the public
how the fiscal setbacks of the past decade have affected the level of service cities are able to provide
to Californians.
Your help is essential. Please return the survey by June 1, 2001 to Charles Surtmerell, Institute for
Local Self Government, 1400 KStreet, Sacramento, CA 95814. If you have any questions about the
survey, please contact Charles at (916) 658 -8259 or suimnere(Wcacities.ore. A postage paid, pre -
addressed envelope is provided.
City- specific information provided to the League by survey participants will not be shared with
other persons or organizations without permission. The Fiscal Condition of Cities Report will
not identify the participating cities by name.
1. Name of City:
2. Name of person who completed the survey or can answer questions about the responses
Phone Number.
E -Mail:
3. In general, how would you describe your city's ability to meet its financial needs in this fiscal
year compared to the previous fiscal year? (Circle your response on a scale from J to 5, with 1
meaning "Less able "and 5 meaning "Better able.')
Less able Better able
110 I Arrrevix B: Suavar In srauwrnr
4. In general, how would you describe your city's ability to meet its financial needs in the next fiscal
yew (FY 2002) compared to this fiscal year? (Circle your response on a scale from I to 5, with I
meaning "Less able "and 5 meaning "Better able.')
Less able Better able
1 2 3 4 5
5. Does your city collect a transient occupancy tax? (please check one)
• No • Yes Rate:
6. Does your city collect a utility user union any of the following? (please mark boxes that apply)
• Cable TV
• No
• Yes
Rate:
• Electricity
• No
• Yes
Rate:
• Gas
• No
• Yes
Rate:
• Telephone
• No
• Yes
Rate:
• Water
• No
• Yes
Rate:
• Other (Specify):
Rate:
7. To what degree do the following affect your city's fiscal health? (please mark boxes that apply)
No Minor Important Major Grave
Impact Impact Impact Impact Impact
Unfunded Mandates
ERAF Shift
Binding Arbitration (SB 402) '
Public Safety Salaries '
Public Safety Retirement Benefits '
(3 9/6@50 / 3 % @55)
Energy Rate Increases '
Compliance with Water Quality & '
Other Environmental Protection
Standards
INSTITUTE FOR LOCAL SELF GOV ERNM ENT 1 111 _
8a. Public Safety Retirement Benefits — Has your city negotiated or will your city be negotiating
any public safety contracts this year? (please check one)
• Yes • No
8b. If yes, has 3% at 50155 entered the negotiations? (please check one)
• Yes • No
8c. What is the estirnated cost to provide this benefit:
• • for the next 5 years? $
• • for the next 10 years ?. $
8d. Is the benefit being provided or negotiated in place of salary increases or other benefits?
(please check one)
• Yes • No
9. What unfunded state mandates have the greatest Impact on your city's general fund? (please list
in order of importance)
1.
2.
3.
10. How would you describe changes in non - public safety service levels since 1997? (please check
one)
• Increased Decreased • No change
11. How would you describe changes in public safety service levels since 1997? (please check one)
• Increased • Decreased • No change
12. To what extent has your city's reliance on service charges for non - public safety services changed
since 19979 (please check one)
• Increased • Decreased • No change
13. To what extent has the amount of your city's discretionary funds changed since 1997? (please
check one)
• Increased Decreased No change
112 I Arr ENRI% B: SURVEY INSTRUMENT
14. Proposition 218 Election Results - Has your city had a Proposition 218 election to impose or
increase any of the following types of taxes, fees, or assessments since 1997? What was the
result? (please mark boxes that apply)
• Business license • Approved • Disapproved
• HoteVTOT • Approved • Disapproved
• Library • Approved • Disapproved
• Lighting/landscape • Approved • Disapproved
• Park/Recreation • Approved • Disapproved
• Policeffire • Approved • Disapproved
• Property • Approved • Disapproved
• Utility • Approved • Disapproved
• Water /sewer • Approved • Disapproved
• Other: • Approved • Disapproved
15a. Does your city fund a department or organization (other than a redevelopment agency) that
works to attract new businesses and investment to your city? (please check one)
• No • Yes Since what year.
15b. if you answered yes above, to what extent has your city's efforts to generate economic
development increased city revenues since the program's inception? (Circle your response on a
scale from I to 5, with 1 meaning "Little or no increase" and 5 meaning "Very large
increase.')
Little or no increase Very large increase
1 2 3 4 5
16. To what extent is the goal of increasing sales tax revenue a priority in your city?
(Circle your response on a scale from I to 5, with 1 meaning "Not a priority " and 5 meaning
"High priority.')
Not a priority High priority
1 2 3 4 5
INSTITUTE FOR LOCAL SELF GOVERN MEN T- 2001FBcGEC ONDITIOX Of CmRs REPORT 1 111 _
17. What budget actions has your city taken in the past three yews with respect to the following?
(please mark boxes that apply)
General government
• increased
• reduced
• not applicable
Police
• increased
• reduced
• not applicable
Fire
• increased
• reduced
• not applicable
Parks/Recreation
• increased
• reduced
• not applicable
Library
• increased
• reduced
• not applicable
Planning
• increased
• reduced
• not applicable
At risk youth/delinquency
• increased
• reduced
• not applicable
prevention prograrn
Cultural programs
• increased
• reduced
• not applicable
City utilities
• increased
• reduced
• not applicable
Reserves
• increased
• reduced
• not applicable
Taxes
• increased
• reduced
• not applicable
Fees
• increased
• reduced
• not applicable
Debt financing
• increased
• reduced
• not applicable
Deferred maintenance backlog
• increased
• reduced
• not applicable
Other (specify):
• increased
• reduced
• not applicable
• increased
• reduced
• not applicable
• increased
• reduced
• not applicable
114 I Arrenoix B: Suavar In sravnvnr
18a. Reserves — Which of the following best describes your city's goal for the amount it maintains as
a reserve in its general fund? (please check one)
Officially stated goal • hrformal goal • No goal
186. What is the specific general -fund reserve for 2001 in dollars?
$ ,000
18c. Does the amount above refer to: (please check one)
The total reserve, or • The reserve amount not designated for a
special purpose?
18d. What is the total general fund amount?
18e. What is the percentage of general fund dollars in
reserve? .
o�
Thank you for your time!
Please select one of the following free gifts as a sign of our appreciation:
Proposition 218 Implementation Guide 2000
Picture Yourself in Local Government Classroom Se
COMMENTS
Help improve future reports on city finances by providing your comments below.
1. Does the report provide useful information on the fiscal status of California cities?
Yes No
2. What aspects of the report did you find most useful? Least useful?
3. How could the report be improved?
4. Would you Eke to participate in or receive information about development of a
database of local agency fiscal information? Yes No
Organization:
City: State_ Zip
Phone Number:
Please print and mail this form to the Institute for Local Self Government, 1400 K Street, Ste.
400, Sacramento, CA 95814, or In to 916 - 658 -8240 ATTN: Fiscal Condition of Cities. Thank
you in advance for your time in filling out this form. The hrstinne values your feedback