Local Government finance as an oxymoron 6/99
Perhaps Davis City Manager John Meyer’s greatest success has been recruiting Karl Mohr to move his young family to Davis, and work on the city’s finances. Mohr had been employed by a financial/city planning consulting firm, Crawford, Multari & Clark, and teaching economics at Cal Poly, San Luis Obispo.
Mohr actually enjoys helping people understand public finance. He served the city by taking apart an exploding Davis city puzzle called the “Major Projects Financing Plan”, (MPFP), which was never a plan. It was a long range wish list of the infrastructure to implement the unrealistic 1987 General Plan that was handcuffed to the city’s annual budget. For several years, the city council had a free ride as they dumped the additional cost of new projects on the brand new homes.
Thank former council member Lois Wolk and Mohr that it hasn’t continued to grow worse. In 1994, Wolk called a halt to the escalating fees for new construction, and set up the MPFP Committee to recommend how to get out of this fiscal mess.
Unfortunately for the city, Mohr’s city position was on the chopping block when Measure I failed. Mohr convinced his old firm to set up an office in Davis, so we still have the benefit of his work, just not full time. The firm is now called Crawford, Multari, Clark & Mohr.
The following is from a speech Mohr recently gave to the Davis Noon Rotary:
“Three elderly men enjoying their retirement were sipping sodas outside the country store on a slow afternoon in a small town. They watched a farmer struggling to direct an ox drawn cart through a rutted street. The first one, a retired efficiency expert, says, “Sheesh, what a life! Taking ten times longer than needed to complete a task, and using the dumbest way on earth to do it! That creature is slow and ponderous, hard to turn, and dim as it can be!”
The second one, a retired City finance director, sighs and says absently, “Actually, it’s a lot like local government finance.”
The third, a retired farmer, snorts and says, “Local government finance?! That’s an ox, ya moron!”
Let us start with the premise that the role of Local Government is to provide services desired by a community via political decisions made by democratically elected representatives. When one votes for a candidate, one presumably is also voting for the batch of programs on which the candidate ran. Thus, one should also be able to provide the means to implement such programs.
Communities should be able to decide their collective futures.
The reality is that Local government finance subverts these roles.
First off, Local government finance is not local any more. Just before Proposition 13 in 1978, property values were rapidly increasing, tax revenues were growing, and the state had a tremendous budget surplus. Property tax was the main way that various local governments, schools, community colleges and special districts raised revenue to finance programs that were often state-mandated.
It was probably the intent of Prop 13 supporters that state and local government absorb the loss and cut their size. Instead, demand for services only increased, so local government came to the state for much of their funding, and therefore real control of the local priorities that are implemented with actual budget and personnel.
Proposition 13 pretty much took property tax off the table as a source for additional funding for local government. Where locals once could establish property tax rates subject to local politics, they now are completely at the political mercy of the state. And cities and counties appear to be at the bottom of the political food chain, at least from the state's perspective.
Cities are largely outside of the grip of the rural county/state power axis, which is why cities and counties have such an awkward relationship that it requires ongoing coordination. Cities’ first financial worry is that the state will arbitrarily yank the rug out from under cities, by transferring funds. In 1991, Governor Pete Wilson balanced the state budget deficit of $14 billion in part by creating the Education Revenue Augmentation Fund (ERAF), which shifted $3.6 billion in local government property tax revenue to local school districts, and reduced the state annual payment for education.
There was no net change for schools, the state has had less burden as it perceives its responsibility, and local governments have been left holding the bag, with less revenues ever since. Counties took 80% of the hit, but cities and special districts were also impacted. Why does the state have to be reminded that counties are the administrative arm of the state and mostly are trying to respond to state mandates with limited finances ?
This city-county-special district-state financing problem has grown much worse in the 21 years since Prop 13 – in terms of complexity, continuity of current program funding, and uncertainty about the larger forces of the future.
So where does that leave Davis ? Next week, we will look.
For fun, Karl Mohr and Jon Li have been debating municipal finance ever since Jon started attending the MPFP committee meetings in 1995. And no doubt will continue to do so. Jon can be reached at jli@yolo.com.
Davis’ Two Tax Cultures 6/99
Karl Mohr is the city of Davis’ financial consultant. He continues describing our situation from last week:
Of the city of Davis’ revenue, only 22 percent is discretionary: $14 million out of a total budget of $63 million, and the state controls the rate or amount of 75 percent of that ($10.7 million). So only $3.5 million or 5.5 percent of the city’s revenue is discretionary, and within the ability of the City to affect the rate and/or method of taxation.
And, now that requires two-thirds voter approval in virtually all cases. Getting two-thirds of the populace to agree that the sky is blue can be difficult; getting that proportion to agree to tax themselves is very difficult, as evidenced recently in Davis by the defeat of Measures H & I, schools and parks, which most would think of as more sacred than money, given the city’ reputation.
A static city general revenue fund means that any increases in the annual operations and maintenance budget must be funded with erstwhile fees and charges, and creative accounting.
The modern redevelopment agency (RDA) was invented not only for the dilapidated downtowns of the past, but also for adjacent undeveloped land (like tomato fields, or the middle of South Davis). That way all of the new property tax dollars stay with the city for infrastructure projects like the Mace Overcrossing expansion, instead of schools which the state then reimburses.
This illustrates one way that local governments have reacted to strictures of Proposition 13 of 1978. RDAs can be powerful tools for revitalizing blighted areas. However, many argue that uses such as Davis' were merely attempts to get back some property tax revenues, even if it was relatively restricted in its use. When you look at the RDA project boundary in Davis and contemplate what was there in 1986, it was predominantly fields. Tomato blight may be an important issue in the agricultural community, but I'm not sure that it can be addressed by urban infrastructure projects, whatever their scope.
Prop 13 has changed the fiscal reality of development. Before 13, the idea was to grow out of traffic and economic problems. After 13, it has become increasingly more difficult to cobble together financing for public works infrastructure. The Feds used to pay for projects like a water treatment plant, but they aren’t any more. Now residential doesn’t pay its own way much of the time. According to a recent Fairfield study, a new $200,000 residence with an $80,000 annual income did generate just enough tax/fee revenue to offset the average of the total general fund service cost for the equivalent of a dwelling unit. An older home, with a 1978 Proposition 13 assessment of 1% definitely does not pay its fair share of the costs to service the people living in the residence.
Growth should pay its own way. In the old days, everyone was taxed, and everyone benefited. Now it is easiest to tax those who are about to arrive, using development fees, Mello-Roos, and other exotic techniques. This is creating gross infrastructure disparities between old established and new barren parts of our city, and grossly unfair taxing, between low paying long time residents and high paying new home owners. This two tax culture is defining Davis politics: it was the main reason why Measure H lost.
The importance of this fundamental shift in the attitude towards new development can not be understated. In the past there was general consensus that on balance growth was a good thing. However, too many examples of poor land use choices (often inextricably linked to the underlying fiscal incentives discussed above) have made many justifiably suspicious of the negative impacts of such growth. This has led to the notion that if we have to have some growth, let's get as much out of it as we can. The resulting "us versus them" mentality is a very real problem that this dysfunctional system has led to, and goes back to original thesis: local government finance subverts the ability to create cohesive communities. Of course, this is exactly what is at the root of the current bi-polar political culture of Davis and many other communities.
Local government still controls land use designations, but communities must maintain a balanced mix of uses, including housing, jobs, shopping, schools, parks and open space, and roads and other infrastructure. (70 percent of the covered surface of California is devoted to auto related purposes.)
Today, cities have only three ways to raise revenue: allow growth and charge high fees, increase taxes on local property (which in Davis is inordinately residential), or add retail activity to increase sales tax revenues. That is it: growth, tax existing property, or add retail business. Other than that, a city must cut back to live within existing revenues, even in prosperous, low inflation times. Prop 13 is a ratchet that makes local government finance successively more problematic each year.
This decade, solvent cities have generated new revenues by increasing commercial development to raise sales tax revenues. But it has meant significant disconnects between taxpayers and consumers of public services, resulting in frustration with overall tax burden. This has resulted in yet more “ballot box funding”, or failures, like Measures H and I.
What kind of communities are we planning & building?
Infrastructure and tax burden differences create divisions in communities, like the difference between the people who bought homes built before 1989, and those built under the 1987 General Plan. Almost all of the people in the second category, who live in Mace Ranch, Wildhorse, Northstar, Aspen, Evergreen or South Davis, are paying much higher taxes now, and even though they would benefit from the projects funded by new local taxes, they feel like they are already paying too much, especially compared to the longtime residents.
Because local taxes now require two-thirds voter support, there will always be opposition to local taxes and fees. The problems are not being addressed by the state government, so the problems are not going to go away.
Thank you, Karl, for giving us this cogent analysis.
Davis has prospered only because Northern California has. Over the past twenty years, the city’s planning has not been innovative. During this decade we have become known for our anti-planning.
In the name of neo-traditional planning, the city has focused on the downtown as a nice place to go. It is not much of a retail center, and the city suffers from the lack of creative thought allowed by the city council’s dependence on the downtown as an idea.
State law requires cities to establish a rationale to calculate its fees. Davis invented the MPFP to fulfill this requirement in 1989, with the fatal flaw of expecting new home owners to pay for the cost of parks and infrastructure, even though existing residents represent three-fourths of the population. That 1989 council and staff started a rip-off which the city has perpetuated: say that existing residents are responsible for most of the cost, set up the fee structure, and then charge new development double by using the construction tax to pay the existing residents share of the burden instead of facing a tax election. No wonder new residents resent more local property tax measures.
According to unofficial reports, the best guess is that there are 1000 residential lots left for sale until buildout of the current general plan. At a rate of at least 50 sales per month, there will be no lots left within 18 months (before January, 2001) for a plan which is supposed to be in effect until 2010. No new residents, no fees.
Tonight the council will rubber stamp the annual Capital Improvement Plan, as a step towards approving this year’s budget. Next year’s council will face a much bleaker financial picture if all residential development grinds to a halt half way through the year. Demand for traffic improvements and parks will continue, but the money will dry up. This council couldn’t care less about thinking beyond their own term.
The city needs to balance its perceived needs and the rights of the market place to respond. Davis does have land zoned commercial, retail, and industrial. What opportunities can we create ? What are our responsibilities to encourage new and expanding businesses ? What would be a positive local economy ? How could tax policies be pro-active or even beneficial ?
Jon Li studied public finance and urban economics, as well as voting behavior and state and local politics at UCD, 1966-71. Jon can be reached at jli@yolo.com.
