On October 31st, the LA City Council discussed options for raising new revenue to address the city’s ongoing budget deficit. Despite years of budget cuts to city services, next year’s deficit is estimated at $216 million. The City Council finally realized that revenue solutions must be on the table and is planning to place one of four proposed measures on the citywide ballot next March or May.
The four proposals include increasing the sales tax by a half-cent, restructuring the tax on transfers of property, increasing the parking occupancy tax, or establishing a parcel tax to fund the recreation and parks department. Council President Wesson and Council members Parks, Koretz and Rosendahl are among those leaning toward supporting a sales tax increase because it would raise more revenue than other proposals (an estimated $208-215 million per year) and because the tax burden would be shared widely across the city. [Update: On November 20th, the City Council voted 11-4 to place the sales tax proposal on the March 5th ballot.]
Increasing the sales tax may not seem like a popular option but based on results from the November 6th election, Los Angeles voters might approve a local sales tax increase. In California cities and counties, 25 of 28 general sales tax proposals were approved by voters. In LA County, voters approved sales tax increases in all three cities with proposals on the ballot, with each measure well above the majority approval needed to win.
- Culver City: 76.6 percent of voters approved a half-cent sales tax increase
- City of Commerce: 67.3 percent of voters approved a half-cent sales tax increase
- La Mirada: 66.0 percent of voters approved a one-cent sales tax increase
Measures to increase the sales tax for specific purposes did not fare as well. Statewide, only three out of seven measures received the two-thirds voter approval needed to win. In LA County, Measure J (the proposal to extend the half-cent sales tax for highway and transit projects originally approved by voters in 2008) won 64.7 percent of the vote, narrowly falling short of the necessary two-thirds approval.
Finally, and most importantly, the passage of Prop 30 may also be a good sign for local revenue prospects in LA. Prop 30 will increase the state sales tax by a quarter-cent for four years and increases income tax rates for individuals earning more than $250,000 a year for seven years. It is a major step toward addressing the state’s budget crisis by raising $6-9 billion each year for education, public safety and other priorities. Statewide, 53.9 percent of voters supported Prop 30 and in LA County support was even higher (59.9 percent). Looking toward the spring citywide elections, the City of LA needs to learn from the hard-fought, successful battle to win Prop 30. If it doesn’t, there won’t be any new revenue to tackle next year’s budget deficit.
With so much collective attention on the Presidential race and the long list of 11 statewide propositions on next month’s ballot, it’s easy to overlook the many local measures also in front of voters.
According to a report produced for the League of California Cities, there are over 350 local measures on the November 6th ballot throughout the state. About two-thirds of those measures (237) aim to generate local revenue through taxes, bonds, or fees. The report finds this on par with the last two presidential elections: 233 revenue measures on the ballot in November 2008 and 249 measures in November 2004.
What the numbers don’t show is that the need for local revenue is more urgent than ever. From budget deficits to threats of bankruptcy, municipalities have been hit hard by the economic downturn. Federal and state governments are similarly crippled and unable to provide help, aside from one-time funding such as the 2009 American Recovery and Reinvestment Act. When it comes to providing sustainable sources of funding to protect and restore services, cities by law must ask voters to approve revenue-raising measures to establish or extend taxes.
In LA County, there are over 30 local revenue proposals on the November ballot, including parcel, hotel, utility, property transfer, business, and sales tax increases. The local measure that would, by far, raise the largest amount of revenue in LA County is Measure J. This proposal would extend the half-cent sales tax for highway and transit projects approved by voters through Measure R in 2008, originally projected to raise $40 billion over 30 years. Measure J would enable Metro to bond against future sales tax proceeds and build transit projects sooner than originally planned, without relying on federal or state funding.
Measure J needs two-thirds voter approval to pass. Proponents such as Move LA say that new revenue for transit and highway projects will create much-needed jobs in construction, operations, and maintenance. However, some opponents are concerned about the impact to low-income communities given the regressive nature of the sales tax. The Bus Riders Union is opposed for this reason and because they say Measure R resulted in $120 million less in overall funding for bus service, leading to deep service cuts and fare increases which, again, hit low-income communities hardest.
There aren’t any City of LA measures on the November ballot but, in August, the City Council promised to consider two potential revenue measures for the citywide March and/or May ballot next year. (More on that here.) It remains to be seen whether the Council is serious about taking leadership to move these or other proposals forward. Let’s hope they are because the city is in dire need of a proactive approach to address next year’s budget deficit and provide sustainable long-term funding for city services and programs.
On August 21st, the Los Angeles City Council convened a Revenue Day to discuss ways to generate, enhance or improve collection of city revenue.
The city’s Chief Administrative Officer (CAO) Miguel Santana stressed that after years of deep budget cuts, the city is left with few options to address ongoing budget deficits. Without a new revenue source adopted by July 1, 2013, he said he was “without a clue” about how to address next year’s deficit. In particular, funding for firefighters, paramedics and police would be in jeopardy because public safety accounts for 70% of general fund spending. The CAO report is available here and the presentation is here.
Chief Legislative Analyst (CLA) Gerry Miller, reporting on options for city revenue, noted that the city has had no new General Fund tax revenues in the 16 years since the passage of Prop 218, which requires voter approval for new taxes. The CLA report is available here.
The full results are forthcoming but here are some highlights of what we learned:
- 76% of voters surveyed think the City of Los Angeles should continue to collect a tax on businesses located or working in the city, an issue we have blogged about in the past.
- 46% of voters support increasing the city Documentary Transfer Tax, the tax paid when property is sold. 39% oppose this increase and 15% are undecided.
- 62% of voters support a sliding-scale increase to the city Documentary Transfer Tax so that higher-valued properties pay a larger percentage. 24% oppose this increase and 14% are undecided.
- An overwhelming 87% of voters think the city should tax oil drillers.
Based on the reports and recommendations from the CAO and CLA, the Council voted 12-1 to move forward to explore two potential revenue measures for the March 2013 ballot. Check out this KPCC story for some quotes from City Council members, including Dennis Zine who voted against further analysis.
The first proposal would increase the Documentary Transfer Tax, the tax paid when real estate property is sold, from $4.50 to $9.00 per $1,000 property value, raising an additional $108 million per year for the city’s General Fund. The CAO also recommends that any additional revenue raised would go toward one-time costs, such as infrastructure, or be set aside in the city’s Reserve Fund. During public comment, representatives from the real estate and business sectors turned out to oppose the tax increase because they think it will discourage property sales.
The second proposal under consideration would increase the Parking Occupancy Tax from 10% to 15% on parking fees collected from patrons at parking lots and garages. The CAO estimates this would raise an additional $45 million per year for the city’s General Fund.
We’ll hear more about these proposals as the October 31st deadline approaches for City Council to place measures on the March 2013 citywide ballot. In the meantime, let us know what you think. Would you support increasing the city Documentary Transfer Tax and/or the Parking Occupancy Tax?
In recent months, there have been many stories in the news about California cities facing the threat of bankruptcy. What’s going on? Is Los Angeles in any danger of joining the ranks of Stockton, Mammoth Lakes, and San Bernardino?
Cities go bankrupt for a variety of reasons. Budget deficits are increasingly common at all levels of government but bankruptcy is a last resort. The media is good at reporting cases of corruption and mismanagement which, unfortunately, are sometimes part of the problem. The 2010 scandal in Bell is well-known and commonly-cited. But there are larger forces at work, too, which we hear less about. One exception is a recent op-ed in the Los Angeles Times by Harold Meyerson which points to the economic crisis and the housing bust as major causes of bankruptcy for cities like Stockton and San Bernardino. Cities rely heavily on property tax revenue. For example, last fiscal year 33 percent ($1.4 million) of general fund revenue in Los Angeles came from property tax. When real estate sales and construction drop, that money disappears.
In California, city budget crises are also closely connected to the politics of the state budget. When the state recently eliminated redevelopment to help address its budget deficit, it increased financial hardship on cities by shifting resources from local governments to the state. Cities have little power to fill the revenue gap because Prop 13 has long restricted local government’s ability to raise revenue by requiring cities to win voter approval for taxes.
When a city can’t pay its debts, it can declare bankruptcy for protection from creditors while figuring out a plan of action. Creditors include those owed money for bonds and employees with paychecks and benefits paid from city revenue. (Because revenue trickles in over the course of the year, cities often borrow money through municipal bonds or other financial instruments to help pay the upfront costs of infrastructure projects or general operations.) Chapter 9 of the Federal Bankruptcy Code outlines the rules and procedures for municipalities to reorganize and restructure debt. In many cases, bankruptcy invalidates existing collective bargaining agreements and forces unions to renegotiate vested and other contractual benefits.
Bankruptcy is a last resort with major immediate consequences for a city, including losing access to credit markets and incurring high costs for staff time and legal fees. Long term, bankruptcy has a stigma that can discourage business activity and real estate sales, two important sources of revenue for a city.
Earlier this year, state lawmakers tried to make it more difficult for cities to declare bankruptcy by passing a law (AB 506) that requires cities to first negotiate with creditors in hopes of avoiding bankruptcy. However, as the New York Times pointed out, this new law could unintentionally become a road map for fast-tracking the bankruptcy process due to one huge exception: if cities declare a fiscal emergency and say they are unable to pay bills within 60 days, they can skip talks with creditors and file for bankruptcy. San Bernardino recently did just this.
A city’s governing body, usually a city council, must vote unanimously to declare a fiscal emergency. In the wake of the 2008 economic crisis, the Los Angeles City Council, with the approval of the Mayor, has declared a fiscal emergency each year since 2009. The details can vary but a fiscal emergency generally authorizes a city to do things like reduce work hours, through furloughs or layoffs for example, or renegotiate vendor contracts.
Declaring a fiscal emergency also allows cities to fast-track local revenue measures. Cash-strapped cities such as El Monte and Duarte are the latest to consider this move in order to place revenue measures (a soda tax and sales tax increase, respectively) on the November ballot. Both cities report no plans to file for bankruptcy but the fate of these measures will ultimately impact future financial decisions.
For all these reasons and many more, the City of Los Angeles should step up to identify new revenue solutions now, before bankruptcy is more than a distant threat.
July 1st marks the beginning of a new fiscal year in the City of LA. With next year’s budget approved and the threat of layoffs averted, at least for now, the City Council and Mayor may feel like they can breathe easy for the moment. But it’s time for more hard work to begin.
The City of LA faces projected budget deficits for the next two fiscal years of $199 million and $315 million, respectively. Ongoing budget deficits are due, in part, to the economic downturn and slow recovery but also a result of city leaders relying on short-term solutions to long-term problems.
The City of LA has two main options to balance its budget: reduce spending or increase revenue. In recent years, city leaders have cut spending and tried to use one-time solutions, such as selling city assets, to address shortfalls. Spending cuts decrease the availability and quality of public services such as pothole repair and tree trimming, particularly when workers are laid off or transferred. One of the most-publicized spending cuts in recent years closed libraries citywide for two days each week. (In March 2011, voters struck back and increased funding for libraries by passing Measure L, with 63 percent of the vote.)
Each year, there are less places left to cut after services have already been slashed to the bone and fewer one-time solutions available. Moving forward, options to raise new, ongoing revenue must be on the table.
The few ongoing revenue solutions included in the upcoming year’s budget were, unfortunately, regressive. Renters and low-income families fought back against the Mayor’s proposed $10 increase for parking tickets, particularly related to street sweeping. City Council compromised and approved a $5 increase for most parking violations. Tickets for illegal parking in disabled spaces will increase by $10.
Looking towards next year’s budget, what’s needed to ensure that more revenue solutions are on the table?
Based on measures approved by California voters, local voters must approve revenue-raising measures to establish or increase taxes. Prop 13 (passed in 1978) requires two-thirds voter approval for a tax allocated to a specific purpose. Prop 218 (passed in 1996) requires majority voter approval for a tax allocated to a general purpose for charter counties and cities, such as Los Angeles.
With citywide elections next March and May, now is the time for city leaders to explore revenue options to ensure more tools are available to address future budget deficits. If the groundwork doesn’t begin now, future budgets will continue to rely on painful spending cuts and problematic one-time solutions.
How do you think the City of LA should address ongoing budget deficits?
The twentieth anniversary of the civil unrest has prompted thought and reflection on our city, our neighborhoods and our home. There’s been a lot written about what’s changed since April 1992 and what’s the same. Over the last few weeks, I’ve been thinking a lot about what this anniversary means for SCOPE’s vision for change and the future of our neighborhoods, economy and country.
SCOPE was founded in the aftermath of the uprising as residents of South LA grappled with the reality of police brutality, decades of disinvestment and the loss of thousands of middle-class jobs. The uprising was not about one incidence of police brutality. Ask any of our community leaders – black or brown – who lived through the civil unrest and they’ll tell you that it was caused not by racial tension but rather by years of neglect and abuse by the police, yes, but also by corporations who shipped thousands of middle-class jobs overseas. Come to any of our membership meetings and you’ll hear that dignity and respect start with the struggle for a good-paying job.
As the economy struggles to recover, a local debate is brewing: do tax cuts create jobs? If so, how many, and at what cost?
Two recent studies commissioned by the City Council arrived at very different answers to these questions.