Dan Walters

Dan Walters: California cities facing tough fiscal times

Dan Walters
Dan Walters

The state budget is largely financed by personal income taxes, and thanks to an improving economy and a temporary tax increase approved by voters two years ago, it is enjoying surpluses after years of deficits.

Indeed, the big conflict in the Capitol this year is over competing priorities for billions of extra bucks.

Gov. Jerry Brown wants to devote most of the extra money on debt repayment and reserves, but his fellow Democrats in the Legislature want more spending, ranging from universal pre-kindergarten to health and welfare services.

Cities, however, are not sharing in the income tax cornucopia because their budgets are based on sales and property taxes, and neither is generating the big gains that an up-cycle brings to the income tax system.

Residential and commercial construction, a source of property tax gains, remains somewhat sluggish. Ditto for retail sales as consumers, still reeling from the effects of recession, remain skittish.

As officials in cities large and small begin work on their 2014-15 budgets, therefore, they are seeing very tight times ahead, not only because of modest revenue growth, but because they face rapidly escalating costs for retiree pensions and health care.

Miguel Santana, the financial analyst for Los Angeles, warned last week that it faces hefty operating deficits through 2018, even if elected officials hold down spending and win concessions from city unions.

Santana projected a $165.2 million budget gap in 2015-16, growing to $186.8 million the next year before beginning to shrink. Rising labor and benefit costs and the effects of a cut in the city’s business tax, aimed at attracting new investment, are factors in the forecast.

It was bad news for Los Angeles’ new mayor, Eric Garcetti, who has pledged to restore cuts in city services.

The news was even worse in Oakland, even though the San Francisco Bay Area’s economy is booming.

Citing pension costs that have more than doubled in recent years, City Auditor Courtney Ruby sees sharply increasing expenses that will outstrip revenue growth and require cuts in city services.

“Oakland has to get its head out of the sand and be very clear that we have significant unfunded liabilities and we have to have a plan to deal with this,” Ruby said, raising the specter of insolvency.

If anything, as columnist Daniel Borenstein pointed out, Ruby’s report understates the depths of Oakland’s fiscal despair, with projected deficits even larger than those of Los Angeles, which has 10 times Oakland’s population.

As recession gripped the state and pension costs escalated, two California cities, Stockton and San Bernardino, filed for bankruptcy protection. They had been particularly irresponsible in spending money they didn’t have, but the underlying squeeze between somewhat stagnant revenue and escalating costs for pensions and other benefits stresses virtually every California city.