Monday, June 8, 2009

Should We Put A Sales Tax On The Ballot This Fall?

Monday night (June 8th), the City Council will once again discuss the possibility of putting a sales tax on the ballot in November. I still don’t expect us to pull the trigger on this yet, but it’s looking more and more likely that we’ll do it.

At first blush this might seem like a crazy thing to do. After all, we’re in the middle of the worst recession in decades. Nobody wants to pay more taxes. And people are skeptical of government spending – the state measures all got creamed a couple of weeks ago.

But here’s the reality: We’ve already cut more than $11 million from our budget – that’s well north of 10%. We’ve eliminated more than 40 jobs. We’re dipping into reserves already to maintain current levels of police and fire services. Wright Library is at risk to be closed – perhaps permanently. We’re cutting way back on maintaining our parks.

And we’re not done yet. The state is threatening to “borrow” close to $3 million in property tax from us, and we might also lose our gas tax money, which is the major source of funds for paving streets.

The news from Sacramento will continue to get worse and many of our revenue sources will continue to be placed at risk. So I think it comes down to this: We can find more local revenue sources and control our own destiny or we can put ourselves at the mercy of Sacramento. That’s not a tough choice to me.

Of course, there are lots of ways to raise revenue besides raising taxes, and we must pursue them aggressively. But none of them will generate lots more money in the short run, and none of them will generate the amount of money we need to maintain our vital services.

Last spring, our blue-ribbon citizen committee recommended a four-year sunset on the sales tax. This makes sense to me. It will get us through this tough economic time, and it will also ensure accountability because a majority of the City Council will serve the same term.

In addition, I think we need to make a sales-tax ballot measure part of a broader effort to maintain our solvency, our public services, and our quality of life in a tough economy – especially if it sunsets in four years. Therefore, I believe that if the City Council places the sales tax on the ballot, we should do so as part of a larger strategy that contains five points:

1. Spend additional tax revenue only on vital services

We know what the core services are to our community. They’re things like police protection, fire and emergency medical response service, libraries, paving the streets, and keeping our water and beaches clean. If we put a sales tax on the ballot that requires only a simple majority vote to adopt it, the money can’t be earmarked in a legally binding way. But my colleagues and I can – and should -- commit ourselves to spending the money only on these vital public services.

2. Increase tax revenue without increasing tax rates

Practically speaking, this means bringing in more retail stores that generate more sales tax – as well as some other development projects (such as industrial and office development as well as high-end housing) that produce more tax revenue than expenses. This is a long-term effort that will require a lot of work on a lot of fronts, because there is no magic bullet here. (Wal-Mart, for example, would likely generate a net increase of between $500,000 and $700,000 in sales tax – a healthy chunk but a drop in the bucket compared to $11 million in cuts.) We must follow through on all of our action items from the Economic Development Summit in May; we must target and aggressively pursue the retailers we want; and we must continue to clean up our planning process so that projects we want can be approved more quickly.

3. Increase revenue from other sources besides taxes

The city provides a wide variety of services to applicants or individuals who benefit directly from those services – for example, somebody who wants to add a room to their house or somebody who takes a recreation program – as well as services that mostly benefit one group of people (for example, hillside weed abatement). In the last couple of years, we have moved more and more toward “full cost recovery” for these services – that is, having those who benefit pay rather than all the taxpayers. I agree with Councilmember Andrews that we must make a conscious effort to decide which of these services we believe should be paid for by those who benefit, and which should be subsidized by the city’s General Fund.

This can be a controversial exercise. Every time we propose creating or increasing fees for those who benefit, that constituency turns out in opposition to it, so we often back off. But that means we spend more money on those services out of the General Fund – leaving less for police, fire, libraries, potholes, and the rest.

4. Restrain future cost increases

Since we can’t count on the same level of economic growth over the next few years that we have seen in the past, we are going to have to work toward restraining future cost increases in all areas. We’ve already done this in many ways, ranging from eliminating positions to contracting out tree-trimming. We may have to do more. And the big unknown in this arena is our employee pensions. When the stock market drops – like now -- the city has to pay more money to cover the pensions of retired employees. Some of my colleagues would like to address the question of pension reform (for future employees only) now. I agree that the pension question is an important one that we must start looking at.

5. Save for a rainy day

Some 15 years ago, our predecessors wisely set up a reserve fund equal to 25% of the General Fund – enough to run the city for three months in the event of a natural disaster. Since then, we have maintained the same amount in reserves -- $12 million – but we have not increased that reserve proportionately with the General Fund. Right now that’s about 15% of the General Fund. We should consider retaining a bigger reserve fund – permanently held at between 15% and 25%. This could be simply a council policy or we could put it on the ballot as a charter amendment. We would also have to decide what the rainy day fund is for – just natural disasters or financial crises as well?

I am not sure how tomorrow’s council discussion will go. But this is what I would like to see, and I will work toward a consensus along these lines.

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