Archive for May, 2009

A recent article by Sacramento Bee writer Daniel Walters, while not directly addressing state Propositions 1A-F, is a strong argument against them. Believe me, I would vote for these props in a heartbeat if I really believed they would solve California’s fiscal crisis. They will not. I cannot place the full blame for this crisis on the Legislature and Governor- they certainly share the blame. We the voters have created the foundation for financial mismanagement with our rubber stamp approvals of propositions that tie the hands of our elected officials, not to mention our approval of bond measures that add to the State’s growing debt service.

Dan Walters’ article discusses how new property tax revenues emerging from redevelopment projects cannot be used for purposes outside of city controlled redevelopment agencies.

That seems counter-productive. Isn’t the purpose of redevelopment to generate new revenue for the greater good of our citizens? Instead, the funds are in a lockbox, as Al Gore would have called it, and their use is limited to projects that may not represent the best utilization of funds.

Another example is Quimby Funds. These represent amounts set aside from developers that are to be used to develop new parks. The problem is, they do not allow for the funding of ongoing maintenance, so cash-strapped cities are reluctant to use them and the money sits in a lockbox, untouchable for use anywhere else.

Remember Prop 98? That had a huge impact on how California prepares the budget. It set a minimum funding level for education in the State. The formula is quite complex- it really can’t be calculated without completing the overall budget first. Now that’s a Catch-22! Please go to this link to learn more about how it works.

Prop 98 greatly limits the flexibility of the State to allocate the budget but, more importantly, it does not provide an incentive for the money to be spent wisely. It’s as if someone were to give you a pre-loaded gift card and a very limited time to use it. You would probably make some worthwhile buying decisions, but some of it would go for frivolous purchases, too.

Getting back to the propositions on the May 19th ballot: remember the story of the Old Woman Who Swallowed a Fly, then swallowed a frog to catch the fly … In the end, she swallows a horse to catch whatever she had just ingested and as the poem goes, “she died, of course.” That is exactly what is happening with our stream of propositions. We are passing bad propositions to counter equally bad ones.

What is more, there is no process to evaluate the effectiveness of the spending. Instead, a rainy day fund will be established that will merely offset the effects of poor decisions, not to mention other half-baked strategies such as borrowing against future lotto revenues ( I might feel better with that specific proposal if Las Vegas managed it and assigned odds).

There is no substitute for sound management. We cannot legislate it. I don’t even think we can buy it.

Three things will have to happen before we can reasonably expect something comparable to sound management: re-districting (in order to break up the ideologic fiefdoms that we call Senate and Assembly districts), reduction of the two-thirds requirement to pass a budget, and competent analysis of the benefits of government programs. It will not be enough for any less than all three of these to occur.

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I want to re-visit one of my earlier e-mails (printed below).  There was an article in the San Francisco Chronicle today that addresses the very points I made then.  The article also discusses the pros and cons of Prop 13, but I want to focus on the following excerpts:

As hundreds of thousands of California properties fall into foreclosure and sell at values well off recent peaks, the amount of money funneled into government is declining dramatically, by nearly $400 million last year, according to an estimate by ForeclosureRadar.com. Those losses are likely to persist into the foreseeable future, with repossessions rising and owners forced to hold onto properties longer amid a real estate climate expected to remain chilly for years, the panelists said.

Research firm Beacon Economics predicts that property tax revenue in California will drop by 6.1 percent from July 1 to June 30, 2010, followed by 3.6 percent and 0.8 percent declines, respectively, in the next two fiscal years. It will take until 2012-13 before statewide property taxes begin to rise and then only by 1 percent, the Los Angeles company forecasts.  (to read the entire article, please go to the following link: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/05/01/BUIR17CF6C.DTL

Back to back annual drops of 6.1% and 3.6% in property tax revenue will be devastating to the City (don’t forget that 25% of our revenue comes from property taxes).  The two years following that will be relatively flat, so there is no relief in sight. 

I hate to be a voice of gloom and doom, but I have seen nothing in the Mayor’s budget proposal that deals with the long term hurdles we will face.  For that matter, I never received data regarding the State Budget’s revenue assumptions from Assemblyman Feuer’s office.  I fear that those assumptions could be overly optimistic, rendering propositions 1A-F meaningless- if they ever were meaningful.


Please share my concerns with our elected officials at both the State and City.  They might pay a little attention if many people contact them.  Also, feel free to distribute this information with your contacts.


Paul Hatfield, CPA

Treasurer, NC Valley Village

From: Phinnoho
Sent: 3/17/2009 12:42:39 P.M. Pacific Daylight Time
Subj: Property taxes and the City's budget


Property taxes comprise 25% of the City’s revenue.  This source will be squeezed for the foreseeable future as reassessment requests filter through the County.  Property tax revenue usually lags behind economic trends in housing because of Prop 13.  The automatic 2% annual increase shielded the County and City from the early declines in market values; however, that will change as newer and deeper declines will soon be felt.

Couple that disturbing trend with the wage increases authorized by the City in late 2007, and what we now have are rising payroll costs versus diminishing revenue on top of our current $400 million projected deficit, not including the pension shortfall.  Payroll is about half of the City’s operating budget- $3.5 billion out of $7 billion total.

The City knew the economy was teetering when it passed the wage hikes.  Now the Mayor is suggesting massive layoffs to close the deficit.  This desperate act is an indictment of the Mayor’s and the City Council’s management of our finances.  A more responsible approach would have been to freeze wages throughout all departments last year.  There would still be some layoffs, but many workers would be spared.  I’d much rather have someone employed then on unemployment.  Employed people spend money; unemployed entrench.  Layoffs would then be determined based on priority, as determined by reviewing the nature and benefit of each program and service offered by the City.

Unless our elected officials are willing to pursue a sensible strategy of controlling costs by reining in wages, the deficit will grow.  There does not appear to be anyone capable of tackling this, probably because of the campaign support received from the municipal unions.  We need to pay close attention to who might fill the upcoming vacancy in Council District 2.  If the Mayor appoints one of his people, we absolutely have to push back and insist on an election.  Even then, it would still be an uphill battle to elect a responsible candidate who is not afraid to fight for sensible and painful decisions to balance the budget.

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