A Viable Solution to Culver City's Fiscal Emergency?

Stephen Murray

Culver City is in a state of fiscal emergency, still. Starting in 2010, a decline in City revenue was finally sufficient enough that the City had to spend from its savings account. Although previously the City had borrowed from other funds and sold property, in 2010 that wasn't enough and $3.2 million was taken from the reserves. Every year since then the reserves have been ransacked to make up the City's deficit. The City's current long-term structural deficit is $7-8 Million. At this rate Culver City is expected to be broke in 5 years.
   
How did this happen? The City has clearly lost income through the state's dissolution of Redevelopment Agencies, the collapse of the financial services industry, the housing market collapse and the tightening of credit culminating in a lessening of consumer spending at retail. Costs have increased too, not just from Cost-of-Living and the increasing complexity of running a city, but from rising employee/retiree medical costs, pension support and higher contribution rates into CalPERS- our public employees pension system.
   
The City lacks an auditing system, such as a Finance Committee, which works with Staff and Council to help create solutions. The City has made numerous and significant plans to address the deficit: deferring maintenance and capital improvements, borrowing from other funds, renegotiating labor contracts, pension reform, eliminating unfilled positions, selling more properties and incentivizing retirement. Each year's planning was helpful but insufficient to meet the City's revenue losses. This years budget analysis brings a suggestion to allow "our voters the opportunity to consider    increasing local tax revenues." 

From my perspective the voters already agreed to take on a tax increase in March. The City Council's proposed solution is to raise revenue via an add-on Sales tax increase of 1/2% or 3/4%. The council has been presenting the budget proposal as a Community Dialogue Series whose last session is tonight at City Council. Tonight's City Council Meeting will involve discussion of putting the Sales tax proposal on the Ballot.
   
California's has a base 7.25% State Sales tax rate and it ranks 6th in the nation on combined State and local Sales taxes behind Tennessee (9.45%), Arizona (9.12%) and Oklahoma (8.66%) to name a few.  Local add-on Sales taxes in California have traditionally been reserved for transportation projects, such as the three in LA County which add .25% each creating a 8.75% tax rate, but since 2001 over 120 local governments have attempted to use add-on Sales tax to fund General Purposes, and nearly 60% have been approved by voters. Of the 8.75% Sales tax in LA County, Culver City only receives 1%.
   
A 1/2% add-on Sales tax for Culver City increases the tax rate to 9.25% and brings in ~$7.5 Million- almost enough to cover the budget shortfall.  Santa Monica, Inglewood and 5 other cities have a 9.25% Sales tax and only 2 other California Cities have higher: South Gate and Pico Rivera at 9.75%. 1/2% won't get the City out of the red as it won't cover the deferred Capital Improvements, Maintenance and replenishment of the City's Self-Insurance and Reserves. An alternate proposal is to seek a 3/4% tax increase which would bring Culver City's tax rate to the 3rd highest in the State.
   
The attraction of using Sales tax is that, theoretically, most of the revenue would be from non-Culver City residents. Non-residents are using our roads and emergency services but aren't contributing their share. This could possibly be a compelling argument if the sales tax wasn't already our highest revenue source at 22% contribution. (When Prop 13 passed, Culver City's property tax rate was locked in below the States median tax-rate which resulted in Sales tax becoming our highest revenue generator.)
   
Sales tax has disadvantages. When Santa Monica proposed their Sales tax increase earlier this year they also expected a 10% loss in sales revenue. Sales tax revenue, like TOT, is relatively volatile compared to the more stable sources of property and utility tax. Dependence on Sales tax also skews land-use priorities by incentivizing local governments to prioritize commercial development and growth over lower income-producing residential uses.  Additionally, like other fixed-rate revenue streams, Sales tax is regressive- it proportionately costs more for those on the lower    income scale than those higher up- though there are exemptions for necessary goods: groceries, prescription drugs and some medical devices.
   
Culver City needs to address its ongoing $7-8 Million budget shortfall and a tax increase may be the most expedient way, but the City also need to address the institutional problems that have led to the City not being flexible enough to respond to forces when it needed to.  Likewise there is question whether there should be a sunset or expiration on the Sales tax. A Sales tax increase can only be a temporary measure, real tax reform should occur where we balance off our existing revenue volatility and land-use decisions with a more stable and community-driven revenue mix.
   
BTW, those looking towards Amazon.com as a way to escape a higher Sales tax will be disappointed as Amazon starts charging local Sales tax this month.

Stephen Murray was a candidate for City Council in April of 2012.