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Why local governments are broke and coming after your money

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Fortuna Mayor Doug Strehl hates taxes. So does Humboldt County Board of Supervisors Chair Rex Bohn. Strehl's worked on Fortuna's Main Street since he was 15 years old and has run Strehl's Family Shoe and Repair for more than 30 years. A Humboldt County native, Bohn worked in private industry for 50 years before joining the board. Both men's views on government finances probably lean more Tea Party than tax-and-spend. Yet they both recently voted to put tax measures before local voters in November, just one of many signs that local governments on the North Coast are at a crossroads.

Still battling the aftermath of the Great Recession, local governments have spent years tightening belts, shedding costs and tearing through savings accounts, many of them working to fend off the day when they would have to come back to the public, hat in hand. But that day is here. Four of Humboldt's seven cities, as well as the county itself, will put tax measures before voters in November. Most say a tax bump is the only thing that will prevent large-scale service reductions, including fewer police on the street, fewer folks fixing local roads and less upkeep of public parks and facilities.

"As we've cut over the years, every department has taken a major hit and every department needs help — they're all bleeding," says Strehl. "The only light at the end of this tunnel is this measure."

Some would say that tunnel extends all the way back to 1978, when California voters passed Proposition 13, capping property tax rates and shifting the balance of power between state and local governments. Prior to Proposition 13, local governments largely earned their revenue through property taxes while sales tax served as the state's revenue bell cow. In the aftermath of Proposition 13, however, local governments — especially cities — have become both increasingly dependent on state funds and forced to look at other revenue sources, chiefly, sales taxes.

With many California cities heavily dependent on sales tax revenues to fund their services — Eureka, for example, gets almost two-thirds of its general fund revenue from sales taxes — the Great Recession hit local governments like a tsunami. When markets crashed in 2008, consumer confidence was shattered. People had less money to spend and what they did have, they increasingly saved and used to pay down debts. The result was less money trickling into local stores and restaurants and into the coffers of local government. Meanwhile, in the midst of a budget crisis of its own, the state launched a massive belt-tightening that included steeply decreased contributions to local governments.

Ryan Emenaker, a professor of political science at College of the Redwoods, says because sales tax revenues filter through the state, there's a lag time between when you buy something at the store and when the local government gets its cut. So the full impacts of the recession in 2008 weren't felt by local governments until 2009 or 2010. Then, Emenaker said, the first reaction of most local governments is to make do with what they have, even if it means dipping into their savings. That's what's happened on the North Coast.

In Fortuna, the city council cut spending in most departments but, not wanting to enact catastrophic cuts that would cripple services, the council also approved a staggering amount of deficit spending. The city went into 2011-2012 with a $10.5 million reserve, but will have spent that down to a projected $4.2 million at the close of this fiscal year. The Eureka City Council enacted four years of budget cuts through 2010-2011, when it approved the cutting of 12 police officer positions in the face of a structural budget deficit of $1.7 million. That year the council put a .5-cent sales tax measure on the ballot, which passed easily and is due to sunset in 2016. But it's not only big cities that are feeling the pinch. Tiny Blue Lake has a structural deficit of $57,000, even after disbanding its police department in 2008, in part as a cost-cutting move. Rio Dell has a $100,000 structural deficit, even after the council downsized city staff by 30 percent in recent years.

And, while state coffers are looking rosier all the time as stock markets have rebounded, local governments continue to see stagnant sales tax receipts and increasing expenses. "Counties and cities rely on things that haven't really improved: consumer confidence, consumer spending and property values," Emenaker said. "They have no real options left. You can defer maintenance and not buy computers for a certain amount of time, but you can't defer forever. You can ask people on the hefty end of the pay scale to retire. But, ultimately, you have to really start cutting those services where people are going to feel it, or you need to start generating more income."

Meanwhile, the costs of doing business continue to increase. As an example, Fortuna has seen general fund revenues increase 31 percent over the past decade while expenses have increased 60 percent. "Since 2003, costs for [Pacific Gas & Electric] increased by 58 percent, health insurance increased by 98 percent, vehicle fuel prices increased by 142 percent and [California Public Employee Retirement System] increased by over 640 percent," City Manager Regan Candelario wrote in the city's 2013-2014 budget.

It's that last line item that's clamping down on local budgets throughout the state, says Michael Shires, an associate professor at Pepperdine University's School of Public Policy who has written extensively about California's tax structures. "The driving factor in all this is really pension obligations," Shires says. "We have a bunch of commitments to spend money in ways we cannot afford."

So, pinched from all sides, what's a local government to do? In the case of Humboldt County and four of its cities the answer is voters: Are you willing to pay more to maintain services?

Ask most people and they'll tell you they aren't big fans of government. In fact, sitting in supervisors' chambers just minutes before voting to put a tax measure before voters, Bohn declared that he hates government and hates taxes. But, Bohn clarified, he likes having streets without potholes to drive on and a sheriff's office to call if the need arises.

This is a pretty typical outlook, according to Emenaker. "In general, people hate the government and taxes in the abstract, but they love specific programs," he says. So when it comes to getting the citizenry to vote for a tax increase, Emenaker says the best strategy is to tell them specifically what's on the chopping block. Some local entities seem to be taking heed.

Eureka — which is asking voters to extend a temporary .5-percent transaction and use tax passed in 2010 — is warning that losing the roughly $4 million in annual revenue would decimate the city's public safety services. Even with the additional revenue, City Manager Greg Sparks says the city is facing significant challenges, noting staff recommended 10-percent reductions across the board and the council dipped into the city's meager reserves this year. If voters turn down the extension in November, Sparks says police and fire services — which combine for about two-thirds of the city's general fund spending — will be cut.

Police Chief Andy Mills is a bit more specific: The popular Problem Oriented Policing team would be gone, as would a pair of positions the Eureka Police Department has to deal with homeless and transient issues. "There are two types of policing: proactive and reactive," Mills says, adding that proactive policing includes surveillance, warrant checks and background investigations. "Without (the temporary tax revenue) we're reactive, barely able to keep up with calls for service."

Emenaker says that, from a tactical standpoint, telling voters exactly what's at stake is a good approach. In Rio Dell, City Manager Kyle Knopp says the city's proposed 1-percent sales tax increase is projected to bring in $173,000 annually, enough to bridge the city's $100,000 structural deficit and, hopefully, restore one of the city's three cut police positions. But, he says, the tax is really about maintaining — not enhancing — services. "Our baseline service level is at serious risk," he says. "This is a real crossroads for the city. To have to cut an additional $100,000-plus out of the budget means we're going to have a real problem."

Blue Lake — which, without much of a business district to generate sales tax revenue, is proposing a 4-percent utility users tax — is taking much the same approach, saying the entirety of its $38,000 in anticipated revenue will go to protect against additional cuts to the city's parks and recreation, police, maintenance and public works departments. Fortuna, similarly, says the additional tax revenue would go toward protecting all city services. "Everyone talks a lot about public safety, which is very, very important," Strehl says. "But there's also other things that make a community safe. We can't just single out one department."

On the county level, frustrations over sheriff's office coverage areas and response times mixed with the prospect of additional cuts in the face of a $1.2 million structural deficit provided the impetus for the tax measure.

It's interesting to note, however, that as soon as the board began seriously moving forward with a proposed .5-percent sales tax increase, county department heads — including the Public Works director, the public defender and the Health and Human Services director — all addressed the board, talking about their departments' needs and their roles in public safety. While a polling firm hired by the county found no significant change in levels of support for a .5-percent tax as opposed to a .75-percent tax, the board opted to put the .5-percent sales tax before voters, foregoing the additional $3 million the extra .25 percent was projected to bring in. That's a decision the board of supervisors may come to regret, Emenaker says, adding that a push and pull over the increased revenue seems to be in the county's future if the measure passes. "When you have to draw a little blood, best to draw more than you need and not have to come back for more," he says.

When Bohn and his board voted to put a county-wide sales tax increase before voters in November, one can imagine the collective gasp that went up in city halls that had already approved similar tax measures. The quietly spoken fear is that — if faced with multiple tax increases on the same ballot — voters are more likely to vote them all down, either due to confusion or spite.

"It's always a concern when something like this happens," says Strehl, conceding that Fortuna voters will be asked to up their sales-tax rate 1 percent by the city and .5 percent by the county, which — combined with the state's 7.5 percent — would bring the total rate to 9 percent in city limits. "We're just hoping the people in Fortuna will understand why we need it, and probably why the county needs it too."

In Eureka, voters will face three tax measures — the city's .5-percent transaction and use tax extension, the county's sales tax and a Eureka City Schools bond — and Sparks said each entity has a legitimate need. Still, he's a bit worried. "The concern is that you'll get voter fatigue when you have three separate tax measures," he says.

Knopp says there was some "hesitation" in Rio Dell when the county opted to move forward with its tax measure, noting that not only had Rio Dell moved forward with a ballot measure well before the county but that "cities are much more dependent on sales tax revenues than the county," which receives the bulk of county property taxes. But, Knopp stresses that he views the county as a partner, and that Rio Dell benefits from healthy county services. "Certainly, having a well-funded district attorney plays a role in the level of safety in Rio Dell, just as having jail capacity and having a probation department that follows up contribute to the overall health of the community."

Emenaker says it behooves local cities and the county to make these points and to advocate for each other moving forward, despite an understandable temptation to push one's own tax increase over that of another entity. "They really have to promote them and they have to be unified," he says. "They have to be very consistent in explaining how these affect real programs that voters can identify with."

So, in the months between now and November, voters can expect to hear and read lots about governmental services on the brink, about backlogs of road maintenance and police staffing shortfalls. And, ultimately, it will be up to the voters to decide whether they want to pony up to hold the line, or if they're willing to get less in order to keep a bit more coin in their pockets. But one thing's for sure, Emenaker says: It doesn't hurt that two avowed tax-haters are out leading the charge for higher taxes in Humboldt County.

"When someone gives an argument that runs counter to what their bias is or should be, we're often persuaded by that," he says. "People let their guard down."

What Comprises the 7.5 Percent California State Sales Tax?

3.9375 percent to the state general fund

.25 percent to pay off economic recovery bonds from 2004

.50 percent to support local criminal justice activities

.25 percent to support education

.50 percent to support local health and social services programs

1.0625 percent to a local revenue fund

.25 percent to county transportation funds

.75 percent to city and county operations

Source: California Board of Equalization

Meet the Measures

Humboldt County's Measure Z

What's being proposed? A .5-percent sales tax that would be implemented countywide and sunset in 2020.

Why? The county faced a $2.7 million deficit in its 2014-2015 budget, including a $1.2 million structural deficit, meaning ongoing expenses are far outpacing ongoing revenue projections.

What if it passes? The tax is projected to bring in an additional $6 million in revenue to the county general fund to help pay for services. If passed, residents in the county's unincorporated areas would see sales tax rates climb to 8 percent. Residents of local cities would see the .5-percent sales tax increase on top of the state's 7.5-percent levy and any sales tax imposed by their city.

What if it doesn't pass? The board of supervisors would be left to balance a $1.2 million structural deficit by cutting spending, and would likely be hard-pressed to find funds to increase sheriff's office coverage and patrols, tackle a backlog of deferred road maintenance or increase county services in any way.

Blue Lake's Measure T

What's being proposed? A 4-percent utility users tax that would be levied on all gas and electricity usage within city limits and would sunset in 2020. The measure includes an exemption for enrollees in Pacific Gas & Electric Co.'s CARE program, which offers subsidized rates for low-income customers.

Why? Facing ongoing annual expenses that are projected to outpace revenues by $57,000 a year, the city council says it has no other options to raise revenue.

What if it passes? The tax is projected to bring in about $38,000 annually, which would still leave the city spending $19,000 a year from its reserves to bring its budget into balance at current service levels.

What if it doesn't pass? The city council will be left facing a $57,000 structural deficit and will consider cuts to law enforcement, parks and recreation, street maintenance and facilities upkeep services in order to bring the budget into balance.

Eureka's Measure Q

What's being proposed? An extension of the city's current .5-percent transaction and use tax. The current tax is slated to sunset in 2016 and the extension would extend that to 2021.

Why? Even with the roughly $4 million generated by the temporary tax, Eureka still faced a projected budget deficit when crafting its 2014-2015 budget, causing staff to recommend across-the-board 10-percent cuts to all city departments. In adopting its budget, the council allocated $200,000 from its already-depleted $1.2 million reserves to maintain police services.

What if it passes? The city will continue to receive the $4 million or so in projected annual revenue and consumers will continue to pay an 8.25-percent combined state and city sales tax within city limits. If the county's sales tax also passes in November, folks shopping in Eureka would see their combined sales tax rate increase to 8.75 percent.

What if it doesn't pass? Large cuts would likely be in order across all departments as the city would lose $4 million of its $30 million general fund revenue, a reduction of more than 13 percent.

Fortuna's Measure V

What's being proposed? A 1-percent sales tax to be implemented within city limits. The measure does not include a sunset date, but gives the Fortuna City Council the authority to end the tax at any time.

Why? The city faced a projected deficit of about $750,000 when crafting its 2014-2015 budget, which followed deficits of about $500,000 in each of the prior two fiscal years. Since the 2010-2011 fiscal year, the city has spent about $6 million from its reserve funds to bring budgets into balance, a practice that is not sustainable.

What if it passes? The measure is projected to bring in about $1.2 million annually, which would allow the city to bridge its structural deficit and maintain current levels of city services. Consumers in the city would see their combined state and city sales tax rate jump to 8.5 percent. If the county tax measure passes as well, Fortuna shoppers would face a sales tax rate of 9 percent.

What if it doesn't pass? The city council would be left facing a structural deficit of more than $500,000 and would have to reduce staff and services or continue depleting the city's reserve funds to balance its budget.

Rio Dell's Measure U

What's being proposed? A 1-percent sales tax to be implemented within city limits until 2020.

Why? Facing a deficit, the Rio Dell City Council spent $140,000 in reserve funds to balance its 2014-2015 budget and faces ongoing expenses that outpace revenue projections by $100,000 annually. This is after the council has cut city staff by 30 percent in recent years to reduce ongoing expenses.

What if it passes? The city is projecting the tax will bring in about $173,000 in annual revenues, enough to bridge the structural deficit, rebuild the city's reserves and possibly allow the city to reinvest in its police and public works departments. Consumers in Rio Dell would see their combined state and sales tax rates increase to 8.5 percent. If the county tax measure passes as well, Rio Dell shoppers would face a sales tax rate of 9 percent.

What if it doesn't pass? The city council would be left to find another way to bridge its $100,000 structural deficit, which would likely include either more cuts to services or a further depletion of the city's reserve funds.

Where does your property tax dollar go?

63.8 percent to local schools

16.7 percent to the county general fund

7.5 percent to local special districts

5.1 percent to redevelopment*

2.9 percent to local cities

2.2 percent to county roads

1.8 percent to the county library

*Redevelopment agencies in California have been dissolved but this money is allocated to pay down debts accrued by the agencies prior to their dissolution.

Source: Humboldt County

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Thadeus Greenson

Thadeus Greenson is the news editor of the North Coast Journal.

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