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Thursday, May 17, 2012
Regional Focus: July 2008
Balancing Act
Citrus Heights and rainy day economics
Story by Elspeth Cisneros
Citrus Heights City Manager Henry Tingle takes a straightforward approach to budgeting: potholes before palaces.
A few years ago, when many cities were flush with cash from the housing boom, focusing on the details of street repairs over more striking projects seemed an utterly mundane strategy.
Now, Citrus Heights’ method appears a model of fiscal responsibility. In a region struggling with deficits and other fallout from the residential real estate market, looking anew at city budgeting seems inevitable.
Vallejo became the most extreme case of financial distress when it filed for bankruptcy protection in May. Closer to home, Sacramento faces a $58 million deficit, resulting in significant budget cuts to all departments. In contrast, Citrus Heights, with a general fund budget of $34 million for the upcoming fiscal year, has tucked away $35 million for a rainy day fund.
The city of 85,000 may have watched enviously as neighbors Elk Grove and Sacramento took initial steps toward grand projects like a high-design civic center and the transformation of toxic railyards into an urban oasis, but ultimately, says Tingle, keeping sight of the basics has meant stability for his city during current tight times.
“It’s really not about a large Taj Mahal infrastructure,” Tingle says. “Our priorities are fixing sidewalks, overlaying streets, landscape beautification and aggressively going after blight in this community.”
Citrus Heights’ thrifty focus wasn’t born purely of virtue. Because the community was already built-out when it incorporated in 1997, city leaders knew they wouldn’t have the same access to revenues from expanded residential development in what was to become a rapidly appreciating market.
The majority of general funding for most municipal governments comes from property taxes. According to the U.S. Census Bureau, these taxes account for an average of 40 percent of general revenues for cities nationwide.
Thanks to the real estate bubble, Sacramento saw its overall revenue grow from just under $300 million in 2003 to approximately $400 million at the beginning of fiscal year 2007. Since then, revenues have stayed flat and are projected to fall slightly by 2009, according to the city.
“Our problem is we have several years of annual cost increases in labor contracts and other commitments the council approved and no revenue growth to back those up,” says Russell Fehr, the city’s finance director. He says Sacramento is one of the few full-service cities in the region, providing a convention center and museum among other services. “We do a whole lot more stuff than other cities do, and because of that, we have a greater vulnerability.”
Gerald Prante, an economist at the Washington-based Tax Foundation, estimates that most cities still have a ways to go before seeing improvement. “Assuming the [tax] rates are left alone, property tax revenues are probably going to fall dramatically this year and next year,” he says.
Although it may have its financial house in better order, Citrus Heights has still seen general fund revenues fall 3 percent. Unlike Sacramento’s property tax revenues, however, Citrus Heights’ losses are more related to an overall downturn in consumer spending.
Because of its revenue neutrality agreement — a 1992 law requiring a newly incorporated city to hand over a portion of its revenue to its county — Citrus Heights receives virtually none of its property tax. Instead, 38 percent of its funding comes from sales tax.
The eight-year-old city of Elk Grove has a similar revenue neutrality setup with the county, which receives 85 percent of the city’s property tax. Perhaps the unexpected result for Elk Grove, which unlike Citrus Heights had fast-paced growth followed by an abrupt slowdown in residential construction, is that the real estate market hit is less direct because it was already accustomed to primarily working off sales tax revenues.
But as the economy slows, this revenue source is also imperiled. In many cities, including Elk Grove, car dealerships are one of the primary sources for sales tax dollars. The city’s Finance Director Becky Craig hopes a new shopping mall will make up for gaps in revenue, but cars are likely to follow homes in seeing steep declines in demand. Already, U.S. car sales are down from 5.2 million between April to January 2007 to 4.8 million for the same period this year, according to Ward’s Automotive Reports.
Paul Navazio of Davis finds that trend worrying. Though the slow-growth college town hasn’t felt the impact of the housing downturn the way many Central Valley cities have, the assistant city manager says lower car sales ultimately could be the bigger financial obstacle.
“Despite our reputation as an environmental, green [and bike-friendly] community — that’s a well-deserved reputation — the fact of the matter is that we rely heavily on sales tax from automobile sales,” he says. The city’s auto row, some nine dealerships facing Interstate 80, make up half of the city’s overall sales tax, according to Navazio.
Citrus Heights hopes low elasticity of demand for its retailers will get it through the economic downturn. With stores like Costco and Sam’s Club selling everyday items, and only one car dealership, city officials are crossing their fingers that consumer spending stays steady.
In Roseville, City Manager Craig Robinson has found that making distinctions is less helpful because losses in sales tax dollars are rooted in real estate troubles. “A lot of family disposable income is related to their housing and their ability to finance purchases through lines of credit and second mortgages,” he says.
But interpreting economic factors only tells half the story. There’s another equally important side of any city budget: labor costs.
At Citrus Heights City Hall, the approach is to bring on more contract workers to keep costs down. Tingle says he aims to keep the staffing level needed for a normal to light workload and hire contract workers to make up the difference during busier periods.
Some other cities like Berkeley tend to shun the contract model in favor of bringing as many workers in-house as possible to ensure that everyone receives a living wage. Davis is considering a similar ordinance.
“We’ve tried to be realistic about what we can and can’t do based on the demographics of this city,” Citrus Heights’ Tingle says. “When you try to keep up, you generally start creating financial problems for your agency.”
Luring employees with work-life balance rather than top-level pay is another tactic. When the city created its police force in 2006, it aimed to offer a median salary range, sweetened with a generous package of benefits and scheduling flexibility. Police dispatchers and record assistants work 12-hour shifts, but only for three days a week, making a 36-hour workweek with four days of weekend.
For sworn officers, the city offers a month-long paid sabbatical each year in addition to vacation time. Citrus Heights patrol Commander Mark Boettger reports that nearly 4,000 applicants applied for 130 positions, and the department now maintains a waiting list of officers who want to come onboard.
“We aim not to pay the most or pay the least, but to offer the most unique environment that offers salary and benefits, and I think one of the most important things, working conditions,” says Boettger, connecting a less stressed work force with higher productivity. He reports Citrus Heights police reduced traffic fatalities by 57 percent and curtailed auto thefts and burglary by 26 percent in 2007.
Pointing to lack of developable land as the force that made Citrus Heights find alternative ways to get by, Tingle predicts many other cities will soon face the same situation, undergoing major changes in their budgets. “I think a lot of cities will now have to feel the pain for a few years until they start to reinvent and get through that paradigm shift,” he says.
In the meantime, city governments may yet face another wave of financial difficulties. Whatever problems municipalities have had with their budgets, the state’s fiscal problems run far deeper. Local officials see the potential for the state to come to them for revenues.
During the 1990s, Gov. Pete Wilson moved billions in local property taxes to schools to ease the state’s financial burden during that budget crisis.
Although proposition 1A, passed in 2004, allowed the state two final raids into local revenues in exchange for agreeing to leave them alone in the future, city officials are nervous about how well the new rules will actually protect them when put to the test.
Cynthia Kroll, a regional economist at UC Berkeley’s Fisher Center for Real Estate and Urban Economics, sees the scenario as a possibility, though the new protections should make such maneuvers more difficult. “The state knows if they go to local governments, they have to pay it back in a couple years, which they didn’t have to do in the past,” she says.
City officials remain on alert. “Just about every city manager in California is concerned about what this multibillion-dollar state budget deficit is going to do to us,” Tingle says. “We’re hopeful that the state will deal with its own deficit problem and not balance its budget on the backs of local governments.”
Luring private investment with public improvements
by Elspeth Cisneros
In a place like Citrus Heights, developers can’t simply find an open field and plunk down a strip mall. Not that it’s altogether that simple anywhere. But in this city, most of the land had already been built into neighborhoods and commercial districts when the city incorporated in 1997.
That leaves current development with infill projects, building on the odd-sized plots of land wedged into the nooks and crannies of a town. Besides anomalous proportions, the challenge for development is finding a compromise with residents who often prefer a quiet, unused parcel of land near their homes than new commercial buildings.
Despite that, the city was able to bring in both a Costco and Wal-Mart surrounded on all sides by residential areas. “Think of what we had to go through in terms of conditions on that project to minimize the impact on the neighborhood,” says Citrus Heights City Manager Henry Tingle, crediting his redevelopment department with taking time to listen to numerous concerns about the projects.
“To develop and redevelop in existing neighborhoods is by far the most complex, challenging development,” he says. Though residents may like the idea of having more stores in the vicinity, they would rather not see them out their windows. “Not next to me. Not in my neighborhood,” says Tingle, describing the outlook.
The other option is redevelopment, which has caught on big. Following the successful revamping of Citrus Height’s historic Sylvan Corners, the city’s aging Sunrise Mall was recently bought by Newport Beach-based Steadfast Commercial Properties. Steadfast has already submitted plans to the city for approval after buying the property last January. The new owner plans to add 170,000 square feet featuring a movie theater, restaurants and shops, as well as major renovations and tearing down some of the existing buildings.
Tingle credits the city’s focus on keeping things like sidewalks and handicap ramps in shape for bringing in investment. Citrus Heights put $5 million into fixing up the Sunrise Corridor, the city’s main commercial area, with landscaping and beautification projects. “As a result of that, we have more than $40 million in private sector investment that went in, in terms of the new stores, the renovations and so forth,” he says. “It’s what I call the real public-private partnership.”
