Voters had their say.
As expected, the response to the Special Election Propositions 1A through 1E – a confusing cacophony of tax extensions, enactment of a rainy day fund and borrowing from the state lottery to balance the budget – was a resounding 65 percent opposed. Only Proposition 1F, the State Officer Salary Increase Limit, received an overwhelming majority of nods from voters. It passed with as high as 85 percent approval rating in some precincts. The average was 75 percent in favor.
That slamming sound left the state scrambling for $21.3 billion instead of the $15 billion that would have been missing during the May revise process.
City and county administrators watched the results in full knowledge that Governor Arnold Schwarzenegger planned to come knocking on their door to fill at least $2 billion of the shortfall if he didn’t get the result he wanted at the ballot box. He sounded the warning a week before the election after a meeting with city and county leaders in Culver City.
According to those in attendance, the governor loudly proclaimed his support for cities and counties and his reluctance to take money earmarked for local general budgets. Then he released early a two-part budget revision proposal.
The “worst-case scenario” if the bond measures failed was that the would state take advantage of the 2004 Proposition 1A clause that allows “borrowing” up to 8 percent of property taxes normally earmarked for cities and counties.
The stopgap measure would be part of a slew of other cuts to schools and social services. It would also have to pass a two-third vote of the legislature.
Finance managers all over the state, already jarred by difficult budget tuning efforts, started looking for more ways to trim millions of dollars.
In Orange County, where $1 billion must be cut to align shrinking sales tax revenues with expenditures to create a balanced $5.5 billion budget, loss of Prop 1A funds would result in an additional $36.6 million in shortfalls.
“We are already cutting 430 positions, using one-time funds, cost savings and maximizing revenue enhancements,” said Frank Kim, Orange County budget director, as he watched the no votes pile up. “Now we have to look at reductions in services.”
In addition to the general fund loss, Kim could face $12.5 million in special district, parks and flood control shortfalls. “We can defer some capital projects, but things like libraries that are not funded as robustly could be difficult,” Kim says.
Kim tried to look at the bright side. Proposition 1A only allows the state to borrow from local governments twice in a 10-year period and not until the previous three-year loan is paid back. That means Kim shouldn’t have any surprises for two more years.
“That is the silver lining,” Kim says.
At the other end of the state, Greg Clark, assistant to the Redding City Manager, hoped the threat to take the local property tax funds was a “shot across the bow” by the governor warning voters of what might happen if they didn’t approve the compromise deal.
If the legislature follows through on the threat, Redding could lose $1.8 million from a $70 million general fund budget that already removed 60 full-time positions and included “severe” program cuts.
The Redding City Council plans to consider a resolution that calls the borrowing a “severe fiscal hardship.”
More than 40 cities, including Palo Alto, Salinas, Arroyo Grande and Del Mar passed similar resolutions.
“These resolutions are a sign of the serious financial strain many cities face as a result of the economic downturn,” said League of California Cities President and Rolling Hills Estates Mayor Judy Mitchell. “We can’t allow the state to compound the existing crisis facing many cities by taking local property taxes or other revenues.”
League endorsed the propositions.
Like the governor, who was in Washington D.C. on election day, Paul McIntosh, executive director of California State Association of Counties (CSAC) watched the predicted thumbs down from out of state. He was at the National Association of Counties meeting in Oregon.
CSAC didn’t take a position on the special election, but McIntosh plans to protest any attempt to take funds from counties.
“If the state is going to borrow the money with interest, why don’t they borrow from financial markets instead of local governments that are already in tough financial situations?” McIntosh asked.
He also plans to appeal to the legislature’s sense of fairness. Counties are already being hit disproportionally as they deliver social services. “How will the state account for counties that receive different levels of state funding?”
Finally, CSAC plans to speak out in the legislative process. Proposition 1A didn’t stipulate the interest rate the state would have to pay when it reimburses cities in three years (which is coincidentally the same time the elevated taxes expire calling into question the state’s ability to make good on it’s loan).
“There should be some kind of net zero agreement so the state pays whatever interest rates the markets charge so cities can borrow against the repayment of the funds,” McIntosh said.
Social service programs are already at minimum state and federal legal levels. “Counties are caught between a rock and a hard place and will have to start cutting the only discretionary income they have left, public safety personnel,” McIntosh warned.
JT Long can be reached at JTLongandco@gmail.com