By: Julia Erdkamp, MPA
It’s a list no municipality wants to be on. When Forbes released their list of the Top 5 Biggest Municipal Bankruptcies in U.S. History, three California jurisdictions found themselves front and center. The list left many to wonder: what’s so different about California? What’s the status of California cities and counties today?
If the recent election is an indicator, the issue of financial health remains a critical focus for many jurisdictions. A record number of local measures were introduced on the November 2016 ballot to increase or impose new taxes.
The challenges facing California’s cities are somewhat unique compared to other states. With many local governments facing mounting expenditures and soaring pension costs, the threat of a debt crisis seems to loom over many city halls like a dark cloud. Even for jurisdictions at relatively peak financial condition, “uncontrollable” costs, such as pensions, and high interest burdens must remain at the forefront of their long-range planning. Why? Because what appears to be minor structural imbalances in the current economic environment can quickly manifest into a financial crisis for a jurisdiction as the market inevitably shifts.
On the other side of the coin are financial pressures of a more universal and manageable nature – diminishing or lagging General Fund revenues. As the life’s blood for local government, these financial streams are the most critical to keep flowing. They are also the most vulnerable with financial indicators showing: housing market performance leveling off, increased energy and commodity costs, and lagging economic growth.
So, what are cities and counties to do as all roads lead to an economic turmoil? The Government Finance Officers Association (GFOA) provides a comprehensive, “12-Stage Financial Recovery Process” to help local governments recover from financial distress. Just as physical emergencies require immediate measures to stabilize the situation, fiscal emergencies require prompt action to keep an economic downturn from deteriorating further. The GFOA calls this “fiscal first aid,” and in that there are five primary treatments to apply to revenues for ailing jurisdictions.
Are we collecting all that we are entitled to from our current revenue streams?
Before making any changes to current taxes or fees, a local agency should first consider audit to determine whether or not they are properly collecting the taxes they are already entitled to. Audits are the keystone to accurate, healthy financial performance. Many of the tax sources tied to local revenues are based on the “honor system” of self-reporting to governing agencies (i.e. California Board of Equalization, Franchise Tax Board). Underreported and misreported (to incorrect jurisdictions) tax liabilities are extremely common; this is especially the case with sales taxes, franchise fees, utility user taxes, and business license taxes. Having unbiased and independent reviews of these revenue streams not only ensures equitable treatment for all tax payers, it is the most efficient way to raise revenues without raising taxes.
How can we improve the procedures for billing and collection?
The benefit of audits is two-fold: they provide opportunities for immediate increases to revenue, and can be utilized as a tool to identify procedural inefficiencies or poor controls. If collections procedures are not consistent and fair, look for ways to standardize them. The GFOA suggests a number of ways to do so including public-private partnerships that allow vendors to assist with billing and collection efforts. This ranges widely from assisting with collection of delinquent taxes to complete turnkey solutions for administration of a particular revenue source. In the same way, vendors can also be a useful source when it comes to the automation of certain procedures online.
Are our current fees ensuring proper cost recovery for services?
Cost allocation studies are very common at the federal level. They are required to determine the repayment requirements for various projects, and fees are updated annually based on use.. Local government would also benefit from such rigor related to fees. Ideally, there should be clear connections between program revenues and operating budgets. At the very least, fees should be reviewed to ensure: (1) fees are fairly allocated to beneficiaries of the services (i.e. user fees), (2) expenditures related to the service are appropriate, (3) they’re comparable to neighboring jurisdictions.
Is there a clear correlation between the tax (or assessment) and the benefit to the community?
The most successful tax or assessment measures are those with a clear nexus, where the public can see a direct connection between the tax being imposed and the benefit being realized. There is a perception of greater transparency for “benefit taxes.” Business improvement districts are a great example of this, where a jurisdiction may finance infrastructure improvements in a particular area through additional property tax fees imposed on businesses in that area. More recent trends in California have led way to soda and sugary beverage tax measures. The funds from these taxes are often used to fund school nutrition and public health programs.
Note: There is a fifth Primary Treatment recommended by GFOA that relates to passing delinquent tax liabilities on to a private investor. However, this technique does not apply since California does not allow for the selling of tax lien certificates.
No matter where a jurisdiction finds itself on the fiscal health spectrum, being proactive in asking these questions is vital to ensuring your city doesn’t find itself on any municipal bankruptcy lists. One message made clear by GFOA’s process is that no jurisdiction has to manage these fiscal challenges alone. Just as no one would expect an emergency room patient to operate on themselves, cities and counties benefit from leveraging public-private partnerships to provide the best antidotes for their fiscal health.
About the Author: Julia is a Client Service Manager for MuniServices where she is dedicated to helping local government maximize revenue. Prior to joining MuniServices, Erdkamp worked for 14 years in the public sector including her work for the City of Sacramento, U.S. Department of Interior, U.S. Department of Homeland Security, and the County of Orange providing expertise in information technology, turnaround management, and financial/budget management. Erdkamp attended the University of Southern California (USC) for her undergraduate education and holds a Master of Public Administration magna cum laude from the USC Sol Price School of Public Policy. Julia is available via email or cell to discuss strategies for protecting and maximizing municipal revenues, julia.erdkamp@muniservices or (559)246-2901.