The state could force Gilroy to lend it more than $1 million,
easing its own budget concerns while worsening the city’s fiscal
plight.
The state could force Gilroy to lend it more than $1 million, easing its own budget concerns while worsening the city’s fiscal plight.
Gov. Arnold Schwarzenegger and state legislators are considering a proposal from the state Department of Finance to borrow 8 percent of local property tax receipts to close a gaping $42 billion deficit. The money, which could amount to more than $2 billion in revenue for the state, would mean more than $1 million more that Gilroy would need to cover in next year’s budget. This would pose another hurdle for the city, which has already made deep cuts during the past year and which still needs to cut “millions more,” thanks in part to declining property values.
“This proposal should be strongly opposed,” City Administrator Tom Haglund wrote in an e-mail Wednesday morning. “The state has many options to cut its own expenses instead of taking our money.”
Cities and counties, most of which have already approved layoffs and other budget cuts, would probably have to issue debt to cover their losses and perhaps issue more pink slips to police, fire, public heath, recreation and other workers, according to the Department of Finance’s proposal. Haglund has already slashed discretionary and non-essential spending here in addition to laying off 48 employees in January and imposing a wage freeze, and the city council has directed Gilroy’s four unions to cut 16 percent from their respective personnel costs to patch up next year’s expected deficit of about $4.7 million.
This year’s total deficit of about $8.4 million, plus whatever council members can’t cut from next year’s budget, will have to come from the city’s general fund reserve. The reserve fund holds about $22 million, and Councilman Dion Bracco said the council will likely have to turn to it to cover the $1 million Sacramento has been eyeing for a while now.
“We knew sooner or later this was going to happen. They get to do this one time, and the bright side is its out of the way,” Bracco said. “It’s just one thing after another, but we have the money in the bank. We’ll be OK.”
The state constitution allows Sacramento to borrow up to 8 percent of local governments’ property tax revenues as long as it repays the amount, with interest, within three budget years. In November 2004, 84 percent of voters passed Proposition 1A, an amendment to the California state constitution that prohibits the state from shifting property taxes from cities, counties or special districts with certain exceptions. Borrowing is allowed if the Governor issues a proclamation of “severe fiscal hardship,” if legislators enact an urgency statute suspending Prop 1A property tax protection with two-thirds vote of each house, and if legislators enact a law providing for full repayment. The state can only borrow twice in any 10-year period.
Councilman Perry Woodward had also been expecting this day sooner or later, and he said he agreed with Bracco that the council would probably have to dip into the reserve fund while also making budget cuts.
“This is why balancing the budget is so important because if we don’t do that, we won’t have any money in the bank,” Woodward said. “When it comes to the structure of government, we’re at the bottom of the food chain, and people are coming to take things from us now.”
The possible hit from the state borrowing scheme comes on the heels of an announcement that declining property values will reduce Gilroy’s property tax receipts to $8.9 million next fiscal year – about $1 million less than expected. The state takeaway would be in addition to that $1 million blow and would have to be repaid, but the move is still short sighted, said Chris McKenzie, executive director of the League of California Cities, a nonprofit statewide association.
“In the meantime, however, the state will have decimated local public safety and other essential community services and dug itself deeper a hole from which it is less likely to recover,” McKenzie wrote to city council members Tuesday. “This is a step backward to the days of binge borrowing that brought California to the financial precipice in the first place.”
In the proposal, state officials argue that local governments could borrow against the state’s constitutional obligation to soften potential budget reductions, though they have acknowledged that borrowing is not easy in this financial climate.
State officials released their plan about two weeks before residents across the state vote on a variety of revenue raising measures in the May 19 special election. If propositions 1A through 1F pass, the state will avoid a $6 billion deficit in the 2009-10 budget. Planned cuts for California schools and prisons are also expected soon.
Just like Gilroy, sinking tax revenues across the state are already squeezing California’s budget. Santa Clara County relies on state funds for about 32 percent of its annual revenue, and, as a result, it faces a $230 million deficit going into next year.
Gilroy’s state representatives could not be immediately reached for comment Wednesday morning.
