By City Manager Greg Carpenter spent much of October telling a horror story of a municipal sort.
Carpenter went wherever anyone would have him. He went to the school board, the city council, the chamber of commerce, the Rotary Club, and the Kiwanis. In total, he gave the same presentation 13 times.
Armed with graphs, numbers, and a short financial history of the City of El Segundo, Carpenter laid bare a simple choice residents will face in the next year: either local voters can choose to increase a battery of taxes, ranging from Utility Users Tax to parking taxes to hotel bed taxes, or they need to accept that their city government can no longer provide the level of services it once did. Without new taxes to address a structural budget deficit projected at $3.8 million next year, everything from police to fire to basic capital improvement planning would need to be slashed in the next two years. In addition, the city has forestalled almost all capital improvement in recent years, leaving a backlog of $4 million in needed repairs on top of an ongoing yearly $2 million needed to keep up with infrastructure needs.
Carpenter looks at the choice as a clarifying one, a fork in the road that will define El Segundo for years to come.
“We have an opportunity to shape our future – either one that has smaller government, reduced expenditures, and reduced services levels. Or to be able to continue to provide services and address our capital needs,” Carpenter said in an interview this week. “2015 is going to be a very interesting year for the city. We get to decide in 2014 what kind of direction we will go in 2015.”
City leaders, including Carpenter, Mayor Bill Fisher and the entire City Council, are loath to raise taxes of any sort. Part of what has historically defined El Segundo is its business-friendly, low-tax ethos – so much so that the city was honored as the most business-friendly municipality of its size in all of L.A. County seven years ago and was a finalist both this year and last after a five year moratorium for winning the inaugural award, given by the L.A. Economic Development Corporation.
Fisher stresses that even with the array of tax increases currently being considered, El Segundo’s tax rates would be lower than nearly every surrounding city.
“No one wants to raise taxes,” Fisher said. “But the way staff has configured the tax option still keeps us competitive, and lower, compared to other cities.”
The dire financial situation the city finds itself in is a result of the lingering effects of the recession, legacy tax issues, and the continuing decline of the aerospace industry affecting all of the South Bay.
The recession hit El Segundo particularly hard. Tax receipts were down across the board, and the city’s investment portfolio took a $4 million hit in one year alone; interest from investments that previously produced $2 million annually in revenue now produces about $160,000. Additionally, the California Public Employment Retirement System (CalPERS) took a huge hit, requiring cities like El Segundo to pay an increasingly large share of employee retirement costs.
The city already took drastic steps in recent years. One in every five city positions, 62 jobs in total, have been cut, largely through attrition, touching every department in the city – the fire department, for example, has gone from operating shifts with 19 firefighters on duty to only 14, thus taking a fire engine out of service. A new “two-tier” retirement system has been implemented giving new hires lower benefits, and all employees have been required to contribute more to their health benefits.
Carpenter said no more cuts could be made without dramatically altering how much service the city can provide its residents.
“We would just be unable to continue to provide services at the level we have been doing, including capital investments – and in reality, those things don’t go away,” he said. “It’s like having a house and deciding not to put a roof on it.”
In a sense, it’s already come to that. A $4 million list of deferred maintenance identified by city staff includes $400,000 in sidewalk repairs that have been left undone. Even things as simple as crosswalk lights that no longer function have not been addressed – the city has identified $130,000 in such repairs – and ongoing street repairs of $800,000 a year have been left to some unknown point in the future, creating a backlog in the millions.
The city already leans strongly on its businesses. According to a staff report, 62 percent of all city tax revenues are from its businesses. Because of its longstanding tax aversion, El Segundo was hit particularly hard by Prop. 13 in 1978 – its low property tax rates were frozen at the time of that reform, meaning that whereas surrounding cities such as Manhattan Beach today receive as much as 15 cents on the property tax dollar, El Segundo receives only 6 cents. Changing this structural problem would require state legislation, a nearly impossible feat for a lone city.
And so in recent years, the city has begun cleaning up what tax issues it has been able to – including last year resolving a longstanding tax issue with Chevron that netted the city $134 million over the next 15 years (without which the existing budget deficit would be in excess of $9 million annually).
Now, the city is looking across the board at its tax rates, which are almost uniformly far below any nearby city and below most in the state. The commercial Utility Users Tax (UUT), for example, is at 3 percent, below the state average of 7 percent and far below Los Angeles’ 11 percent. Likewise, the hotel, or bed tax, is at 8 percent, far below the 12 percent state average. The city is also looking at eliminating a sales tax credit enjoyed by local businesses worth a total of $1.1 million annually, instituting a 10 percent parking tax worth $1.1 million annually, and instituting a Utility Users Tax on consumers as well as businesses.
This last notion was emphatically brought home at Tuesday’s City Council meeting. The council, which hopes to prepare ballot language in the next few weeks for a municipal election next spring that would include all of these tax changes, sought to agree on exactly how much taxes it would need to ask voters to approve. The lower-end estimate was $5.8 million, in order to cover both the structural deficit and the list of delayed maintenance. Council person Dave Atkinson argued that the city needs at least $7.4 million to insure it never finds itself in this position again.
Atkinson said imposing the UUT on consumers as well as businesses was an essential display of good faith and shared burden. The business community, he said, has already indicated its willingness to help – but he said residents need to send a message that, even though their share of the taxes will be much smaller, they are willing to pitch in.
“We are doing this together,” Atkinson said. “We are showing you we care….This is our time to fix it. Our time – not just us five, but all the people who live in El Segundo and who do business in El Segundo and help us grow like we should, not piecemeal.”
The resident UUT tax would cost local consumers roughly $18 to $26 annually.
Council person Marie Fellhauer suggested some of the taxes could be passed with a “sunset” clause intended to end when the city passes its period of crisis. But she agreed that residents should contribute.
“You look at the balance, or the imbalance, that businesses pay of the tax revenue in the city, and it’s ridiculous,” she said. “It really is. It’s not fair. So I am in support also of having residents kick in. This is not redistribution of wealth. We are not seeing money disappearing to Washington D.C. and not come back here. Because it will come back to the city of El Segundo and in what you see and enjoy every day.”
The council will hold a special meeting next week, after the El Segundo Chamber of Commerce returns with a report from local businesses and their preferences for the mix of taxes on the ballot.
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