By Zach Friend, Supervisor, Second District
Recently, the Board of Supervisors received an update on our mid-year budget. This provides a check-in halfway through the year to give a sense of challenges that may be on the horizon, changing conditions from what we adopted in the budget in June of last year and also the integration of any Board-directed requests up to this point.
Economic Conditions
The past year was marked with continual rising inflation and some sector-specific job losses (in particular the tech sector) that have impacted our region. Rising interest rates have slowed home sales, which has an impact on property tax growth in our area, and consumer retail spending has also declined — impacting sales tax intakes.
Overall, the local unemployment rate has averaged 4.4% — one of the lowest rates in the last 30 years. The overall economic trends led County budget staff to project a decline in sales tax revenue and increased growth in core services that are in higher demand during economic downturns (such as human and health support systems and public safety response).
General Fund Forecast
While it’s challenging to forecast economic conditions, there are known obligations and some assumptions of revenue conditions that can help the Board with budgeting. Federal Recovery Act funding during the pandemic is winding down, many FEMA claims for the COVID-19 pandemic and CZU fires declared disasters have yet to materialize and the County just faced its third declared disaster in the last three years.
Overall, the County is awaiting more than $67 million in outstanding FEMA claims, which is straining multiple areas of the County budget. Additionally, the most recent storm damage has direct costs in County response that we anticipate will also take some time to get through the federal reimbursement process.
The major assumptions for FY 2023-24 include a 1% decline in sales tax, a slowdown in growth in certain property tax transfer revenues, and collection of up to $16 million in FEMA obligations that would be used to restore and strengthen reserves. County budget staff assume normalized cost increases for wages and benefits, a continued decline in costs associated with professional services, and increasing facility capital investments.
In additional to normal revenue and cost growth, the long-range forecast includes allowances for programmatic cost mandates such as the Community Assistance, Recovery and Empowerment Act in FY 2024-25 and increases in health care costs for those residing in detention centers and other state-related mandates. Put simply, there is an expectation of additional state-mandated program costs coming to County in the coming years but at this point much of the funding provided is one-time – which creates an on-going gap.
Proposed State Budget: $22.5 Billion Deficit
Gov. Newsom released his proposed budget. The Governor’s budget estimated a deficit of $22.5 billion.
The financial challenge the State is facing is from steep declines in personal income tax, corporate tax, and state sales tax revenues. The State is considering a number of one-time solutions (delaying and deferring programs, funding) as well as reductions to close the gap. There is a lot of back-and-forth that will occur between now and the final budget adoption between the Legislature and Governor’s Office — and at this point it’s unclear the extent by which our County will be impacted by the deficit and cuts/delays.
Transient Occupancy Tax & Cup Tax
On the June 2022 primary election, voters approved two general taxes through ballot measures known as Measure B and Measure C. These increased the Transient Occupancy Tax to 12% and 14%, respectively, for hotel and vacation rental stays, and created the half-cent Single-Use Cup Tax. Both became effective on Jan. 1, 2023.
The TOT measure is an essential part of the County’s strategy to offset the structural ongoing deficit and is estimated to generate annualized revenue of $2.3 million for FY 2023-24 and approximately $860,000 for FY 2022-23. Although the FY 2022-23 amount is for half the year, it is proportionally lower as the January-March quarter is generally the lowest activity quarter, generally collecting only 15% of the total annual revenue.
Revenues
The County’s primary General Fund revenues are generally meeting our budget expectations, except for two which are expected to fall short this year. The FY 2022-23 budget for Sales Tax will be reduced by $1.1 million and Cannabis Business Taxes will be reduced by $1.5 million.
Our two largest general purpose revenues, Property Tax and Vehicle License Fees are increasing, and Transient Occupancy Tax has returned to its pre-pandemic levels.
Property Tax. Property tax is one of the most stable and dependable revenue bases. Our Property Tax revenues have grown steadily within the constitutional 2% annual growth cap plus the amount of supplemental reassessment triggered by property renovations or transfers. However, it is believed that with transfers slowing down this may not grow at the same pace as it did the last few years.
Sales Tax. Sales tax for our County is the general revenue source with the most variability, as it is directly and quickly impacted by economic impacts and/or changes in consumer behavior.
Inflation and locally high housing costs have impacted retail spending in our community. Year-to-date sales tax revenue is falling short of budget by $1,150,000. Factoring in this slowdown and our projection for an economic slowdown in FY 2023-24, we are currently projecting that sales tax will drop by approximately 1%.
Systematically Underfunded
The County remains systematically underfunded as compared to our county peers and statewide county averages.
We serve a greater percent of the population (50.5%) than our peers (average 15.9%), which requires us to spread smaller tax dollars over a greater portion of our population.
On average, the County receives only about 14 cents on your property tax dollar — the remaining of the 86 cents that you contribute in your property taxes goes to local special districts, school districts and more.
By way of example, our peers per-capita property tax revenue averages nearly $4,000 per resident while the County receives just under $500 per resident.
These combine to limit our County’s ability to reach the service expectations our community expects or that other counties can provide.
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As always, I appreciate any feedback you may have on this (or any other County issue). I’m maintaining regular updates on social media at www.facebook.com/supervisorfriend and you can always call me at 454-2200.