Santa Cruz prepares to dig itself out of one of the worst budget deficits in its history.
Is there a trickle of hope?
Ten trillion dollars sounds like an imaginary number floating off in space, intangible and far from the reaches of understanding. The United States’ deficit has passed that figure and continues to grow incomprehensibly. Even California’s $24 billion deficit is hard to realize. Although, with proposals such as closing more than 200 state parks, locals are now beginning to feel the enormity of the economic crisis in their daily lives.
But it is at the city level where the gravity of extreme deficit truly hits home: a neighborhood’s library is forced to shut its doors; police officers are handed lay-off notices; a family’s favorite park falls to ruins because of maintenance cuts. Suddenly it’s all very real. And, with the City of Santa Cruz slated to slash $9.2 million from its budget by July 1, the community is about to come face-to-face with that reality.
According to City Manager Richard Wilson, the last time Santa Cruz even planned to break even financially was in 2001. The city has been in “reduction-mode” since 2002, having since made more than 10 rounds of budget cuts, reducing the city’s budget by $14 million and eliminating 111 job positions. But although deficit has been cause for concern for more than seven years, it escalated into a sudden fiscal emergency toward the end of 2008 when the inescapable effects of the national recession and financial crisis caught up with local governments.
On May 20, Wilson and Mayor Cynthia Mathews stood before a gathering of concerned citizens in the Santa Cruz High School auditorium, attempting to explain the situation. “In late 2008 we realized that revenues and projections for this fiscal year were falling very short,” Mathews told the crowd, a modest turn-out for the city-sponsored Community Budget Forum. At the start of the 2008/2009 fiscal year, the city predicted a $5 million deficit. By the end of 2008, that figure was $7 million. The city took two actions, one in November and another in December, to close that $7 million budget gap with service cuts and revenue increases. The reductions included the elimination of such amenities as the Beach Flats Community Center, Harvey West Pool and the Natural History and Surfing museums, some of which have since been kept open thanks to community donations. After the two balancing acts were complete, the city planned to close the remaining $2.4 million deficit with salary savings.
However, just a few months after finding a way to save $7 million, the city found itself facing another $6.7 million deficit, a figure that city leaders have since adjusted to $9.2 million, and project will continue to grow. The deficit estimate stood at $8 million at the time of the Budget Forum, where Mathews explained to attendees that, unlike a national or state government, a city must deliver a balanced budget. “We can’t just keep running [the deficit] up and up,” she said, noting the city’s looming July 1 deadline. “We’re grappling with concepts that we’ve never grappled with before.”
$8 million in Perspective
When we talk about cuts to the City of Santa Cruz budget, we’re talking specifically about reductions to the net General Fund. Of all city services, there are those that have built-in fees and support themselves, and there are those that ride on the back of the tax base. The first group of services, such as water, refuse, and wastewater management, are known as “enterprise funds” and are self-sufficient, and thus spared from the perilous budget chopping block. The second group is those that comprise the net General Fund, and are almost entirely funded by the city’s tax receipts.
Police and fire hold the largest share of the $55 million-plus net General Fund, at over 60 percent, followed by Parks and Recreation at 12 percent. Other groups include Public Works, Social Services, Human Resources, Libraries and the city payroll, among others.
In a May 19 budget memo addressed to Mayor Mathews and the city council, Wilson attempted to put $8 million in cuts to the net General Fund in perspective: “How much is $8 million? It is the entire Parks and Recreation Department’s budget. It is 80 full-time employees. It is 20 percent of the net General Fund payroll. It is 42 percent of the non-public safety net General Fund payroll. It is an amount that cannot be obtained in any remotely reasonable way without obtaining pay reductions from the city’s employees.”
The 2010 fiscal year budget issued from Wilson to the city council on May 27 laid forth a proposal to reach $3.8 million in compensation reductions, $2.1 million in new revenue (by increasing charges to enterprise funds), and $3.3 in service cuts. All city employees—everyone from Wilson himself to police officers and council members—were asked to take a voluntary 10 percent pay reduction. Even in the best-case scenario, in which there would be 10 percent pay cuts across the board, the city would still be left with $4 million to make in cuts—the equivalent of laying off 40 city employees. If some or all of the bargaining units refused the reduction, the worst case would be realized: the city would be up against at least $6 million in pure reductions. The city is still in negotiations with all bargaining units; although a tentative agreement has been reached with all non-public safety units to take the 10 percent. As for public safety, Assistant City Manager Martin Bernal says negotiations will most likely result in something slightly different.
“It’s much harder to do 10 percent furloughs [with the police department],” he says. “We are in negotiations with the unit there to do something that would reach equivalent savings through a mix of different approaches, and allow them to still operate 24 hours.”
All bargaining units are expected to reach a decision sometime this week, although none had been announced as of press time.
As for the $3.3 in spending cuts, the goal will be met by closing the Teen Center starting Jan. 1, 2010, cutting 30 percent of Social Service funding, “defunding” several vacant city positions and eliminating some filled ones, cuts to park maintenance, and more.
The council reviewed the 2010 budget at a meeting on Monday, June 8, at which time they provided feedback and guidance to the city on the proposals. The budget will be finalized after a vote at their July 14 city council meeting. The aforementioned closures and cuts are technically tentative until that time.
The State’s Affair
The roots of the budget problem are extensive. At the core of it all is the inextricable tie between local government and the national and global economies; as they worsened, so did cities. The “bursting of the real estate bubble,” in the words of Wilson, made things even worse. Santa Cruz started the last fiscal year with less than projected—$10.7 million instead of $12 million—and has experienced a steady decline in sales, property and utility tax revenues, which are the city’s main sources of income.
The defeat of Measure T, or “the 911 tax,” was another detrimental blow to the city budget. A mandatory 911 fee, attached to residents’ phone bills, had brought $1.3 million into the city each year to fund Netcom, the Santa Cruz County Emergency Call Center. A series of California court cases turned these fees into a tax. Santa Cruz, the county, and the City of Watsonville put variations of the tax on a mail-in election ballot last summer. All three were voted down. For the City of Santa Cruz, that meant $1.3 million less in the annual budget.
The results of the May 19 statewide special election will also unavoidably impact local governments, most of which are also in a dire financial jam. To cope with the failure of five of the six ballot measures, all aimed at fixing the state’s massive deficit through borrowing and redirecting funds, Gov. Arnold Schwarzenegger proposed the state borrow more than $2 billion in local property taxes—a little more than $1.5 million from the City of Santa Cruz, specifically. This isn’t the first such loan; the state shifted property tax revenues from local governments to the state during the recession of 1991, and again in 2002.
Deanna Sessums, Monterey Bay public affairs manager for the League of California Cities, is Santa Cruz’s league representative. She says that, among the reasons the organization opposes the governor’s new proposal, the state has proven that is incapable of repaying loans.
“When Gov. Schwarzenegger first got into office, he said that the state was going to borrow from local governments, but that it was one-time borrowing only,” Sessums says. “Today the state is still paying off that loan—they are $24 billion in the hole, and $3 billion a year, at least, of that is in paying off tax borrowing.” Sessums is referring to 2004’s Economic Recovery Bond Act, which allowed the state to borrow $15 billion. “[From this] it is clear to us that they have no idea how they would pay us back, and it does nothing to solve their problem.”
The league has launched the “Save Your City” campaign on the platform of protecting California’s cities from “state raids on city government and redevelopment funds.” According to Sessums, demanding money from an unwilling lender, especially while deep in debt, doesn’t make any sense.
“When you’re in the hole personally, the last thing you do is borrow even more,” she says. “You find a way to cut your spending and make more money, but you don’t borrow your way into further debt.”
It may not make sense, but it may be one of the state’s only options.
Assemblymember Bill Monning (D-Carmel), who has presided over Santa Cruz County since elected in November 2008, says that the belief that the state is taking locally grown money is a misconception. Most of the borrowing will be from joint local-state programs or come in the form of temporarily extending less support to local governments, he says.
“I want to look for every other alternative [other than borrowing],” he says. “But when it gets presented as a taking, it doesn’t do justice to the interdependence of the health of the state budget and the local economies.”
Monning says that borrowing is not the most appropriate path to take, but there are obstacles hindering the legislature from trying others.
“There are some endemic problems in the California government that exacerbate the problem,” he says. One of those problems is the necessity of a two-thirds majority vote to pass anything in the legislature.
Of the three main ways to solve a deficit—spending cuts, creating new revenues, and borrowing—he says that the inability to reach a two-thirds majority has prevented new revenues from even being considered. “That option is off the table because we can’t get the two-thirds votes in either house,” he says. “There is not enough legislative support to raise new taxes or [get them] from new sources like oil extraction fees or a one-time surcharge on those with the highest incomes.” Accordingly, that leaves cuts and borrowing.
Still, neither Sessums nor Monning can deny that California’s failure to manage its budget will have visible consequences on its cities.
“The City of Santa Cruz is already looking at dramatic cuts,” says Sessums. “It would be impossible for the city to absorb the cuts of this magnitude without impacts to the services that residents receive.”
Busting the Basics
To address the changes looming on the city’s horizon, council members Don Lane, Lynn Robinson and Tony Madrigal held Community Listening Sessions over the past two weeks to hear the public out on the matter. According to Lane, Cruzans are beginning to show an interest and understanding proportionate to the size of the problem.
“Over the years the city has had budget problems and people have heard [about] and seen what are relatively modest impacts on public services, so they couldn’t necessarily tell initially that this was different, and it really is,” he says. “People are really getting that now. The magnitude of this one is so much greater, and people know the difference because they can see it in their own lives.”
Perhaps they see it because a friend or family member lost their job, or because their favorite city amenity was forced to shut its doors. But when millions more is inevitably taken from city departments, the impacts will move from noticeable to inescapable.
Thinned public safety may prove the most worrisome. Zach Friend, spokesperson for the Santa Cruz Police Department, says that the department received more calls last year than any other year in its 143-year history. The force is fully staffed for the first time in decades, but following reductions, it will have to cope with increased needs with fewer resources.
“We haven’t made specific decisions about what would be cut, but we may be moving toward a situation where you may not be able to reach a police officer for things that are lower priority,” says Friend.
In the short term, expect to see extensive cuts to spending. Cuts and closures will put jobs on the line, not mention venues like the Santa Cruz Civic Auditorium, the Louden Nelson Community Center and the 1,600 acres of open space and parks, suddenly all in the line of fire. Some of these places may reopen as non-profits, be privatized, or run by volunteers; some may regain city funding. In the long term, the city plans to increase its tax base and operate at a lower cost in an effort to replenish the cuts and provide Santa Cruz with the level of service it deserves.
If there’s any more hope, it may be coming from Wilson. In an exclusive GT Q&A, he sums up the current economic conundrum this way: “The state of California is an example of an inability to govern itself; the state has failed. We are now a failed state. That is an ugly thing. And Santa Cruz won’t follow suit.”
The Economic Outlook from Santa Cruz City Manager Richard Wilson
By Elizabeth Limbach
“If I look very tired, and sound weak in the voice, it’s because I am,” Richard Wilson, Santa Cruz city manager, said half-jokingly to the crowd at the May 20 Community Budget Forum. Wilson has been in an arduous battle with the city’s ballooning deficit since it became dire late last year. The fiscal crisis has been the most trying experience in his 28-year tenure as city manager; and yet the burden of balancing an unceasing budget deficit has not tired him of the job. GT caught up with Wilson earlier this month in his office at City Hall. Pictures of Wilson’s smiling granddaughter line the walls above his desk and his unexpected air of tranquillity—although frequently punctuated by sudden, wide-eyed looks of grave concern—suggests that, even in the face of grim economics and inescapable challenges, the man behind the town’s budget remains hopeful.
GOOD TIMES: Have you seen anything in your 28 years as Santa Cruz City Manager that compares to this crisis?
DICK WILSON: No, nothing even close. I don’t think we’ve seen a challenge that is this thorough going. The earthquake was a huge challenge, but it was a narrower one than this. I don’t want to take anything away from that experience, because we had exceptional leadership and the community came through that with a vision for its future and we’ve enacted it. We now have one of the most attractive downtowns ever. We have a good history of having done really well in a crisis, so I’m hoping that, looking back, we’ll be able to say the same thing.
GT: When did the magnitude of the city’s budget deficit become evident? Were there signs, or was it a surprise?
It is a reflection of the recession, so it started in 2007–-but both the financial crisis and the recession were going on for months before anybody knew. We didn’t see the evidence until Fall 2008 that we were seeing a major event for us. At the end of 2008, early 2009, we defined our deficit as about $7 million, and we redefined it as $8 million shortly after. The council cut $7 million in December and January. [At that time] I knew we weren’t all the way, but I never would’ve guessed we weren’t even half way to dealing with the issue.
GT: In one of your budget memos to the city council you said that, had the gravity of the situation been known, the city would’ve made more cuts, sooner. What could’ve been done?
The same cuts, but sooner, and with the wisdom of hindsight. We are actually ahead of the curve, though. We were among the very first to make extensive reductions in the face of this economy.
GT: There is no way around making some tough cuts—what will be first to go?
It has to be amenities. We have to look at things like the Teen Center, the Civic Auditorium, the Louden Nelson Community Center, and what our park maintenance levels are. [Parks and Recreation] is the biggest non-public safety service we offer, so inevitably we go there when we need a lot of money because we have no choice. Community programs are gong to have big cutbacks, probably amounting to several hundred thousand dollars. There will be a huge impact on local nonprofits that provide services to people in this community and enjoy a very strong level of support from the city. I think [the cuts will] start pushing the basics pretty hard.
GT: How will public safety be affected?
Sixty-percent of what we do is police and fire. We’ve actually taken a very small percentage from police and fire so far, through the several rounds of reductions already made. [But] we’ve come to a place where we can’t spare them any more. We have operated with a smaller force before, and we can do it again –- it will simply be a big negative for the people in the department who have less help and a bigger workload, as well as a bigger challenge for the city in the long run to meet the needs we have with a smaller number of people.
GT: What are the city’s plans for increasing tax revenues?
The major change we’ll see in the years ahead will be in the visitors’ sector, where we’ve had a significant increase in the number and quality of rooms. With the development of the Marriott, the Holiday Inn Express, the La Bahia, and the Dream Inn remodel, we should see additional hotel occupancy tax receipts in the years ahead. That sector of the local economy is very promising for the future, and is where I’m most optimistic.
GT: How is city leadership managing the predicament?
With the city council there are all kinds of things that there will be seven different opinions about, but in addressing the extreme circumstances we have here, it’s remarkable how focused and disciplined all seven council members have been throughout the experience. It isn’t that we don’t have a choice [to make it work] –- the alternative is you do what [the City of] Valejo did, and you fall apart. You say we can’t govern ourselves. The state of California is an example of an inability to govern itself; the state has failed. We are now a failed state. That is an ugly thing. And Santa Cruz won’t follow suit.
GT: How much of the local level budget crisis is the state’s fault?
A lot of it. If cities had the tax base that they [used to], they’d still, of course, be making reductions and reducing costs in the face of this economy, but we’d be doing nothing of the magnitude that we are doing now. The collective impact of all of the state measures–-from Prop 13 to 62 to 218, and all sorts of other provisions—make for a tortured financial structure. No sane person or group of people would ever create something like what [California] has. To add insult to injury, the state made massive transfers of local tax receipts to the state in 1991 and again in 2002, and now they’re doing it again in 2009. All told, those will amount to probably well over $10 billion a year. If the state had dealt with its own issues, the local government sector would be $10 billion a year better off today. We’re at the bottom of the totem pole.
GT: What needs to change at the fundamental level of the state’s government and its financial structure to prevent an economic crisis like this from occurring again?
The structure is broken from top to bottom, no matter if you’re a conservative and want less government or if you’re a great supporter of public goods and services. The whole structure needs to be redone. Political process isn’t about policy, it’s a raw competition among political forces. But, clearly, no one would have designed the mess we are in … but how to dispose of it and put something back together that makes sense [is] an enormous challenge.
GT: How do you think the community will handle the changes?
I think there will be a level of acceptance for a while, where people will be OK if median strips aren’t maintained and the parks don’t look so good. But then, and maybe it’s farther down the road, we’ll reach a place where we say that’s not who we are or what we want; it’s not good enough. People in Santa Cruz don’t regard the parks and the open space, and the arts and community programs, as expendable; nor do I. What kind of a community do you have when you take all those things out? The range of public goods and services is essential.
Most of what local government does is indispensable –-most, not everything. You can have a community without libraries and parks if you wanted to, but not many want to. You cannot have a community without water, sewer, sanitation, law enforcement, fire response, and emergency medical response. Take those out for one day, just one day, and what do things look like? They don’t look good.
GT: What is the most interesting thing you’ve learned about Santa Cruz from this experience?
I say this all the time, but the Santa Cruz public is the best public in the entire country to work for. The voters in Santa Cruz are incredibly supportive of local goods and services, so for me, personally, it’s always been a wonderful thing to be working in the local government environment and doing my best to contribute to the provision of products that people really want and value. We don’t always think of Santa Cruz as being grounded in economic reality, but the acceptance of the reductions shows how grounded people actually are. It’s shown me more than anything else how people, in the worst of times, pull together pretty well. We’re still in the constructive, positive response mode, I hope we stay there, and I don’t have any reason to think we won’t.