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Tim Myers: Credit is due: the revenue side

Myers Musings

Posted: September 5, 2009 5:15 p.m.
Updated: September 6, 2009 4:55 a.m.
 
Part 2 in a series.

Dr. Norbert J. Schuerman served the Omaha Public Schools ("OPS") in the capacity of superintendent for more than 13 years from 1984 to 1997, serving the prior 11 years in the capacity of associate and assistant superintendent.

Personally working in Omaha from 1985 to 1994, I felt that Schuerman enjoyed a strong tenure of leadership, despite the fact he never worried about revenue.

Schuerman's detractors liked to refer to him as the "8-percent man."

For many years, he would prepare a school budget that required an 8-percent increase in tax receipts, primarily from local property taxes levied directly by the Board of Education.

In the non-Prop 13 environment of Nebraska, the Board of Education by majority vote could raise the levy at will if tax receipts did not increase organically by the enrollment of new property.

Imagine if people could raise their pay or the receipts of their businesses 8 percent year over year with just a majority vote of 10 or less people.

Within 10 years, they would double their pay or the size of their business without any real effort, and the OPS did in fact double its budget.

Would that municipalities like Santa Clarita possessed that flexibility?

Unfortunately, the sources of revenue for cities in California post Proposition 13 not only fail to provide flexibility, they also slant themselves towards cyclical volatility.

Since Prop. 13 effectively flattened increases in historical property taxes, municipalities seeking revenue must chase the holy grail of sales taxes, development fees, and the higher enrolled property-tax values engendered by commercial and residential development.

During the years prior to 2007, the city of Santa Clarita enjoyed healthy doses of all three of these.

Developers of residential tracts filled the city coffers with high mitigation and other fees to execute on the development in the Bridgeport and Woodlands area of Valencia, for example.

They then built houses sold at prices not seen before in the Santa Clarity Valley and the houses hit the property-tax rolls at those perhaps bubble-inflated values. Those inflated prices pushed up the prices of other homes in the city, and the sale of those existing homes at the higher values also levered the property tax roles; a seemingly endless cycle that many thought would last forever.

Think of the sales-tax-generator growth in the last 10 years.

Two WalMarts and one Sam's Club within the city limits in one calendar year.

A new Target and Lowes in the Golden Valley area also contributed, but everyone knows the real sales tax bonanza occurs where people spend $40,000 a transaction in auto row.

This sales-tax generator also benefited indirectly from the real estate boom.

Homeowners feeling flush with the increasing value of their homes thought nothing of spending $40,000 to $60,000 on vehicles, sometimes even borrowing money on home equity lines to effect the purchase, undertaking on a small scale the bane of Finance 101 that led to the eventual demise of so many businesses; financing short term assets with long term debt.

The city and auto row made one mistake in their joint marketing campaign: They appealed to city patriotism to keep the sales-tax revenue within the city.

They should have just kept hammering home how much the median residence price increased every month!

What goes up must come down. The credit crunch after the failure of Lehman immediately stopped development by drying up credit.

The seizing of credit in the subprime market one year earlier stopped the musical chairs of spin and refinance that resulted in ever-increasing foreclosures, with the attendant decrease in home values squeezed on both the supply and demand side.

The Los Angeles County assessor on its own volition lowered the enrolled values of many homes purchased during the peak of the boom by up to 25 percent.

Add to this an up to 50 percent crash in car sales from an auto row that at times generated up to 30 percent of sales-tax revenue for the city and you have the makings of catastrophe of epic proportions.

The city endured all the ill winds of tax-receipt misfortune during the current economic troubles, so we know their recent credit upgrade could not relate to some magic bullet strategy to maintain tax receipts in such an environment.

Therefore, the upgrade in rating must relate to the other side of the budget equation: Expenditures.

The next column will explore this for the city of Santa Clarita.

Tim Myers is a Valencia resident and CPA who thinks numbers hold the key to everything. His column represents his own views and not necessarily those of The Signal.

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