Nearly every city in the Daily Journal coverage area so far has bridged budget gaps through the use of reserves. In San Mateo, it was $12.6 million. In Redwood City, it was $9.3 million. In Belmont, it was $700,000. Other cities, like Half Moon Bay, used money carried over from the year prior but reserves will likely be necessary in the future. San Carlos did not use reserves.
It runs the gamut and points to what could be a fairly troubling trend.
While cities led by smart people build up reserves to use when revenue does not equal expenditures, no one should ever really want to spend those rainy day funds. They are there to be used for times like this, but you never know how much rain will fall or how long the storm will last.
In local and state government, demand for services go up when revenue goes down with the economy. Yet, local and state governments cannot issue funds. The federal government can, and it can also deficit spend. Oh yes, it can deficit spend. This was the case for COVID, and federal money helped local and state governments. That money kept people healthy and housed during what is hopefully a once-in-a-lifetime pandemic. But that money is drying up and the financial situation is lagging while we are feeling the effects of the overheated economy and inflation caused, in part, by excess federal spending. It’s a squirrelly financial time and even experts can’t figure out what direction we are headed. One thing is clear for local governments, tax revenue is down and spending is not in that same category. High inflation means people are spending less on taxable extras. High interest rates means there are fewer property sales. Less business travel and tourism means there is less hotel tax. And it seems development is slowing as financing is making it hard for new buildings to pencil out. Spending remains approximately the same. The trendline is alarming.
The taxpaying residents rightfully want service levels to remain the same, or even get better. Cities themselves are growing in their ambition in taking on projects to meet new goals outlined by the aspirations of our elected officials and other forces. Street and park maintenance, libraries and public safety are no longer the basic goals. Now remaking personal power consumption and providing new bicycle and pedestrian infrastructure are included as addressing climate change climbs to the top tier of city goals. Add in the lingering house guest of ever-growing pension obligations, and you have a mix of spendy ideals.
The trick is now about making it pencil out. No city finance director wants to keep flying out the idea of spending down reserves as a way to make it through a rough patch, just as no responsible person wants to spend all their savings at once. There is comfort in a buffer. It’s also smart in case there is a true downturn or other disaster. After all, there is still a chance for a recession and consensus is mixed whether Wall Street is in a bull market or a bull market within a larger bear market. There are many unknowns.
A usual next step is to start seeking new revenue sources and possibly limiting expenditures. That first one means proposals to raise taxes and fees, which is not ever that popular but also may not be possible if economic conditions sour voters on the idea. The second one means cutting employees, which is also not popular since it means less service overall. No one wants fewer parks programs or shorter library hours and most people don’t want less law enforcement.
It’s a bit early to say these options will be on the table just yet, especially since cities are wrapping up their fiscal year budgets by the end of the month. The budgets are balanced, as required, but it’s how they are balanced that is causing concern. The signs of softening are there. More developers are asking for extra time on their project approvals, the only industry on the rise seems to be biotech, real estate is locked up with high prices sticking and few sales, and the extremely high cost of living here does not seem to be abating anytime in the near future.
Looking around, it appears everything is fine. People are jamming restaurants, many retail areas are still drawing shoppers and money doesn’t seem to be a problem for a large percentage of the population. Yet, something doesn’t feel quite right. This may not be a Potemkin village, but there is peril around the corner if you look with a watchful eye.
Jon Mays is the editor-in-chief of the Daily Journal. He can be reached at jon@smdailyjournal.com. Follow Jon on Twitter @jonmays.
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(9) comments
Thanks, Jon, for a plain-spoken column on the economy.
I agree. The "experts" don't seem to have the answers, and that makes it all the more difficult for local officials to map out what services must be provided.
Mr. Mays, thanks for the informative and well-summarized article. I have no doubt we’ll see more and more tax and fee proposals (what economic environment would we not?) and I hope that most folks will vote no. Not because of a desire to minimize services, but because of a desire to hold local and state governments accountable for fiscal incompetence and wasteful spending. We all know at least $30 billion was lost to EDD fraud, untold $billion have been wasted on the train-to-nowhere, at least $19 billion has been allocated to address the homeless crisis with no, perhaps negative, headway into the crisis, to name a few. If these local and state governments can’t get their act together, why enable them with more money to waste?
Jon - thanks for another alert. The City of Belmont is still owed well over $2 million per year by the State for the Vehicle License Fees that are collected upon car registration. That would more than offset the $700K now taken out of the reserves. If we went back to funding our schools without Sacramento interference, we would not have to issue bonds. Sacramento routinely diverts funds that it collects ostensibly on behalf of cities and other municipalities but applies the money to its own, often wasteful priorities. There ought to be a law...
Circa 2015 City budgets did not rely on VLF because there was always the threat that at any moment this funding source could go away. Fast forward a few years later Cities now rely on these funds, and are claiming to be victims. It is ridiculous that this is even considered a revenue. It is essentially a loan, Cities should record a receivable and reduce it as they are repaid, not consider as a revenue. Otherwise cities will overspend and create more pension obligation.
Thomas - if recorded as a Receivable, it would still add to the debit side of the balance sheet. Based on what the city of Belmont is reporting it will never be repaid. And, aren't many revenues subject to a sunset or subject to economic conditions? Isn't that what Jon Mays is alerting us to?
I think the switch to even year elections is going to end up hurting cities. Cities will end up with 3 -4 different needs each election, and need to choose the one that will pass. In addition, general funds will be favored over capital improvements, meaning a further deterioration of infrastructure.
Smart people are different from effective allocators of resources. Money(taxes) that is given and not worked hard for will not be appreciated nor spent wisely.
Most people despise the high cost of living, but higher home prices are the most efficient way for the government to receive more money (provided there are sales and properties get closer to market value).
Belmont's General Fund balance is much stronger than it has ever been, with a balance of almost $30 million at the end of April, which is more than double the balance of about $13 million two years ago. Only $6.4 million of this increase is due to ARPA funding, and the rest is due to strong revenues in other areas.
Belmont's General Fund balance is much stronger than it has ever been, with a balance of almost $30 million at the end of April, which is more than double the balance of about $13 million two years ago. Only $6.4 million of this increase is due to ARPA funding, and the rest is due to strong revenues in other areas. VLF is only about $1.5 million per year so even if lost, it would not support the doomsday scenarios for future years. The top priority of Bemont's City Council for many years has been to raise taxes, and they continue to spin the financial numbers in the most negative way to support this agenda. Belmont's actual budget numbers in recent years have been much stronger than projected, so there is no reason to believe the latest doomsday projections. When I asked in the past, they were unable to support these projections. As I wrote to the Council, our financial condition is very strong and there is no need for alarm now. Wait to see how the numbers actually play out for a few years before making any move to raise taxes.
I'd ask community members to review their cities' budgets. Find the largest category of spending, then find out what that service actually does. Not what we assume it does, but what it actually does. I'll offer one name: Mariame Kaba.
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