Tax Plan Puts Segundo Firms on Offensive

Until recently, Hughes Aircraft Co. and other big corporations here considered themselves benefactors, almost patrons, to the city’s 14,000 residents.

Paying a mere $48 a year each in business taxes in 1983, companies were happy to indulge the city’s relatively modest requests--remodeling council chambers, providing consultant services, donating thousands of dollars to the city’s educational foundation, adopting schools and generally being soft touches.

Those days are over.

A tentative City Council decision last month to triple an employee head tax instituted just last year--to $60 from $20--has touched off a wave of outrage among the large business community, souring relations in a town where employees outnumber residents 5 to 1 and leaving many companies doubtful about just how welcome they are in a city once known for its pro-industry environment.

The new taxes also may shatter the city’s reputation as “the cheapest game in town,” as the mayor recently put it--a reputation that in the past drew industry like a magnet, transforming El Segundo’s bean fields and strawberry patches into a dense hub of aerospace installations and towering office buildings. A comparison with other South Bay cities with large industries shows that the increased taxes would rank El Segundo among the most expensive in terms of business taxes.

If the proposed increase wins final approval at Tuesday night’s council meeting, Hughes alone will pay business taxes of about $2.1 million a year, more than 10% of El Segundo’s $19-million proposed general budget for 1985-86. That figure represents a 124% increase from the $900,000 the company paid in 1984-85.

City officials argue that El Segundo is strapped, facing a $2-million deficit that is the result of providing increasingly costly services to industry’s 75,000 employees. That drain, they say, has outpaced the revenue that industry brings in, forcing the city to tap its reserves for the fourth consecutive year.

Until 1982, sales tax from the massive Chevron USA Inc. refinery provided more than 80% of city revenue, fattening reserves and eliminating the need for any other taxes. But when Chevron lost a major fuel oil contract that year, sales tax revenue plummeted, leaving the city scrambling for new sources of income.

While reserves have dwindled steadily since then, industry officials counter that with an estimated spendable reserve of about $9 million, the city still has little justification for raising taxes. The $9 million is part of a $19.6-million reserve that includes “dedicated” funds that cannot used for the general budget.

Claiming that in El Segundo, “voters don’t pay taxes and taxpayers don’t vote,” Hughes officials last week fired the first round in a battle they liken to the Boston Tea Party.

“We were considering placing little tea bags in front of each of the City Council members at the next meeting,” quipped John Brown, Hughes vice president in charge of taxes, “because what we have here really is taxation without representation. But instead, we’ve decided that we need to educate the residents about the issues and what we think is at stake.”

City officials, he said, “have roused a sleeping giant.”

Unlike residents of most other cities, people who live in El Segundo receive city services such as trash pickup and sewage treatment for free and pay only property taxes. In the past, residents have strongly protested any proposals for a resident utility tax or service fees, preferring instead that the city turn to industry.

However many of those residents also are employed by the city’s “Big 7” corporations--Hughes, Chevron, Rockwell International, TRW Inc., Northrop Corp., Xerox Corp. and Continental Development Inc.--that form a virtual employment conglomerate in town.

Several companies are considering following Hughes’ lead in appealing to residents to take into account industry’s perspective on increased business taxes.

No-Holds-Barred Letter

Mailing a no-holds-barred letter to the 1,400 Hughes employees who, together with their families, make up one third of El Segundo’s population, Hughes officials hope to convince employees that the company’s continued well-being rests with them.

“We’re not saying we’re going to leave town,” spokesman James Hurt said. “But when these facilities become obsolete--and eventually they will--we may opt to transfer groups elsewhere rather than modernize here. If we need to expand, we may look to other areas.

“We’ve got a very picky client--the U.S. government--and that client is not favorably disposed to increased costs right now. The Air Force once called the Justice Department to investigate in Culver City because of a tax increase they proposed there. Just because we’re big business doesn’t mean we have endless pockets.”

Culver City eventually dropped its proposal.

The Hughes letter, which was mailed Thursday, says that “economic impact on our three groups in El Segundo would be significant. We put the question to you: Is it wiser for us to pay $1.2 million more to the city as unneeded tax, or to invest money in company programs that will create jobs and improve productivity?”

Resident Employees

The letter asks resident employees to attend the council meeting and state their views. Hurt, who also is president of the El Segundo Chamber of Commerce, said he is urging other major companies in town to send similar appeals to its resident-employees.

Officials at other companies say they are just as disturbed by El Segundo’s pattern of raising business taxes and its reluctance to part with reserves as by the increase itself.

“Industry needs predictability,” TRW spokesman Michael Jackson said. “There has been more predictability in cities such as Torrance, Redondo Beach, Manhattan. Redondo just lowered its utility users tax and rejected an increase in the business license tax. We’re getting signals.”

Redondo Beach reduced its utility tax slightly because it could still balance its budget with the lower rate.

Found Management Lacking

Since the City Council voted tentatively on July 23 to increase the head tax, the corporate giants’ tax experts have been poring over El Segundo’s budget, and have found it lacking in what they call sound money management, spokesmen for the companies say.

Jackson said studies at TRW have shown that some of the city’s so-called “dedicated” reserves of $10.6 million are bloated, carrying four and five times the amount of money needed to cover the city’s obligations. In addition, parts of the $9 million in spendable reserves appear to have been created at whim, he said, citing what the city calls “emergency reserves” of $3.2 million and “dry-period reserves” of $750,000.

The workers’ compensation fund, he said, carries a balance of $1.6 million, despite the fact that claims against the account total no more than about $250,000 a year.

City Finance Director Jose Sanchez acknowledged that the emergency and dry-period funds have never been drawn on. He said they were created, along with three other funds, in 1978 shortly after Proposition 13 was adopted by voters when many cities feared that the state would withhold money from cities with large, unencumbered reserve funds.

Guard Against High Claims

But, he said, the workers’ compensation fund must maintain a high balance to guard against unforeseen accidents or unusually high claims.

Jackson countered that industry is “tired of funding the city’s paranoia.”

“We can’t pay for their desire to operate on a worst-case scenario. Other cities manage to get by on much less.”

To draw less on its reserves, the city last year passed a $20 employee head tax and a 5-cent-per-square-foot floor tax on businesses, in addition to an existing acreage tax.

This year, the staff proposed tripling the head tax, repealing the floor tax and contributing $1 million from reserves to balance the budget. Instead, council members voted 3 to 2 to adopt a budget that calls for tripling the head tax, keeping the floor tax and drawing $200,000 to $500,000 from reserves.

Vote on Tuesday

The vote on Tuesday night will be on the actual ordinance tripling the head tax. Mayor Charles (Chip) Armstrong staunchly defends the council’s decision, insisting that industry has caused “a tremendous drain” on city services and must be willing to pay.

“They’re crying bloody murder now, but what about when Hughes was paying $48 a year for 10 damn years?” he said. “If we wanted to, we could eliminate the head tax and put in a utility tax. That would run them out of town.”

If El Segundo adopted, for example, the 5% utility tax that Redondo Beach charges, Hughes would pay $2.3 million, $200,000 more than El Segundo’s head tax. “We don’t want to do that,” Armstrong said. “But we want the city to run well. I can’t ask the citizens to pay for bills that really aren’t theirs.”

Sophisticated Services

Armstrong said that because of industry, El Segundo must provide more highly sophisticated and extensive services than a city of 14,000 would normally require.

“Hell, we wouldn’t need a 59-man police force to walk up and down Main Street,” he said. “We wouldn’t need a fire department capable of fighting high-rise fires and dealing with hazardous materials. In fact, we’d probably contract out for those services.”

Even though Hughes and some of the other companies have their own fire departments and security forces, city officials say they have a legal responsibility to respond to emergencies at their sites.

Maintenance Costs

City Manager Nicholas Romaniello agreed, saying that while companies often are tapped for the cost of installing new streets and curbs as a condition of development, the city must forever bear the cost of maintaining those improvements.

“They may pay for the street,” he said, “but underneath that street we have to dig sewers and run utility lines. On top we have to install street lights and sidewalks. Then we have to maintain it all.

“Every time a new development goes up, it’s another 1,000 people that paramedics have to worry about, that police have to respond to, another few thousand car trips through the city. All that costs money.”

Romaniello contends that the city should be raising even more money to improve services, add programs and generally raise the quality of life in a city bounded by a refinery, a regional sewage treatment plant and one of the world’s busiest airports.

Put Money Away

“We haven’t had a new program in this city in years,” he said. “Some of the proposed capital improvements in our budget are already 10 years old. We ought to be laying money away for the day when we decide to seriously tackle the noise issue at Los Angeles International Airport, or the smell that comes from the Hyperion Sewage Treatment Plant.

“We’re operating now like a family that by necessity spends its entire paycheck every week. That’s no way to run a family or a city.”

Romaniello scoffed at the possibility of industry leaving town.

“There’s no way we could ever tax industry to the point where it would be feasible for them to leave,” he said. “As for future expansion, they keep telling us they’re going to bring jobs. There are 90,000 jobs out there. With 14,000 residents--many of those senior citizens--the prospect of more jobs is not as enticing as it might be in other cities. If they don’t want to expand here, that’s fine. What this city really needs is a retail-commercial base. We have some hotel developments coming up that will broaden that base. Hopefully, we’ll attract some retail, too.

“But right now, like it or not, we’re stuck with all our eggs in one basket.”

The following is a city-by-city comparison of the business taxes that Hughes Aircraft Co. and TRW Inc. pay in El Segundo and those they would pay if located in other South Bay cities. Figures for both companies are based on number of employees, taxable floor space and average yearly utility bills.

Hughes Aircraft Company El Segundo plant: 30,000 employees, 7.3 million square feet taxable floor space, $47.9 million average yearly utility bill. El Segundo Floor tax-- $365,000 (Based on 5 cents per square foot) Per employee head tax-- $1.8 million (Based on proposed $60 head tax) Utility users tax-- n/a Gross receipts tax-- n/a Total -- $2.1 million n/a means figures not available Carson Floor tax-- n/a Per employee head tax-- $375,000 (Based on $12.50 per employee) Utility users tax-- n/a Gross receipts tax-- n/a Total -- $375,000 n/a means figures not available Manhattan Beach Floor tax-- $72,988 (Maximum allowable) Per employee head tax-- City applies greater of either head or floor tax, with ceiling on both Utility users tax-- n/a Gross receipts tax-- n/a Total -- $72,988 n/a means figures not available Redondo Beach Floor tax-- n/a Per employee head tax-- $14,300 (Based on $13 per employee for first 1,100 employees Utility users tax-- $2.3 million (based on 5%) Gross receipts tax-- n/a Total -- $2.3 million n/a means figures not available Hawthorne Floor tax-- n/a Per employee head tax-- n/a Utility users tax-- $1.6 million (Based on 3.5%) Gross receipts tax-- $50,000 (maximum allowable) Total -- $1.6 million n/a means figures not available Torrance Floor tax-- n/a Per employee head tax-- $870,000 (Based on $29 per employee) Utility users tax-- $2.8 million (Based on 6%) Gross receipts tax-- n/a Total -- $3.7 million n/a means figures not available TRW Inc. 2,500 employees, 650,000 square feet taxable floor space, $3 million average utiltiy bill. El Segundo Floor tax-- $32,500 (Based on 5 cents per square foot) Per employee head tax-- $150,000 (based on proposed $60 head tax) Utility users tax-- n/a Gross receipts tax-- n/a Total -- $182,500 Carson Floor tax-- n/a Per employee head tax-- $31,250 Utility users tax-- n/a Gross receipts tax-- n/a Total -- $31,250 Manhattan Beach Floor tax-- $72,988 (maximum allowable) Per employee head tax-- (City applies greater of either head or floor tax, with ceiling on both) Utility users tax-- n/a Gross receipts tax-- n/a Total -- $72,988 Redondo Beach Floor tax-- n/a Per employee head tax-- $14,300 (Based on $13 per employee for first 1,100 employees Utility users tax-- $2.3 million (based on 5%) Gross receipts tax-- $150,000 (Based on 5%) Total -- $164,300 Hawthorne Floor tax-- n/a Per employee head tax-- n/a Utility users tax-- $1.6 million (Based on 3.5%) Gross receipts tax-- $105,000 Total -- $155,000 Torrance Floor tax-- n/a Per employee head tax-- $72,500 Utility users tax-- $2.8 million (Based on 6%) Gross receipts tax-- $180,000 Total -- $252,500 n/a means figures not available