Costa Mesa Sits Sadly on Riches It Can’t Spend

Times Staff Writer Is it possible to be too successful? That is the question city officials in Costa Mesa are pondering as they decide what to do with millions of dollars in tax revenue that the city is legally precluded from spending.

Fueled by sales tax revenue from the highly successful South Coast Plaza and Harbor Boulevard’s auto row, the city figures to have a surplus amounting to more than $38 million by 1993.

Lest other local governments become too envious, however, also consider: The city could run up a deficit of more than $37 million by 1993, at the same time that tax revenue is pouring in. Officials are considering cutting services and/or raising various user fees to try to head off the anticipated crunch.

“It’s a bad position to be in,” said Robert Oman, the city’s finance director. “It will create one of the toughest finance and management situations this city will face. What if your employer said you couldn’t spend the money that you earn and that you had to put it into an account and that he was going to take it back at the end of the year?”

Paradoxical Position

How does a city find itself in this paradoxical position? After all, Costa Mesa is one of the top tax-generating cities in the state, according to Oman. In the last fiscal year, for example, the city collected more than $22 million in sales tax revenue out of a total budget of $60.8 million.

The problem, say city officials, is the 1979 Gann initiative, which was intended to protect citizens from overtaxation by imposing a ceiling on taxes state and local governments can spend. The law ties spending to a formula based on the national consumer price index and population growth.

Costs to run the city of Costa Mesa are increasing, but its population is remaining stable. Under the formula imposed by the Gann initiative, the revenue the city is receiving from growth can’t be used because it exceeds the spending limit and must either be returned to the taxpayers or the city must ask the voters’ permission to spend it.

Costa Mesa officials say the law has created an “Alice in Wonderland” situation in which the city is effectively penalized for its economic success.

“It’s like a brass ring sitting right there but we can’t touch it,” said Mayor Peter F. Buffa. “We can’t change the sales tax. We can’t put up a blockade around South Coast and say, ‘Don’t buy anymore.’ Any number of people would look with envy at having the tax base of South Coast. Yet 5 years down the road we’re looking at a deficit.”

And it is not just Costa Mesa. Cities up and down the state are faced with the same problems, financial analysts say. In 1988, the county consolidated the finances of its Harbors, Beaches and Parks districts to lower the risk of reaching the Gann spending limit. County budget analysts said the action would provide a 3- to 5-year reprieve before the spending limitations were again faced.

The state ran up against the Gann law in 1987 when it exceeded it spending limit and was forced to rebate $1.1 billion to taxpayers.

Costa Mesa became the first city in the county to exceed its spending limit in 1985 and it has exceeded its limit in each succeeding year.

The city of Newport Beach has come within $650,000 of its spending limit, according to finance director George Pappas. “We’ve come close but we’re still ahead of the game because there has been enough of an increase in our population,” he said. “But we don’t know what’s going to happen next year, we’re figuring the budget now.”

According to a study by the California League of Cities, there has been a 50% increase in the number of cities that have reached their spending limit since the Gann law took effect in 1980. In 1987, for example, 45 cities in the state reached their limit or were within 10% of that limit.

“Eventually, the only cities that are not hitting their spending limit are the ones not having any economic growth,” said James Harrington, an assistant director of legislative and policy development with the League of Cities. “One of the flaws is trying to put into the state Constitution economic formulas that don’t work. You can’t put sophisticated formulas on the ballot and have voters understand them, so you end up with very simplistic things.”

See Changes Needed

Even proponents of the Gann law now acknowledge that some modifications are needed. The Sacramento-based California Taxpayers Assn., known as CalTax, which sponsored the original initiative, is now promoting legislation to include economic growth as a factor in determining a government’s spending limit.

“To the extent that it erodes the flexibility that a city council has in balancing its fiscal priorities in a given year, that is one of the downsides,” said Dick Simpson, executive vice president of CalTax. “Permitted growth needs to be loosened, it needs to be more permissive. I think the law is gradually being perceived as a tool to prohibit growth by virtue of the election process. That is why we’re studying this and proposing changes.”

Simpson said although polls do not indicate voter support for repealing the Gann law, most communities faced with the choice, under the law’s guidelines, of voting to reduce tax rates or returning the surplus to their governments to be spent, have opted for the latter.

Of nearly 300 communities in the state that have had Gann elections, 90% have voted to override the initiative, according to CalTax. In most of these elections though, the money has been earmarked for specific projects. In Santa Monica, residents have voted three times to override the Gann spending limitation in that city. Each time the surpluses were earmarked for law enforcement.

In 1987, voters in Costa Mesa, the first city in the county to consider such a request, passed a measure that rejected a property tax rebate and instead allowed the city to spend a $2.1-million surplus from the two previous budget years--and any surpluses through 1990--on street and sidewalk repairs.

There was little organized opposition to the measure. City officials calculated that, based on an average home price of $150,000 and a rebate rate of $44 per $100,000 of assessed value, residential property owners would receive a credit of $66 on their 1988 tax bills.

However, city officials are not so sure that voters would make the same decision if they opt to put a similar measure on the ballot. Because of the huge surplus amounts being generated now, officials estimate that property taxes could be virtually eliminated in the city.

For example, a property owner with a $2,000 tax on his $200,000 home would realize a rebate of 60%, or about $1,200, on his 1990 tax bill, Oman said. By 1993, the rebate would amount to 71%--$1,420--of the tax bill.

“That’s an impressive amount of money,” said Costa Mesa City Councilman Ed Glasgow. “It would be unlikely that the people would allow us to spend that money for other projects.”

Or for general operating expenses, Oman said. According to his calculations, if there was no spending limit, anticipated revenue would be just enough to handle anticipated expenditures.

“I think it very unlikely the voters would approve a measure allowing us to keep the entire amount (of the surplus) and the entire amount is what we need to balance the budget,” he said.

Most groups of homeowners said they have not had time to discuss or analyze what the city should do with the expected surplus. But they agreed that many property owners would be hard-pressed to vote against their own self-interests.

“I have a feeling the pros of a tax rebate would outweigh the cons,” said Marie Maples, president of the College Park Homeowners Assn. “Those tax totals would look mighty big to a whole lot of people. It’s plain old common sense. Right now I’m willing to listen to all sides before I make up my mind, but the city is really in a Catch-22 situation.”

Tom Santley, a spokesman for C.J. Segerstrom & Sons, which owns South Coast, said his company has not yet discussed the ramifications of the surplus nor calculated how much of a windfall a tax rebate would mean for them.

The company supported an override of the Gann law last time around, but Santley said voters, if given the choice, are likely to want at least some of the money returned to them.

“I think we would still favor using some of the funds to provide relief for the city’s budget problems, but this time the taxpayers will expect to see some percentage as a return,” he said.

The city might face another problem if it decided to offer another property tax rebate. Only about half of Costa Mesa’s residents are property owners, but officials say it would be impractical to attempt to return the money in any other way.

The City Council faces three options, Oman said: to cut city services by as much as 22%, increase revenue from various user fees, or put the matter before the voters.

A ballot measure might in turn have three options: allow the city to keep the entire surplus, allow the city to keep a portion of the surplus and return the rest to taxpayers in the form of a rebate, or rebate the entire surplus.

“To put it on the ballot is probably the fairest way to handle it,” Buffa said. “But we will do whatever it takes to insure that we don’t go into a deficit situation.”