News Analysis : Budget Woes Threaten Tax Cut in Pomona : Finances: Plans to lower the city’s utility tax to 5% from 11% may be shelved because of a projected financial deficit. The issue is a key point of contention in the race for mayor.

A politically popular plan to lower the city’s high utility tax may be shattered as Pomona officials begin trying to finagle their way out of a projected $3.8-million deficit next year.

And Mayor Donna Smith is all but saying, “I told you so.”

Smith, running for reelection March 5, voted against the City Council majority when it decided in late 1989 to begin lowering the 11% utility tax in stages to 5%.

The decision to cut the city’s largest single source of tax revenue was disastrous,Smith says, and may force officials to either renege on their promise or begin laying off city workers to make ends meet.

Sounding one of her campaign themes, she says: “We need more officers on the street, not less. We need more recreation. We need the library open longer.”

Her chief opponent in the race, Councilman Tomas Ursua, voted for the tax reduction, and obviously is taking another line. He insists predictions of a budget crisis are overblown, and says he intends to make continued reduction of the tax a major campaign issue. “The utility tax has been one of the most damaging things in the city,” he says.

Meanwhile, another mayoral candidate, Abe Tapia, is accusing Ursua and Smith of putting the city “on the brink of bankruptcy” with their financial policies.

That may be a bit extreme.

Elray Konkel, city finance director, has forecast a $3.8-million deficit in a $55-million budget next year and a succession of larger deficits in future years.

But the city has $7 million in reserve. And City Administrator Julio Fuentes prefers to term the current fiscal dilemma “a revenue gap” that he hopes will be bridged in several years by revenue from a longed-for regional mall or other commercial projects.

However, things may get worse before they get better, for a number of reasons:

* Financially strapped state and county governments are pushing more of their costs on to cities. Pomona paid $218,000 this year to have the county collect its property taxes, a service that used to be free.

* The business slump has cut sales tax revenue. Pomona collected $8.9 million in sales taxes last year, but will take in $150,000 less this year, and the prospects for next year are uncertain.

* Payments on a $17-million bond issue to pave streets, improve the water system and undertake other long-deferred projects will start next year, adding $1.5 million to the budget.

But the most politically volatile reason that revenue isn’t keeping up with expenditures is the phased reduction in the utility tax, which gives the city more than one-fifth of its revenue.

The tax, first enacted in 1969, was raised sharply in 1986 by a City Council desperate for cash. The council increased the tax on water, gas, electric and telephone bills--which had been running from 5% to 8%--to 11% for residents and up to 12% for businesses.

Faced with continuing complaints about it, the council promised in late 1989 to reduce the tax 1% each year to 5% by 1996. The tax on telephone bills now amounts to 9%. On other utility bills, residents pay 8% and businesses 10%.

Councilwoman Nell Soto, who voted to reduce the tax, said it isn’t much of a load on the rich, but for young families even the current tax on a $50 phone bill--$4.50--is a burden and should continue to be reduced.

Few cities rely on the utility tax as heavily as Pomona. The city will gain $11.5 million from utility taxes this year, compared with $10.2 million from property taxes and $8.8 million from sales taxes.

In contrast, Pasadena’s utility tax of 7% to 8% is budgeted to produce $15.3 million this year, while the city expects to take in $19.3 million from sales taxes and $18.5 million from property taxes.

To deal with the revenue squeeze, the Pomona City Council in November appointed a 25-member committee to look at revenue options.

The committee is moving toward a recommendation that the council freeze the utility tax if it needs revenue rather than impose new or increased taxes on property transfers, sewer maintenance and businesses. The tentative recommendation, scheduled for final consideration by the committee Feb. 11, is billed as a utility tax “freeze,” but would actually raise the tax back to 1990 levels--10% on telephones, 9% on other utility bills for residents and 11% on other utility bills for businesses.

The draft report also calls for the city to begin auditing utility companies to make sure the tax is being fully collected and passed on to the city.

John Guthrie, committee chairman, said the utility tax is easy to collect, spreads the tax burden over everyone and is fairly equitable since utility bills incorporate lower rates for people with low income.

Councilman Ursua said he believes the city needs to curtail expenditures before freezing the utility tax or raising other taxes. He noted that the forecast of a $3.8-million deficit for next fiscal year is based on an increase in expenditures from $49.3 million this year to $55.1 million next year, a jump of 11.8%.

Konkel said the steep increase is partly attributable to a $1.5--million payment on the new $17-million capital improvement bond issue. The increase appears greater also because last year’s expenditures were lowered by a $1.1-million rebate from the state-administered employee pension system. Without those two factors, Konkel said, expenditures would reflect a more normal rise of 6% to 7%.

Responding to criticism from the council and the revenue committee, Konkel has prepared a series of budget projections that show more modest growth in expenditures and revenue. But the new calculations still show future deficits, including $3.4 million next year, unless the council raises taxes or cuts spending.

City officials say the city’s long-term financial picture is much brighter than the budget projections show. The city is hoping to make as much as $2 million a year in revenue from a proposed trash receiving station that would sort recyclable materials, and it is aggressively pursuing new businesses, including auto dealerships and a regional mall. The budget forecasts do not include revenue from these potential sources.

For nearly a decade, the city has been touting construction of a regional mall at the junction of the Pomona Freeway and the Corona Expressway as the answer to chronic revenue shortages. But it won’t be built unless department stores agree to locate in Pomona instead of in rival malls proposed in Chino and Chino Hills. The Pomona project is now in the hands of its third developer, after two others dropped out.

Even if the Pomona mall is built, it would not be open and producing tax revenue until 1993 at the earliest.

Meanwhile, Pomona is turning to experts to help it price its services. The city is soliciting proposals from consultants who would analyze the fees the city charges for everything from zone changes to overdue library books and compare the costs of providing the services.

Nancy Guider, assistant to the city manager, said cities traditionally have set fees by surveying other cities to find out the going rate. Through the proposed analysis, however, the city would be able to set fees to match costs for services that should be self-supporting.

But the price of the analysis itself isn’t cheap. Fuentes reported to the council recently that a consultant estimated the cost at $195,000.

The council told Fuentes to shop around.

REVENUE LOSSES Revenue lost by cutting Pomona utility tax. Each is for fiscal year beginning July 1. Figures for 1990 and beyond are projected losses.

988 $84,284 1989 $700,489 1990 $1.4 million 1991 $2.8 million 1992 $4.5 million 1993 $6.2 million

Source: Pomona Finance Dept.