A Subtle Way to Generate City Revenue : Finances: The utility tax is gaining popularity. It’s easy to administer and doesn’t require the approval of voters.

For city budget-makers strapped for cash, there is so much to be said for slapping a tax on utility bills that five San Gabriel Valley cities have done it in the past year, and others are considering the possibility, despite the political risk.

City officials say the tax has these advantages:

* It is easy to administer because utility companies send out the bills, collect the money and forward it to city coffers.

* It nicks just about everybody, spreading and diluting the pain to minimize complaints.

* It is easy to include exemptions for the poor, eliminating extreme hardships.

* There is no worry about inflation because revenue goes up as utilities raise rates, and utilities are always raising rates.

* No approval from voters is required.

* Unlike sales tax revenue, which plunges in a recession when people stop buying cars, furniture and other items, utility tax revenue holds steady because people never shut off the lights, gas and water even when times are tough.

So it’s no wonder that cities are turning to the utility tax as sales taxes slump and the state usurps other revenue sources, including property taxes, to solve its own budget problems.

Azusa, Claremont, Covina, San Marino and South Pasadena have initiated utility taxes within the past year. In addition, El Monte doubled its rate and Monterey Park increased the commercial rate and extended the tax to residents for the first time.

Pomona, Pasadena, Alhambra, Arcadia, Baldwin Park and Irwindale also levy utility taxes, and the county supervisors have been imposing a utility tax on residents and businesses in unincorporated areas since 1991.

In some cities, residents have grudgingly accepted the tax, but in Covina, the entire City Council is facing a recall election over the issue. The Covina council imposed a 6% levy on electricity, gas, water and telephone bills last fall.

In Pomona, the tax has been a political issue for several years and is emerging again as a source of contention in the April 20 mayoral election.

Pomona has the area’s highest rate: 10% on all telephone bills, 10% on other utility bills charged to homes and apartments and 12% on utility bills charged to businesses. The tax raises $13 million a year, making it the city’s biggest single source of revenue--more than the $9 million Pomona collects from property taxes or the $8 million it nets from sales taxes each year.

Councilman Tomas Ursua, who is running for mayor, contends that the tax is so high it is driving businesses out of the city, while his opponent, Planning Commissioner Eddie Cortez, views the tax as a necessary evil.

Ursua said benefits from the tax are illusory because it deters businesses from moving to Pomona, depriving the city of sales tax and business license revenue it would otherwise receive.

He said the city has taken a Band-Aid approach to its fiscal problems by patching in utility taxes instead of drastically cutting costs. Pomona and other cities must learn to live within their reduced means, he said, adding, “You’re going to have to reinvent city government.”

Ursua sounded the same theme in 1991 when he narrowly lost an election for mayor to Donna Smith. She declined to run for reelection this year, but her views on city taxation are not far from those of Cortez, a longtime Pomona businessman.

Cortez said that retaining the utility tax is necessary to maintain city services while the city strives to boost economic development to gain new revenue.

“I am opposed to the utility tax, but what we have to do is face the fact that it’s an integral part of our budget,” he said. “I will remove it when we have the revenue to replace it.”

*

Both Pomona and Pasadena have levied a utility tax since 1969.

Pasadena Mayor Rick Cole said the tax has not been a political issue in Pasadena in recent years even though “ours is fairly high.”

Pasadena raises $16.5 million a year from a tax that ranges from 7.5% for electricity, gas and water to 7.86% for telephone bills and 8.92% for cable television service. It is a substantial part of the budget, but less than the $19.5 million the city gains from sales taxes and the $17.9 million from property taxes.

Most other cities have lower rates, usually 5%, and impose the tax on fewer utility bills, often exempting cable and water. Most cities exempt low-income utility users, and a few put caps on utility charges so that, for example, the Huntington Library in San Marino has a ceiling of $4,000 a year, and no business in El Monte pays more than $40,000 a year.

*

In Covina, the City Council tentatively approved a 9.5% utility tax last August but lowered the amount to 6% before it took effect in November.

Virginia Vignol, one of the leaders of the successful effort to force a council recall election over the tax, said she objects to both the tax and the way it was adopted.

Vignol said more taxes “aren’t the answer for everything” and a utility tax just drives business away. Besides, she said, “The way they (council members) went about it angered so many people.”

The council gave final approval to the tax at a meeting that was held at 7 a.m., in part so that Mayor Henry Morgan could make an early flight to Hawaii. But, Morgan said, the council had already conducted a public hearing on the issue and had openly discussed the tax for months before adopting it.

The city had reduced its staff by 11%, cut hours at City Hall and the library and still faced a $2.3-million budget deficit when it resorted to the utility tax. “I was not going to bankrupt the city,” Morgan said, just to keep taxes low.

Hank Vagt, owner of a Covina escrow business, said Covina’s problem is not lack of revenue, but poor management and overly generous labor union contracts that drive up costs. Instead of doing all it can to cut expenditures, Vagt said, the city has raised taxes. “People are sick and tired of more taxes,” he said.

Morgan insists the city has cut expenditures to the bone already, even adopting a policy to withhold raises to employees until they are 5% behind pay levels in comparable cities. If Covina erred, Morgan said, it was in failing to realize the public relations effort needed to smooth the way for a tax increase. “We did not run a PR program.”

One city official said council members rushed to enact a utility tax because the city urgently needed the money and the longer the tax was delayed, the higher the rate required to produce sufficient revenue. But, the official said, council members obviously miscalculated, as evidenced by the fact that after the tax was enacted they ordered a series of neighborhood meetings to gather public input.

*

Claremont did not make that mistake. The City Council informed the public about the city’s financial problems through its newsletter and the media, and organized neighborhood meetings before giving final approval to a utility tax early this month.

Mayor Diann Ring said that when the tax was proposed, it elicited opposition, and some people arrived at neighborhood meetings ready to roast the council for raising taxes, thinking the decision had already been made.

Instead, they found themselves invited to participate in the decision-making process, Ring said. People were asked to sit at round-tables and hash out solutions to the city’s financial problems, including a $1.5-million budget deficit.

Ring said the public discovered that the city had already done what most people thought it should do to cut expenditures, such as contract with private companies, reduce the staff and freeze salaries. And, she said, the public saw that the state government had been shifting money away from cities in a calculated move that avoids increases in state taxes, but puts the burden on City Councils to decide whether to raise municipal taxes or slash services.

Thus, by the time the process ended, Ring said, the public was persuaded. At a public hearing, she said, “16 of the 17 speakers asked for a utility tax and we gave it to them.”

The 5.5% tax, which will begin showing up on utility bills in May, will erase the deficit, put $500,000 in reserve in case the state diverts more property tax revenue from the city, finance $400,000 in maintenance work that had been deferred and provide $100,000 for youth programs.

*

In El Monte, City Administrator Gregory D. Korduner said raising the utility tax from 3% to 7% last year enabled the city to hire 10 more police officers and six firefighters, positions that were desperately needed because El Monte had ranked near the bottom in public safety officers per capita among Los Angeles County cities.

In Azusa, the City Council adopted a 5% utility tax last fall but deferred its effective date until July 1 of this year. Geoff Craig, finance director, said the city received a windfall rebate that solved the current year’s financial problems, but it will need the utility tax next year to help pay for public safety services and road repairs.

In San Marino, a 5% utility tax, which became effective Jan. 1, will raise $800,000 a year, but that is less than the $888,000 the city could lose in property tax revenue next fiscal year, according to a League of California Cities calculation based on Gov. Wilson’s budget proposal. So the city is also exploring other options, including awarding a trash service franchise, which city officials believe could produce $250,000 in revenue without raising trash collection rates.

The South Pasadena City Council also enacted a 5% utility tax last year. It took effect in August and will raise an estimated $1.2 million a year.

Several other cities are at least tentatively exploring the idea of a utility tax.

*

In Sierra Madre, for example, City Administrator James E. McRea said that is one possibility to be considered as the city reviews options for spending cuts and revenue increases totaling $750,000 to balance its budget. He said a 5% utility tax would raise $500,000 a year in Sierra Madre.

Monrovia City Manager Rod Gould said, “If the state keeps up this business of taking our revenue, we may have to consider (a utility tax).”

He said officials would not propose such a tax until they can say “we’ve wrung every bit of excess out of this organization.”

Last year, he said, the state took 9% of the city’s property tax revenue, and under Gov. Wilson’s proposed budget the League of California Cities is estimating a 22% reduction for cities next year. That would bring the total revenue loss to Monrovia to $1 million, Gould said.

In West Covina, Mayor Nancy Manners said a utility tax is not likely at least until 1995, when BKK landfill, which produces $4.8 million a year in city revenue, is slated to close.

“We’re not in dire straits until 1995,” Manners said. As of now, she said, “a utility tax is not one of the options we’re looking at. No council member has expressed any interest in that.”

In a number of other cities, including Duarte, Glendora and La Verne, city officials said they are not actively considering a utility tax, but it is one of many options that could be explored as the cities develop strategies to cope with budget problems.

Utility Taxes in San Gabriel Valley Cities Amt.: Business pay on: Residents pay on: Annual revenue: Alhambra Amt.: 5% Business pay on: electricity, gas, water, phone, cable Residents pay on: phone, cable Annual revenue: $2.6 million Arcadia Amt.: 5% Business pay on: electricity, gas, phone Residents pay on: electricity, gas, phone Annual revenue: $3.7 million Azusa* Amt.: 5% Business pay on: electricity, gas, water Residents pay on: electricity, gas, water Annual revenue: $1.6 million Baldwin Park Amt.: 3% Business pay on: electricity, gas, water, phone Residents pay on: electricity, gas, water, phone Annual revenue: $1 million Claremont Amt.: 5.5% Business pay on: electricity, gas, water, phone, cable Residents pay on: electricity, gas, water, phone, cable Annual revenue: $2.75 million Covina Amt.: 6% Business pay on: electricity, gas, water, phone Residents pay on: electricity, gas, water, phone Annual revenue: $2.3 million El Monte Amt.: 7% Business pay on: electricity, gas, phone Residents pay on: electricity, gas, phone Annual revenue: $4.2 million Irwindale Amt.: 7.5% Business pay on: electricity, gas, water, phone Residents pay on: nothing Annual revenue: $2.3 million Monterey Park* Amt.: 3%- Amt.: 5.5% electricity, gas, phone electricity, gas, phone $2 million Pasadena* 7.5%- 8.92% Business pay on: electricity, gas, water, phone, cable Residents pay on: electricity, gas, water, phone, cable Annual revenue: $16.5 million Pomona* Amt.: 10%- Amt.: 12% Business pay on: electricity, gas, water, phone Residents pay on: electricity, gas, water, phone Annual revenue: $13 million San Marino Amt.: 5% Business pay on: electricity, gas, water, phone, cable Residents pay on: electricity, gas, water, phone, cable Annual revenue: $0.8 million S. Pasadena Amt.: 5% Business pay on: electricity, gas, water, phone Residents pay on: electricity, gas, water, phone Annual revenue: $1.2 million Unincorporated Amt.: 5% Business pay on: electricity, gas, phone Residents pay on: electricity, gas, phone Annual revenue: $33 million * Azusa tax will take effect July 1. Monterey Park and Pomona charge lower rate to residents, higher rate to businesses. Pasadena rates are 7.5% for electricity, gas and water; 7.86% for phone and 8.92% for cable.