More Bad News for State: Sales Tax Revenue Slows

By LESLIE EARNEST

June 27, 2001 12 AM PT

TIMES STAFF WRITER

California sales taxes are running significantly below projections this year, adding to the budgetary woes of a state that has been hammered by the energy crisis and the loss of revenue from the stock market’s decline.

Statewide, retail sales grew by just 2.5% in the first quarter, half of what was forecast by economists and the lowest growth rate for the quarter since the state was mired in recession in 1993. State economists expect retail sales to grow at an even slower pace in the current quarter and to turn negative in the in the second half of this year.

The jarring decline, a direct result of the slowing economy, has worried officials of cities, which rely heavily on sales tax revenue to help pay for police, firefighters and a wide range of basic services. Sales tax accounts for 26% of the average city’s general fund.

Although no city is laying off workers or cutting services because of sluggish retail sales, some municipal officials are concerned that the state, its own budget strained by the energy problems, will begin raiding local coffers. They flash back to the early 1990s when the state, then wrestling with other budget woes, held onto millions of dollars in property taxes that were earmarked for local governments, prompting such moves as pool and library closures and delays in road repairs.

“Cities and counties are at the low end of the pecking order,” Laguna Beach City Manager Kenneth C. Frank said. “And when the state needs money for any purpose, we tend to be the ones who pay.”

If the energy crisis--which is draining resources from both state and local budgets--is not resolved, local governments have cause for alarm, said Claude Parrish, chairman of the State Board of Equalization, which collects sales, alcohol, tobacco and other taxes.

“It could be even worse than what we’ve experienced in the past,” he said. “People on the street don’t know how serious this is.”

Statewide, the 2.5% gain in taxable sales revenue during the first three months this year is far below the 15% surge a year earlier.

“It’s a huge dip,” said John Chiang, vice chairman of the state equalization board. “Obviously we’re concerned . . . because it impacts everybody.”

The trend continued last month, with tax receipts falling $149 million short of projections, according to the state’s Finance Department.

Retail projects also have stalled statewide, with the total value of building permits sagging 12.3% in the first three months this year.

These indicators all add up to more uncertainty as most cities finalize their budgets this week for the new fiscal year beginning Sunday.

“You probably have a lot of city managers reaching for the Alka-Seltzers,” said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp.

For every $100 dress that’s rung up on a cash register, $1 goes to the city where the sale took place--or to the county if the sale was in an unincorporated area. About 60% of the sales tax money that cities receive is spent on public safety, such as police and fire departments, said David A. Jones, legislative representative for the League of California Cities.

“Those areas are some of the last to be trimmed,” Jones said. “But if our No. 1 revenue source takes a significant dive, you’re certainly going to see a reduction in services.”

Northern California could feel the brunt of the sales tax slowdown because of the sharp downturn in high-technology industry, including the collapse of many dot-com businesses.

Mountain View, which spent lavishly on parks, a new transit center and a library as it raked in revenue during the Silicon Valley tech boom, is now bracing for a “doom and gloom scenario”--a 15% drop in revenue from sales and use taxes in the coming fiscal year, Finance Director Robert Locke said.

The city figures it can absorb a significant loss of sales tax revenue without slashing services. But it has dipped into $10 million of its reserves to buy back bonds from investors so it could trim $1 million in annual interest payments. It also is setting aside about 6%--or $5.5 million--from the city’s general fund to use as “a cushion,” Locke said.

Southern California cities, for the most part, sound more optimistic. But some are watching their budgets warily.

In Commerce, first quarter taxable sales receipts slid 4.5%, Finance Director Tom Bachman said. Taxable sales revenues are “about a third of our budget, so it’s a large concern to us,” he said.

“I’m not ready to revise [the budget] yet, but it’s something we will monitor very closely,” he said.

Los Angeles financial officials also feel fairly confident about revenue for the coming year, saying they expect sales tax growth of 3.5%. Even if these revenues don’t hit the mark, the city has a bulging reserve fund--about $106 million--finance specialist Rex Olliff said.

In Orange County, which has one of the state’s lowest unemployment rates, many city officials also remain upbeat.

Anaheim expects taxable sales to jump 11.3% in the coming fiscal year, fueled largely by Disney’s new California Adventure theme park, Finance Director William Sweeney said. Costa Mesa, beneficiary of tax revenues from the bustling South Coast Plaza shopping center, expects sales tax revenues to grow by about 6.3%, Finance Director MarcPuckett said.

“We’re fortunate to benefit from a regional mall that draws from a very wide area,” Puckett said. “As a result of [that] and our auto dealers, we have not felt the decline to the same extent as other areas of the state.”

And Riverside County, which is still in a growth mode, expects growth of 7%, said Anthony Bellanca, the auditor-controller.

Some cities also say higher revenues from other sources--such as property taxes and motor vehicle license fees, which are much less volatile--will offset declines.

But the outlook is decidedly more cautious for the state.

The latest projections show that revenues for the current and coming fiscal years will fall $3.4 billion short of earlier estimates. The revised budget deleted hundreds of millions of dollars that had been earmarked for local governments.

The state’s general fund, used to pay for schools, prisons and many other programs, is expected to drop by $4 billion to $74 billion next year. That fund is fed primarily by income and sales taxes.

The decrease, as Gov. Gray Davis sees it, is largely the result of stock market declines that erased investors’ profits from stock options and other transactions that would have generated tax revenue.

Davis has said he expects tax revenue from stock options and capital gains to slide to $138 billion this year from $201 billion last year.

And now the energy crisis has clouded the picture further, as the state earmarks millions to help state agencies and school districts cover mounting utility bills.

The energy crisis “is putting additional strain on the fiscal system,” said Tom Lieser, senior economist with the UCLA Anderson Business Forecast.

“It makes it a lot tougher for governments in this current climate,” he said. “It’s going to be greater austerity for awhile.”

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Slower Spending

California’s income from taxable sales is growing at a much slower pace than in recent years, based on preliminary figures released by the state. Change in first-quarter taxable sales, by year:

‘90: 7.8%

‘91: -5.2%

‘92: 0.3%

‘93: 0.1%

‘94: 4.3%

‘95: 3.3%

‘96: 8.8%

‘97: 5.0%

‘98: 5.3%

‘99: 7.4%

‘00: 14.6%

‘01*: 2.5%