Terrorism, State Woes Cast Pall Over Cities

Among the unseen casualties of the Sept. 11 terrorist attacks are California cities, which are bracing for cuts in services because sales and hotel bed-tax revenues are declining as shopping and travel spending craters.

And beyond short-term worries over tourism, there is the specter of further trouble because the state of California’s budget is going into deficit--and that will spell cutbacks for all cities and counties.

Sales taxes are what many cities depend on to pay for police and fire departments, libraries, parks and other services. Counties depend on them and state funding to pay for health and welfare services as well as law enforcement, museums and children’s services.

And right now, some of the world’s most-famous destinations are taking stock of damage from the terrorist attacks and the slow economy.

Beverly Hills is busy revising its $110-million budget because hotel occupancy fell off dramatically after Sept. 11.

Pasadena also is concerned about lower sales and hotel taxes, but like most cities it won’t know for months how much its budget will be in shortfall because it takes that long for data to come in.

Anaheim, which depends for 54% of its budget on sales and hotel taxes from its big resort and convention area, is “evaluating the situation carefully” says finance director William Sweeney. But he notes also that large conventions scheduled for Anaheim next year are still on track.

Confidence is a California virtue. The consensus of those high-profile cities is that “drive-up” tourists from within California will help cushion the blow. Pasadena, for example, still expects big crowds for the Tournament of Roses parade and football game.

But state budget troubles are more ominous because they could cost all cities and counties vital revenues.

“It’s a ‘Perfect Storm’ for cities: sales and tourist taxes down and the state’s deficit going to cut their revenues by 20% to 30%,” says Larry Kosmont, head of Kosmont & Associates, a Los Angeles urban economics consulting firm.

“The cities fears are well-founded,” says California Treasurer Philip Angelides. The state could end up with a deficit of more than $10 billion in the next fiscal year because of the economic slowdown, the shock that followed the Sept. 11 attacks and a continuing squabble over state payments for electricity that must now be reimbursed to the general fund.

Even if the electricity outlays are repaid, California’s budget will still be more than $3 billion in deficit, Angelides projects.

But as the state is prevented by law from running a deficit, that means costs must be cut somewhere. In 1993, then-Gov. Pete Wilson reached down to the cities and took a share of the property taxes up to Sacramento for the state’s use.

The result was to force cities to become even more dependent on sales taxes--leading cities to scrap for auto dealerships and high-volume retail stores to generate tax revenues. The historic reason for the shift to sales taxes dates to 1978’s Proposition 13, which limited property taxes.

But sales taxes aren’t as steady a revenue source as property taxes, as cities are finding out now when the economic slowdown is coinciding with a terrorist abomination that has stalled economies everywhere.

It all adds up to tough times ahead for cities and counties and for the state--which failed to invest in water and transportation systems and other community infrastructure when budgets were flush, and now cannot do so when budgets are bare.

“It’s especially hard to make cutbacks at this time,” explains Gerald Caton, city manager of Downey. Sales taxes, which account for almost 40% of the $34 million that Downey spends for police, fire and public works, surely will be down for several months. Some cutbacks in library hours and programs in parks are almost certain to be made, he says.

“But at this time, with people worried about all sorts of threats, we may have to spend more on public works and on policing,” Caton says. The strain will be particularly severe because the state undoubtedly will cut a return to the cities of motor vehicle license fees that brought Downey $5 million last year.

Motor vehicle fees won’t be Sacramento’s only cutback. When Gov. Gray Davis took office in 1999, a state commission estimated that $100 billion was needed to repair and expand California’s infrastructure of highways, water systems, public buildings and facilities that had become rundown from years of neglect.

But last winter’s expenditure of $6 billion in state funds to buy electricity and the sharp downturn in state tax revenues--no longer swelled by stock market gains--mean that overdue infrastructure spending will be put off again.

The result is that “the state’s cities are becoming shabby and that’s not attractive for business,” says Rick Cole, city manager of Azusa.

The outlook is mixed. The cities’ short-term finance problems should resolve themselves in the next year as normal travel and commerce returns.

But solving the longer-term problem will take an overhaul of state and local finance to form a more stable, productive system. And that will take awhile.

James Flanigan can be reached at jim.flanigan@latimes.com.