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Sales tax measure addresses Escondido’s structural deficit

Sales tax measure addresses Escondido’s structural deficit

Late last year residents concerned with the city’s structural deficit began meeting in the California Center for the Arts, Escondido. The meetings were sponsored by Escondido Citizens for Safety.

This article presents the state of play in that effort.

Who were the Escondido Citizens for Safety? They were initially the city’s police and fire unions. Later they were joined by the Teamsters, who represent Escondido’s maintenance workers. But those attending came from all walks of life. Since Escondido is almost evenly divided between Republicans and Democrats, it’s fortunate that it’s not a partisan issue.

As one person attending the first meeting declared, “It’s not a Republican or a Democratic issue; it’s an ‘I can read a balance sheet’ issue.”

For many months—really since the defeat of a previous sales tax measure—Measure E— by a razor thin 400 or so votes in 2022— concerned residents had been discussing the need to try again with a sales tax increase that would address that structural deficit. Because of those conversations,  a series of “town hall” style meetings were held beginning last fall.

The main movers at the beginning were city workers, including police and fire, who said from the start: “This new revenue would allow the City to fund critical priorities like addressing homelessness, repairing and maintaining local streets, sidewalks, and infrastructure, and keeping parks and public facilities safe, clean, and well-maintained. Perhaps most importantly, the initiative would allow for continued emergency response capabilities— giving us enough police, firefighters, dispatchers, and paramedics to respond quickly to emergencies and proactively protect public safety.”

But the coalition is more broad-based than that.

Carol Rogers, an influential business leader in Escondido who is deeply involved in the city’s arts community, early on expressed a sentiment that many felt. That any effort to raise taxes must benefit everyone impacted by the myriad services Escondido provides. Not just police and fire.  “It seems like what we are showing is heavily weighted toward police and fire,” she said at one of the first “town halls.” “Is there a way to weigh it more equitably? How do we frame this so more people embrace it? We are talking about the quality of life in Escondido. It’s not going to resonate otherwise.”

Others in the room agreed.

The common denominator in those early meetings was the recognition that Escondido faces a financial precipice. If it leaps off, the city’s most recognizable amenities, such as its world class Arts Center, would close. If the structural deficit is left unaddressed, it would lead to shuttering most things that make the city’s motto “City of Choice” something other than an ironic joke. Such as the library, parks, and recreation.

A Dry Sucking Sound

In December, City Manager Sean McGlynn and Director of Finance Christina Holmes briefed the group. The setting was the conference room of the California Center for the Arts, Escondido. Appropriate since the sprawling Arts Center would most likely be shuttered, maybe for years, maybe for good, if the city fails to staunch its structural deficit.

The facts they presented were grim— like reading the menu for a last meal on death row. It concentrated the mind. The reserves built up during the COVID-19 years, when funds flowed from federal and state sources like water from a fire hose are drying up. Beginning in a few years—when the straw is inserted in the reserves, it will make a hollow sucking sound.

The library is another facility facing shutdown.  City employees are heading for the exits.  The parks and city pools would also be closed.

For those who say create more revenues by encouraging more business: there is one city employee who processes business permits. Which means business permit requests are many months behind.

Using a Power Point presentation—the same one used to educate council members—McGlynn and  Holmes said the difference between revenues and expenditures, unaddressed, will average $10 million the first five years, and $18.2 million annually for the next 15 years.

At a previous council workshop in 2023, councilmembers were shown three scenarios to address the structural deficit: 1) Proportional across-the-board budget reductions, 2) Across-the-board but preserve public safety departments, 3) Targeted business model approach.

Holmes explained that Escondido is a “full service” city, unlike, neighboring San Marcos, which doesn’t provide its own water or police, but contracts with the County for Sheriff’s deputies, and has a water district within its boundaries. Escondido has its own police department and water department.

Health and Safety, i.e. Police, Fire And Public Works, is 76% of the budget, about $130 million annually. Items under the umbrella of “quality of life,” such as Community Services, Parks And Recreation, the library, recreation, senior services, etc., make up the rest.

Fifty-three percent of city revenues come from taxes. Sales tax is the largest at 39%, or $49 million in 2023. Next comes property taxes at 28%, and other taxes, 13%. Total expenditures for 2023 were  $141,144,800, of which $11.3 million was deficit, with that shortfall coming from the city’s rapidly shrinking reserves.

The council wanted to look at three possible revenue options: 1) Taxing short-term rentals, i.e. B&Bs and Air B&B’s, called TOT (Transient Occupancy Tax. 2) A parcel tax to benefit the library. 3) Full cost recovery for things such as recreation programs.

Knowing that this guillotine is poised over the city’s neck, staff have for many months been taking cost saving measures. Eliminating 106 full time positions and deferred maintenance on city facilities by $8 million annually.  It also controlled pension and employee benefit costs, investing in technology and forming strategic partnerships to provide services.

The Department Of Development Services has a 25% vacancy, so “everything is moving at a snail’s pace [including process business and development permits]” said McGlynn.

You can’t really defer maintenance forever. Eventually sidewalks fall to pieces. The city, McGlynn said, gets $5 million from gas taxes to maintain the streets. If it were to stop doing that to any degree, that money would go away.  “To keep getting the gas tax the city has to keep investing,” he said. “The council has done a really good job in maintaining streets,” he said. “But it’s hard to see how it can continue to maintain city streets at current levels.”

One audience member observed, “When you say community services people understand what you are talking about. Services where you have a library to go to, to escape the heat. They know you are talking about city pools being drained.”

Another woman had asked, “Is it really true about the pensions causing the structural deficit.”

Another answered her, “The short answer is ‘yes.’”

After the McGlynn/Holmes presentation, someone said, “If anyone saw that Power Point (budget presentation) they would be totally for it.”

Another observed that the city needs economic development to grow its tax base. Noting Escondido recently lost the Bronner soap company. “It’s not just a quality of life issue but quality of business,” he said.

Coming up with the Measure

Those who attended the first meetings began working together during the holidays to craft a proposal.

Eventually they coined their effort: Escondido Community Investment Initiative. That name reflected that they had widened their appeal beyond just raising money for police and fire. The coalition submitted the initiative on January 9 and received a title and summary from the City Attorney on January 17.

The Escondido Community Investment Initiative would increase the city’s sales tax by one cent on the dollar, bringing Escondido’s sales tax rate in line with surrounding cities, say proponents. It would sunset after 20 years and includes a Citizen’s Oversight Committee to oversee how new revenue is spent.

When the initiative officially launched, Escondido Firefighters Association President Joe Portman declared, “From the very beginning, this has been a citizen-led effort to bring new investment to our community. With thousands of Escondido residents joining our cause and signing the petition, this is a clear signal that voters are ready to fix the financial issues facing our City, fund critical services like public safety, and help our neighborhoods thrive.”

The official proponents—whose names will be at the end in the measure’s ballot statement—are J. Neil Hobbs, former Deputy Chief of the Escondido Fire Department, Deanna Smith, chairwoman of the Escondido Chamber of Commerce, and Rich Aeling, a leader in various local civic and charitable organizations.

They began collecting signatures. Before long you saw both volunteers and paid signatures gatherers at events like the Grand Avenue Festival, Cruisin’ Grand and every Friday night at the Escondido Street Market in the back lot of Elote Restaurant.

In early June the group’s spokesman, Ryan Gardiner announced, “We turned in close to 12,000 signatures, which is far more than the required amount.”

City Clerk Zack Beck confirmed this: “On Friday, May 31, 2024, proponents for the Escondido Community Investment Initiative submitted 11,898 signatures to the City Clerk’s Office. Per California Elections Code 9202, the proponents needed to obtain signatures from 10% of registered voters in Escondido, according of the last report of registration by the San Diego County Registrar of Voters to the California Secretary of State. Per that report, the number of signatures required to qualify a measure for the ballot in the City of Escondido is 7,748.”

Making tough choices

Meanwhile, since the initiative is entirely independent of the city council, the council members began looking at the hard choices of cutting the budget to the bone—and beyond. Although obviously aware of the initiative, they had no fingerprints on the document itself. Council members—on advice of the City Attorney—were careful not to involve themselves in any way.

In anticipation of the possible loss of funds, the city council in June began the process of cutting that includes asking staff to bring back ways of recovering expenditures from such things as swimming lessons. When, for example a resident pays $40 for a swimming lesson (not the actual cost), when it might actually cost hundreds of dollars, the city absorbs the difference between what the parent pays for Little Johnny or Jennie to learn to swim and what it actually costs. It is, in effect “subsidizing” that activity.

The council directed staff to begin on “full cost recovery.” The staff report for the June 5 meeting said, “When a fee targets less than full cost recovery, another City revenue source – in most cases, the General Fund – subsidizes the individualized activity.”

The council is confronting the stark reality of cutting city services unless other revenue is developed. It has also begun a study of legalizing commercial cannabis dispensaries. Other cities have done this. Vista derives about $7 million by taxing dispensaries. A recent survey indicated that about 56% of likely voters like this approach—in theory.

The same survey also indicated that about 56% supports a sales tax increase and would vote for it.

SDCTA endorses

On June 13 a very positive development happened from the perspective of the proponents: San Diego County Taxpayers Association (SDCTA) announced its position.

SDCTA announced that a study it performed on city’s finances “[has] demonstrated immediate and urgent needs to be financed, but have structural deficits that must be addressed.  These agencies may not have sufficiently adequate tax bases to finance their community’s expressed needs.”

The endorsement included caveats. “Escondido’s largest expenses, like all municipal entities, is in public safety, namely law enforcement.  Escondido maintains its own police department, whereas neighboring cities like Poway and San Marcos contract with the San Diego County Sheriff for law enforcement services.  SDCTA recommends Escondido leadership consider structural reforms to right-size expenses to the tax base.”

“We struggled with Escondido . . .,” said Mike McLaughlin, chairman of the board. “We see a real need that affects real taxpayers right now.  But you can’t tax your way out of a structural deficit so something’s got to give.”

A Possible Election Issue

Whether the Escondido Community Investment Initiative becomes a political football in the November election is an unknown. Given that the council has no authority to stop the election—what candidates think about it is largely irrelevant. Except to provide a window into their governing philosophy.

Three of the four council candidates are for the initiative. District 3 candidate Christine Spencer said, “I support the sales tax measure with ALL CAPITAL letters. I’m not a fan of raising taxes but we pay the lowest sales tax of any community in the County, except Oceanside.” She added, “I’ve spoken to small businesses and the don’t think it’s an issue. People won’t take notice of it and it will help the city so much.”

Her opponent, incumbent Christian Garcia said: “It’s public record that I supported Prop E in 2022, and that I would support a similar measure in the future. And though the council must remain neutral, I support our citizens right to campaign on this. Furthermore, I think we recognize that all revenue options should be considered.”

District 4 candidate Judy Fitzgerald, whose support/opposition has evolved over the past few months, most recently (May 21) told the Latino American Political Association (LAPA) forum that she supports the “right of the citizens to propose an initiative and their right to make a decision.” She isn’t a fan for raising taxes “but we need to look at different ways to raise revenues,” she said and added, “It’s all interrelated.” She and Garcia were endorsed by LAPA after their appearance.

Two weeks later she was endorsed by the San Diego County Republican Central Committee—which rarely endorses candidates who support raising taxes.

One of the strongest supporters of the one cent sales tax effort from its inception is city council candidate Stef Holden, who has tied his candidacy to its support from the beginning—and could rise or fall on how the electorate ultimately views the initiative.

Responding to the SDCTA’s comment: “But you can’t tax your way out of a structural deficit so something’s got to give,” Holden responded:  “Sadly, the question itself reveals they don’t understand the problem.  In fact, an adjustment to the tax structure is precisely one of the tools which can be used to address a structural budget deficit.  That’s why they call it a structural deficit.  The basic set of ongoing and necessary revenues are not enough to cover the basic set of ongoing and necessary expenses.  A change in the underlying structure is necessary.  Government raises money through taxes and provides services such as police and fire protection and public works services.  When the basic cost of providing those services exceeds the revenue, either the services need to be cut back on an ongoing and structural basis, or the revenue must be increased in an ongoing and structural basis.”

Holden added, “Escondido has tried short term and one-time solutions which have been great at putting off the problem to another day.  Each time, those solutions become harder and harder and the rainy-day fund gets smaller and smaller.  That’s why we all agree there is a structural deficit, and structural solutions are necessary.   I don’t want to see cuts in our basic services, so I support an increase on the revenue side.  This addresses the structural problem on an ongoing basis and puts us back on secure footing.”