Guest Op-Ed by John Capoccia – Measure UUT: Your City, Your Choice, Part III

Op-ed Posted 3/30/14 – by John Capoccia, Member of Sierra Madre City Council

This is the third and last of a three-part series.  (Read Part I and Part II) Yes on Measure UUT will keep your Utility User Tax at 10%, the same rate you are paying today.  If Measure UUT fails, the tax will sunset to 6% in 2016, resulting in a $1,000,000 per year loss to Sierra Madre’s General Fund.

Continuing discussion on where it may be possible to cut expenses, it’s been suggested that we’re too generous to our employees.  Nothing could be further from the truth.  While it is true that for active employees, health benefits are generally a higher percentage of total compensation compared to other cities, but what is important for Sierra Madre taxpayers is this:  The total compensation we offer our employees is far less than our neighbors (don’t take my word for it, I invite you to peruse the “Transparent California” website to do your own comparisons – call me and tell me what you find!).  Sierra Madre offers its employees a total compensation package that is merely sufficient to retain and recruit competent employees. Sierra Madre’s strategy of keeping wages low in relation to health care benefits is good for taxpayers in another way –  it lowers future pension obligations.  Pension calculations are based on salary, not on health benefits.  This strategy also does not negatively contribute to future Other Post-Employment Benefits (OPEB), because after an employee retires, Sierra Madre only offers the lowest-cost health package, and only for the retiree, not their dependents. We don’t offer insurance or other OPEB benefits either – only health insurance, and only until the retiree is eligible for Medicare.

Our OPEB benefits are minimized in another way – There’s a high threshold to qualify for post-retirement medical benefits.  For non-public safety employees hired after 1995, individuals must work for Sierra Madre for 30 years (service for other cities does not count), and must not retire until age 62.  For public safety employees hired after 2012, the situation is similar.

The bottom line:  It is not practical, nor is it reasonable to cut back further on employee compensation.  Our policy should continue to be such that we provide a total compensation package that is sufficient to retain and recruit competent employees.  Our current strategy of weighting health care more heavily than salary is a good one that benefits Sierra Madre’s taxpayers.

Some have suggested that Sierra Madre will soon be awash with cash from rising utility prices and real estate prices.  This is untrue.  Since Sierra Madre’s City Council voted to suspend the automatic UUT increase in 2010, keeping it at 10% instead of the 12% authorized by voters in 2008 with Measure U, utility tax revenue has been relatively flat. Increases in water rates have been offset somewhat by the council-voted reduction to 9% for water and sewer.  Furthermore, the current council voted to reduce the UUT to 8% for water and sewer effective March 1, coincident with the latest water rate increase.  If measure UUT passes, the water and sewer tax rate will then automatically reduce to 6% by June 30, 2015.

Revenue from telecommunications is down considerably from its high in 2010, due to the trend of customers disconnecting their land-lines in favor of mobile phones, and because of the rise in data services, which are not taxed, in favor of voice communications.  Trends in telecommunications may continue downward, and there’s uncertainty regarding cable TV, as many disconnect in favor of streaming from Netflix, Hulu and other services, and also because of increasing costs of sports packaging, and the unwillingness of consumers to bear those costs.

Yes, electricity rates are bound to go up, and overall there is likely to be an increase in tax revenue from water and sewer revenue in the outer years of the rate implementation plan, but the bottom line is that overall utility tax revenue has been flat and is likely to remain so.  Even if there is an increase in revenue, it will be insufficient to meaningfully offset the effect of a UUT sunset to 6%.

Property Tax: Likewise, there will not be a revenue windfall from increasing home values.  There are three factors that influence property tax revenue:  Property valuation, turnover rate, and inflation factor.  Under Proposition 13, the yearly increase in property tax is limited to the lesser of 2% or the California Consumer Price Index (CCPI).  For fiscal year 2013/2014, this is the first time since 2008 that Sierra Madre will get the full 2% increase on property.   For 2014/2015, the State Board of Equalization has notified municipalities that the inflation rate to be applied is less than ½ of 1%.

Property values have been increasing, and turnover has increased recently, but on average, the assessment has not increased enough to make a substantial difference.  I recently did my own study of the last fifty-two residential single family properties that have sold.  The average price was $925,000, and the average assessed value prior to the sale was $519,000, with an increase of assessed value of $406,000.   Assuming a healthy turnover of 120 houses in a year (99 were sold in fiscal year 2012/2013), this yields an increase in revenue of  $100,000.  Combine that with the paltry 0.05% CCPI on remaining homes,  General Fund revenue will increase by less than $120,000, and this is a good year when prices are booming!  At best, this will help to offset rising costs. It will not help close the gap if the UUT tax sunsets with the resultant annual loss of $1,000,000 in revenue.

Sales Tax:  Sales tax revenue represents only 2% of GF revenue, or approximately $200,000.  I’ve been listening to many wonderful ideas over the years on how we’re going to stimulate business in town to increase sales tax revenue.  Despite best efforts, the trend is the same – Absolutely flat.  We’d need a WalMart or Target here in town to bend the sales tax curve!

Likewise, Franchise fees and Business License fees represent a small portion of the revenue stream and are not likely to increase significantly.

In conclusion, the revenue forecast in the current 2013/2015 budget is accurately represented, and a meaningful deviation is extremely unlikely.

The Case for Healthy Reserves:  If you’ve been following events in the news regarding Sierra Madre, you recognize that there are other significant challenges that we must address.  Without specifically mentioning these sensitive, publicly disclosed threats, let’s suffice it to say that we’re in a better position to defend our collective interest when we have healthy financial reserves.  If we can’t afford to defend and protect our interests, we’ll more easily be pressured to concede.  With a loss of $1,000,000 annual revenue if Measure UUT fails, the potential to eat away our reserves is very real.

Healthy reserves are a good thing.  In the past, reserves were used to build the municipal pool, and purchase mountain property to protect our watershed wilderness among other things.  All of us should think for a few minutes how better reserves could have helped us to take advantage of hillside opportunities in the recent past, and what we might be able to do in the future.

I should also remind readers that the City Council removed the funding for the National Pollution Discharge Elimination System (NPDES) from the sewer rate study (keeping your sewer rate increase as low as possible).  The funding will now come from unallocated reserves and gas tax funding (less money is now available for street repair), and is unfunded beyond the next two fiscal years.

What Can We Afford?  We conservatives often talk about “living within our means”.   Sierra Madre’s Median Household Income is $83,875 compared to LA County’s $53,880.  Among our neighbors, only Bradbury, La Canada and San Marino are higher.  Our city’s finances should reflect our collective “means”.  Since we don’t have a Walmart or an Auto Mall, there’s no one else to pay for our streets, programs and public safety but ourselves.

Former Mayor and Councilmember George Maurer was quoted in Michele Zack’s Southern California Story – Seeking the Better Life in Sierra Madre: “We used to just make a realistic – and this being Sierra Madre, that means conservative – budget, and then would adjust property tax rates to cover what we needed.  It was much easier and we always had money to repair streets and so forth.”  Today, even at the current 10% UUT rate, we’re challenged when it comes to properly maintaining our streets.  How will we do that if the tax rate sunsets to 6% and we lose $1,000,000 in annual revenue?

As a member of our City Council, I strive to ensure that our precious tax dollars are spent wisely and for the benefit of the community.  How we take care of our city reflects our common values, similar to the way our homes and other possessions reflect our values. Sierra Madre’s citizens want to keep their city safe.  We want streets that are properly maintained. We want level, contiguous sidewalks.  We want trees that are trimmed and properly maintained. We want a library that is reasonably well-stocked and staffed, that offers enticing programs, and is open to serve the community at convenient hours.  We want quick response time from our Police, Fire and Paramedics.  We want a visible police presence to discourage the bad guys.  Our citizens are sensitive to the needs of our Seniors, we support our youth by striving to have programs that provide growth, camaraderie and that will provide them with life-long friendships.  We support community programs that are essential to maintaining our tight sense of identity that is special to Sierra Madre and sorely lacking in so many surrounding communities.

It is for all these reasons that we choose to make Sierra Madre our home.  Let’s take care of our home by cherishing our legacy, providing for the future and keeping our finances strong and stable by Voting YES on Measure UUT.

It’s Your City, and Your Choice.

Thanks for listening, and as always, feel free to call me at 355-6407 or email me at jcapoccia@cityofsierramadre.com.

John Capoccia
Member of Sierra Madre City Council