.Limits of City’s Quarter Cent Sales Tax Measure

Make no mistake about it: the city’s new quarter-cent sales tax measure won’t help fund a new Santa Cruz Warriors arena, or even a revamped Santa Cruz Civic Auditorium. Nor does it cover improvements to the Santa Cruz Municipal Wharf or Santa Cruz Fire Department’s engine fleet—each of which has been vaguely discussed and eyed for possible future measures.

Instead, the June 5 ballot measure is all about “preserving existing programs and services,” City Manager Martín Bernal says—“essentially public safety, parks and recreation.”

The city may still look for revenue in future years for bigger-ticket projects, but those would be a few years out. “There’s an interest in doing that too,” Bernal adds, noting that investment in local infrastructure fell during the recession.

Bernal and Santa Cruz’s city councilmembers have been upfront about their reasons behind the measure, which the City Council placed on the ballot when it declared a fiscal emergency in February. Part of their explanation is that the state places a cap of 9.25 percent on sales tax. Santa Cruz’s sales tax is already getting close, at 9 percent. City leaders are, in part, looking to snag that last quarter cent before some other group does with a regional measure.

The $3-million-per-year tax should allow Santa Cruz to avoid budget cuts in the upcoming fiscal year, but Finance Director Marcus Pimentel projects that the deficits will reappear in three or four years.

The City Council unanimously voted to put the measure on the June ballot, although Councilmember Sandy Brown expressed deep concerns, calling the tax “regressive” and worrying it would most severely impact Santa Cruz’s poorest residents, who spend a greater portion of their income.

“I’m not opposed to sales tax, per se. It’s more that we weren’t pursuing other taxation measures,” Brown tells GT.  Although Brown ultimately voted to place the measure on the ballot, she hasn’t decided how she’ll vote in June.

While the city’s budget has $100 million worth of details, recent news coverage has zeroed in on one cost—government pensions. CalMatters ran a March 18 column about Santa Cruz titled “How Pension Costs Clobbered One Small City.”

Santa Cruz bargained with unions to negotiate new pension contributions and retirement ages in 2011. City leaders also implemented the state’s reforms more recently, but the city only sees savings from those reforms when employees leave. The city’s contributions to California’s Public Employees Retirement System (CalPERS) will exceed employee contributions for the first time ever in the upcoming fiscal year. Essentially, Santa Cruz is paying for the money that didn’t materialize in the state’s investment portfolio, given the California board’s stubbornly optimistic projections.

Pimentel, the finance director, projects that healthcare and pension costs will go up for the next four years, with more of the weight falling in the pension area. In four years, projected pension and healthcare costs will combine for nearly a quarter of the general fund budget. Pensions alone will come out to a projected 16 percent.

Many union workers are supporting the tax measure—which needs 50 percent voter approval to pass—sensing that its failure would mean layoffs to employees. And the SEIU has endorsed it.

Matt Nathanson, a public health nurse who serves on the SEIU’s local political action committee, says he and his fellow committee members heard overwhelming support for the measure in union meetings.

Bernal thinks the city would need to pass a ballot measure regardless of pension issues. He compares it to any business raising its prices.

The League of California Cities made six fiscal recommendations to local governments in January to help them balance budgets. Bernal says Santa Cruz has implemented four of those and is in the process of doing the final two, which includes the local ballot measure.

He also notes that the city was required to declare an emergency not because of any dire financial straits, but because of a technicality. He says that when Proposition 218 passed in 1996, it required local governments to declare a fiscal emergency whenever they ask for additional revenue at any point besides a general election. In this case, that would have been this November. Bernal says he didn’t recommend putting a tax on the November ballot for fear of impacting an affordable housing bond measure that former Mayor Don Lane is working on with former County Treasurer Fred Keeley. (Crowding too many taxes onto one ballot is seen as a political faux pas, one that can doom otherwise politically popular ideas.)

Elsewhere in California, other cities are asking for sales tax increases as well. Pasadena already has a 9.5 percent sales tax—some cities have secured exemptions to go above the sales tax cap—and the Los Angeles suburb is seeking a three-quarter cent increase to bring the sales tax up to 10.25 percent.

In local polling, the idea of Santa Cruz’s sales tax measure has looked popular, with 59 percent of respondents supporting it.

One measure that polled even better than a sales tax was a sugary beverage tax. Bernal hasn’t recommend pursuing that route for the June election because supporters often need to mount an aggressive campaign to pass such a measure—even in communities where the idea is popular—in order to overcome big spending from the big soda lobby.

Some councilmembers say the soda tax is still on the table for future elections. But Councilmember Brown—who remains ambivalent about the sales tax—says a sugary beverage tax isn’t easy for her to swallow either, and for similar reasons. Brown says soda taxes are similarly regressive, as lower-income families consume more of the drinks than other groups do.

Brown says she would have rather explored taxes on second homes or vacant properties.

The sales tax effectively adds a single quarter to the bill of someone who’s spent $100 at the cash register.

But Brown is still weighing the impact that a new sales tax may have on low-income families. The alternative is the impact of cutting services, which could have a big impact on low-income groups too.

“This is something that I’ve definitely been struggling with,” she says. “I do not intend to be an active member of the campaign, but I have a hard time deciding how I will be voting personally.”