In Chula Vista, Government’s Boom Time Goes Bust

Monday, Aug. 27, 2007 | This decade, the city of Chula Vista caught a bad case of housing fever.

With sparkly new neighborhoods — and more where that came from — appearing as if from thin air, the city partied. It built a new city hall. It courted the Chargers and a new convention center. It wooed public safety officers from that cash-strapped city to the north, San Diego, by promising better raises and benefits in the years to come.

But now, with many of its sprawling suburban neighborhoods caught in the vortex of foreclosure, with unsold homes piling up, and with home prices dropping, it’s as clear in Chula Vista as it is in much of the county that the real estate heyday — and its accompanying spending power — is a past-tense phenomenon.

The city is grappling with its budget, revisiting and potentially revising the promises it made while the party raged. Officials may even try to renegotiate some of the terms of the labor contract struck with public safety employees — a year after the city boasted about snagging them from elsewhere.

“It’s pretty bleak,” said Maria Kachadoorian, finance director for the city of Chula Vista. “The reality of the market as it is today is … we’re hit a little harder than most. The biggest shift is that the assumptions of growth clearly can’t be there.”

The trouble in Chula Vista is trouble felt by cities nationwide as the United States sustains a slowdown in its housing markets.

The housing fever that infused individual homeowners with dreams of eternal appreciation and easy retirement also infected governments. Years of spiking values propelled homeowners to invest in vacation homes or to tap newfound equity to purchase new cars and travel the world. So too, cities, school districts and redevelopment agencies got a taste of increased revenue from property, hotel and sales taxes and spent it, budgeted for it to continue, grew to expect it. And now many must gear down the budgets they drafted mid-euphoria.

Lew Feldman, chairman of the Los Angeles office of law firm Goodwin Procter, likened the phenomenon to the state’s reaction to the dot-com boom.

“It’s like Gray Davis, when he assumed that the dot-com boom would continue and spent 30, 40 percent more from the state dollars than were coming in for state income,” he said. “It’s like anything — what goes up, must come down.”

Perhaps in no city in this region is the trend clearer than in Chula Vista. In recent years, as San Diego came to grips with dire financial straits and faced major staff and salary cuts, Chula Vista boasted of its skyrocketing revenues and ability to attract employees away from the county seat.

For eight fiscal years starting in 1999, Chula Vista’s assessed value for property taxes shot up in double digits. The assessed value of houses and boats and commercial properties tripled for Chula Vista between fiscal year 2000 and fiscal year 2008 — from $8.3 billion to $24.9 billion.

Those increases in assessed values meant increases in Chula Vista’s revenue from property tax. Where the city saw low single-digit percentage increases in its property tax revenue from fiscal years 1995 through 2000, the growth rate boomed in 2001 through this fiscal year, hitting double-digit increases every year but one. What was a $9.3 million property tax revenue stream for the city in 2000 has grown to an estimated $28.5 million for fiscal year 2008.

Chula Vista was the only city in the county to see a year-over-year increase of more than 10 percent in the most recent tally of total assessed value by the County Assessor’s Office. But in contrast to the 14 percent revenue growth from property taxes for the city this year, Kachadoorian has lowered the growth forecast to no more than 4 percent next year, and has warned the city could see even less growth than it did this year.

And worse off are the city’s sales tax revenues, which have dropped to 5 percent growth in fiscal years 2007, 2008 and in projections for 2009 after three years of at least twice that much annually.

Despite the two new malls and auto businesses that sprang up in Chula Vista, Kachadoorian called the tapering of the sales tax revenue the “domino effect” from the real estate slowdown and the increasing numbers of homes in foreclosure, and from the delay in opening State Route 125, a toll road to the east parts of Chula Vista that officials hoped would bring eager shoppers.

“If you can’t afford to save your house, you can’t afford to go out and buy furniture,” she said.

All of these add up to a perfect storm for Chula Vista as it faces some of the same belt-tightening it once bragged only happened in San Diego. A slowing of revenue growth is a reality — now and for future years — with sobering implications for those trying to balance the city’s budget.

As the city of San Diego cut back employee benefits to deal with its financial issues, Chula Vista last year happily snapped up San Diego police officers, promising them better benefits. Now, like San Diego, Chula Vista is learning what happens to long-term promises when things don’t go as planned.

David Garcia is two months into a position as city manager for Chula Vista. He said one of the first things he did after coming from an administrator job with the Arizona county of Yuma was to institute a hiring freeze.

“It just doesn’t make sense to bring on a whole bunch of people if you’re going to have to turn around and lay them off,” he said.

Last week, Garcia spoke to the City Council. The week previous, he met with the four labor unions representing city employees. The subject of the meetings: the magnitude of the financial problems slamming Chula Vista.

This year, for example, Chula Vista faces a possible budget deficit of $7.5 to $9 million. Last year’s deficit was $5.2 million. Before the real estate boom, however, the city didn’t have a deficit — Chula Vista’s reserves grew every year from fiscal year 1997 through 2002.

The city is dealing with the shortfall by reining in some of its service expenses. The current budget announces $1.4 million in direct service cuts — reductions in recreation center hours of operation, library staff and park maintenance, and “potentially longer” wait times for non-emergency police calls. And the city has plans to consolidate some departments and streamline management to deal with some unexpected revenue shortfalls; the council has yet to vote on such measures, officials said.

“This is something we’re all going to have to deal with together,” Garcia said. “It’s going to be a difficult process.”

Garcia stopped short of saying the 4 percent, 3 percent, 4 percent and 4 percent raises promised to police officers, for example, for 2007 through 2010 would be threatened. But 80 percent of the city’s budget is spent on salaries and compensation for employees, Garcia said. And all departments — whether through attrition or early retirement or other streamlining measures — will face reductions in expenses, he said.

Garcia attributes the trouble in Chula Vista to the same economic impacts of foreclosures and a slow real estate market hitting the rest of the country, drawing a line between that city’s financial stress and the woes of San Diego, which he characterized as bad internal decisions regarding long-term investments. Chula Vista’s problems, he said, are the same economic challenges affecting the entire country — the crunch of adjusting mortgages, the propensity for homeowners to have stretched to get into homes in the first place.

But when it came to analyzing whether Chula Vista officials spent too much of the increased revenues while the times were good, Garcia backed off.

“I really don’t want to speculate on what was done or how the decisions were made,” he said. “I’m kind of dealing with the reality of where we are right now. I wasn’t here when those decisions were made.”

But a year ago, local political consultant Scott Barnett issued an analysis of Chula Vista’s spending, concluding it had used too much of the one-time building fees and property tax bursts to fund ongoing expenses and had increased its debt while it had healthy growth. The city would soon feel the pain, he warned.

“It doesn’t look like any of this has been heeded in any way,” Barnett said. “You can’t cry poverty when they just spent what they had and then some. It’s a perfect, self-created storm.”

County Tax Collector Dan McAllister said after so many booming years, the county was due for a reality check.

“Some people are prone to over-react, to get out the torch and set their hair on fire and run up and down the hallways,” he said. “But it’s not bad for everybody to tighten their belts every once in a while. The American public is wooed into thinking things will go on forever in a good market, and now they need to set their sights a little more reasonably lower.”

The phenomenon of spending when you have the money is hardly new or restricted just to Chula Vista. Tom Haynes, fiscal and policy analyst for the city of San Diego, said it’d be nearly impossible to find a city that doesn’t spend when it has money. The city of San Diego saw a “significant bump” in property tax revenue while it began to deal with its own financial mess this decade, and that revenue helped to soften the blow.

“There never seems to be enough revenue, and when it’s there, it’s going to be spent on something,” he said.

But a major difference between Chula Vista and San Diego could show up starkly in the next few years. Proposition 13 is a California law that locked in a property tax base rate in 1978 for homeowners who don’t move. But when the property does change hands, as happened often during the housing boom, that property is reassessed to its contemporary value and the new owner is taxed based on that value. As a house comes out from the Proposition 13 rate lock, the recipients of property tax revenues see a proportionately large gain.

The more houses a city has that have the potential to change hands and come out of that Proposition 13-locked tax rate, the better chance a city has of retaining positive property tax growth even in a housing slowdown.

Since 2000, Chula Vista has issued enough residential building permits to increase its owner-occupied housing unit stock by two-thirds, from the 33,000 such units reported in the 2000 census. Because Chula Vista has a greater proportion of new houses to existing ones than does San Diego, Chula Vista’s revenue growth could slow more dramatically than the city of San Diego’s.

But Haynes said more than a slowdown in property tax revenues, he’s concerned about the “spillover impacts” of the housing downturn on the economies of the city of San Diego and the rest of the county.

“The bigger concern that I have is how much the housing decline might influence the rest of the economy,” he said.

Job growth in real estate, construction, finance and retail like furniture and home furnishings is slowing, he said. The “wealth effect” that stemmed from skyrocketing home values has vanished, tightening the spending of some homeowners who were once “a little more liberal in terms of what they were willing to spend money on,” he said.

Many adjustable-rate mortgages have yet to reset to higher monthly payments. The local tourism industry could take a hit as the real estate market clamps down on spending nationwide. Homeowners can’t as easily withdraw money from the equity of their homes to spend.

“When we start seeing disposable incomes decrease, that’s kind of a scary situation,” he said.

Barnett, president of TaxpayersAdvocate.org, issued a grim assessment of Chula Vista’s future financial health.

“I’d say they’ve been extremely cavalier in ignoring the warning signs in San Diego and they’ve been spending like drunken sailors,” he said. “They could become San Diego South here.”

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