Monday, Jan. 28, 2008 | The financial problem facing the city of Lemon Grove is four-fold, says Graham Mitchell, city manager.

Economic disquiet means fewer sales in the city’s stores and restaurants, funneling less general sales tax money to city coffers. New car sales are down nationwide, and again, Lemon Grove feels acutely the dwindling revenues. The scenario was enough to shutter a big dealership in the city last year, shutting down another source of funding. And fourth, without the confidence boost instilled by a sizzling housing market, a weekend trip out for a flat-screen television or a new couch is less and less common for shoppers in Lemon Grove.

And so, Mitchell and the other city managers and financial officials for San Diego County’s 18 cities grapple with sales tax revenues that hardly resemble the economic boom time in recent years. And even among cities whose managers thought they were being quite conservative with revenue projections, some find themselves lowering their expectations.

The trouble has hit El Cajon’s car dealerships and Lemon Grove’s home improvement stores. San Marcos’s building permit fees have dropped, and Chula Vista’s new mall hasn’t magnetized the hordes of shoppers envisioned. Those cities that haven’t yet felt the pinch are watching cautiously, hoping to weather the storm but knowing the economy could pull them down, too.

“The slumping housing market and drop in consumer confidence has a very direct effect on cities in California,” said Rod Gould, city manager in Poway. “I don’t think any will be exempt from this economic malaise.”

Most city councils in the county will hear staff’s mid-year budget projections in the next few weeks. Cities’ general funds are typically fed chiefly by a mix of sales, property, and hotel-room taxes, and sometimes fees from vehicle licenses and property transfers. Many aren’t seeing revenues dip below what they received last year. But compared to the double-digit percentage revenue spikes experienced earlier in the decade, the budgeting these days must be far more cautious.

Those cities with budgets that are thrown out of whack will have to find ways to cut costs or — as a last resort, most officials swear — ask residents for a tax increase. Those cost-cutting measures could mean shortened work schedules for city employees, thinning of library hours, pullbacks in road and park maintenance, and second looks at retirement and raise promises.

Chula Vista’s well-publicized plight stems from some similar sources. City staff dreamed of soaring tax revenues to come from its new mall and the shoppers a new freeway would bring into the city. But tough times for its own residents plus delays in the freeway’s opening and a large consumer deterrent — home foreclosures — have left officials staring at an economic landscape they’ve called “pretty bleak.”

And officials in the city of El Cajon last week warned its City Council and mayor of “an impending fiscal emergency.” The city must eliminate a $6 million deficit, warned the city manager’s Jan. 18 memo, or it will have to deplete its reserves and “become insolvent within two years.” That $6 million represents at least 10 percent of the city’s annual budget.

El Cajon is a big car-selling city. Though the city’s deficit stretches back several years, a local and national plunge in car-buying activity — and the resulting decrease in sales tax going to the city — exacerbates the gap. As an older city with little room for new, tax-generating development, the situation is acute.

“We’ve known that we’ve had this imbalance for a long time, and I think we were all hopeful that the sales tax revenue would go up,” said Mike Shelton, El Cajon’s finance director. “But not only did the economy not get better, it got worse.”

In the first two quarters of the city’s current fiscal year, it pulled in 5.4 percent less sales tax than it did in the same period in the previous fiscal year — a $650,000 difference. In the same comparison, cities’ sales tax revenue on the county whole dropped by 2.6 percent, according to data from El Cajon’s tax consultant, MuniServices.

El Cajon isn’t alone, nor is the problem limited to cities in San Diego County. Last week more than 250 mayors met in Washington, D.C. for the winter meeting of the U.S. Conference of Mayors and pleaded for an infusion of federal money to address the growing problems in cities nationwide due to abandoned, foreclosed houses and the economic distress wreaked by the housing market.

And late last week, Congress and the Bush administration struck a tentative agreement, hoping to jumpstart the economy by rebating several hundred dollars to citizens, and by temporarily raising the cap on “jumbo” mortgages. Raising the cap from $417,000 to potentially more than $700,000 would mean the loans in that spread could be made with the lower interest rates, likely saving many county homeowners a few hundred dollars a month on their mortgage payment.

If they’re saving more on their mortgage, so the hope goes, they’ll spend more money in restaurants and in stores on things like cars and home improvements.

Still, the stimulus package comes several months, and more than a year in some cases, after cities have begun to feel the effects of slump. Gould, in Poway, said his city began cutting spending and employment hours for some city staff and raising fees last year.

And Lemon Grove’s Mitchell said the city has revised its expectations for sales taxes especially dramatically. When Mitchell compiled the budget in May for this fiscal year, he projected a 6 percent decline in sales tax revenue.

“But that was before we knew the economy was as bad as it is,” he said. “In our mid-year budget review, we’re projecting up to a 15 percent decline.”

Now Lemon Grove’s City Council will likely face some of those cost-cutting measures when it meets for the mid-year budget review.

Escondido’s situation is similar. Gil Rojas, finance director, said sales tax revenue in the last three months of 2007 was down by 8.6 percent from the same quarter in 2006. And fourth quarter 2006 itself was down 7 percent from the year before.

“You add the two numbers and all of a sudden you’re dealing with a 16 percent fall from where we were two years ago,” Rojas said.

In the city of La Mesa, City Manager Sandy Kerl said she’s had to revise sales tax estimates by about $500,000, about 4 percent of the expected sales tax revenue. She said she thought those initial estimates were “very conservative at the time.”

“We anticipated about a 2 percent increase (compared to last year) in sales tax, but we’re actually seeing a 4 percent decrease,” she said. She said La Mesa is about in the middle compared to other county cities for sales tax revenue per capita, though some has begun to “leak” to surrounding cities with new development and retail options.

Santee, near El Cajon and La Mesa, is hearing about its neighbors and anticipating potential tough times ahead.

“I don’t want to say that Santee’s immune to the impacts of this because we’re all feeling the slowdown,” said the city manager, Keith Till. “However, Santee’s yet to be affected by an impact on property tax — we’re still in a growth mode.”

Between fiscal year 2002 and the next one, Santee saw an 11.7 percent increase in sales tax revenue. The expectation made in May for the difference between fiscal 2007 and the current fiscal year was just 3.6 percent.

The city’s financial director, Tim McDermott, said the city has not finished reviewing the projections, but said “the potential for a downward adjustment in revenues is there.”

Falling housing prices, foreclosures and slumping house sales — plus a spillover into the market for office and retail space — mean the revenues many cities get from property taxes are stagnant, or at least growing at rates substantially lower than the boom earlier this decade.

Teri Ferro, city manager for Oceanside, said ongoing development in that city will cushion anticipated weakness in property taxes. But she said a wildcard for all cities right now is what the governor’s budget cuts will mean for funding they’d counted on to balance their own budgets.

Lilian Cerio, San Marcos city manager, sounded a similar assessment — though sales taxes have fallen, the city didn’t live beyond its means when times were good, she said.

Because the city of San Diego is substantially larger than the other cities in the county and has more diversity in its revenue base, impacts in any one segment — car sales, for example — are unlikely to impact San Diego as directly, said Tom Haynes, fiscal and policy analyst for the city of San Diego’s Independent Budget Analyst. The city downwardly adjusted its sales tax revenues in its mid-year budget report to the mayor City Council on Friday.

“We’ll probably feel it here, too, though, if there is a widespread reduction in consumer spending in all other segments,” Haynes said.

Haynes said even though the housing price drops have been very slight in some neighborhoods, many city residents have been hit psychologically.

“There may be something to be said for the decline in prices hitting people psychologically,” Haynes said. “Where they used to feel a little bit more insulated, now [they’re saying], ‘Maybe now’s not the best time to go out and make a big purchase.”

El Cajon’s mayor, Mark Lewis, said he thinks some of the tax base would come back.

“People are people, and they’re going to have to buy a new car eventually,” he said. “But you’re seeing if you can make a coat go another year, asking, ‘Do we really need to go out to eat again?’”

With an extra-cent sales tax in National City implemented in October 2006, that car-heavy city is doing OK, said its city manager, Chris Zapata. This year’s expected $8 million from that tax constitutes one-fifth of the city’s annual budget. The city had a “very, very serious general fund problem” a few years ago and made adjustments at that time, he said.

Shelton, in El Cajon, said his city’s problems, at least when it comes to addressing the deficit, are worse than those in cities that are just beginning to wake up to the problems.

“There’s a lot of things you can do for the first time,” he said, referring to staff scheduling changes and services cuts that the city began implementing several years ago. “There’s nothing easy anymore. … And the magnitude of our problem is greater.”

For some cities, the tough economic conditions mean little change from any other time.

“We’re always struggling to make sure we can balance the budget, that’s for starters,” said Gary Brown, city manager in Imperial Beach. “We’re a very poor city, and we don’t have much of a sales tax base.”

“That’s both the bad news and the good news,” he continued. “When sales are way down we are not affected. … But when the good times come back it doesn’t go much up for us.

It’s a really close call for us, but so far we don’t look like the stories in the other newspapers of the other cities.”

Still, in cities like El Cajon, finance officials say they must communicate in strong words the seriousness of the problem.

“We now see the problem being bigger than it was before,” Shelton, that city’s finance director, said. “At some point, obviously, the bleeding has to stop.”

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