Friday, Nov. 7, 2008 | To pay off its debts for its deluxe new City Hall, police station and other facilities built this decade, Chula Vista counted on receiving building fees for 600 housing units a year, a total of about $5.3 million.

Inspired by gangbusters development within its boundaries, the city built a lavish, sprawling new public center, paying for it partly with the development-related cash already burning a hole in its pocket. The rest it financed with bonds, pledging to pay off those loans with fees from the future building permits.

But the struggling city has received only 20 permits so far this year, four months into the new fiscal year.

The startling shortfall underscores how bleak the city’s once bullish financial outlook has become. City officials thought they were being conservative when they took out bonds based on the receipt of 600 housing permits. They considered it a bar that would be easily cleared for years to come, especially in light of the thousands of houses built there several years in a row.

“Six hundred permits didn’t seem unreasonable,” said Maria Kachadoorian, finance director for the city. “No one knew that the housing market was going to crash as far as it did.”

The city didn’t count on the region’s housing fever vanishing. But now, Chula Vista’s day-to-day budget could ultimately be on the hook for the city’s new debt, adding a potential $5.3 million to an existing $6.4 million deficit brought about by a drop in sales tax and other revenues. Officials say they’re looking for alternatives to raiding the general fund — which pays for such things as police and fire, parks and libraries — to make the bond payments. They’ve talked about refinancing the city’s debt or borrowing money from other departments.

Though not all cities banked on housing development to finance public facilities like Chula Vista, the austere economic situation there is shared to varying extents across the county. This year, city managers regionwide presented budgets that require major belt-tightening and service cuts for many county residents.

The region’s economy has since slid into a recession, consumer confidence has plummeted, the housing market continues to slide and the region is bleeding jobs. Local governments rely on such things as development fees, property tax, sales tax and hotel-room tax to fund their everyday operations.

“Things have obviously deteriorated in the global economy, the national economy, the California economy and the regional economy, and all of that affects us in little Poway in northeast San Diego County,” said Rod Gould, city manager in Poway, who has begun updating the City Council every three months on the economic situation instead of twice a year.

Fifteen of the county’s 18 cities sustained a decline in sales tax revenues in the second quarter of 2008 compared to the same quarter in 2007. Property tax gains have shrunk with the declining housing market, and global economic malaise has affected cities’ revenues from taxes on visitors staying in hotels.

Nationwide, auto sales were down 31.9 percent last month compared to October 2007 — bad news for the region’s car-selling cities. To deal with severe budget gaps, voters in La Mesa and El Cajon, for example, passed sales tax increases this week of three-quarters and one-half of a cent, respectively. Those new taxes won’t take effect until April, and the cities will see revenues from them in mid-2009. Voters in National City elected to keep that city’s one-cent sales tax, a measure that has stemmed some of the losses in car-heavy National City.

On Thursday, Gov. Arnold Schwarzenegger announced a plan to temporarily raise the statewide sales tax by 1.5 cents on the dollar and called for cuts to schools and some medical and welfare programs to shore up a state budget shortfall that has grown to $11.2 billion. The state could also soon take advantage of its authority to capture 8 percent of cities’ property tax revenues. Schwarzenegger called a special legislative session to address the budget crisis.

While the city of San Diego’s budget cuts have attracted attention this week, city managers and finance directors across the county are also confronting budget gaps. San Diego Mayor Jerry Sanders has said some parts of the city budget are untouchable; despite a $43-million budget gap in the middle of the year, Sanders has vowed not to cut uniformed public safety positions.

But many other cities said they’re looking at every line in the budget. Many have already adopted cost-cutting measures like hiring freezes and reductions in library hours or other staff time to deal with budget shortfalls.

Mike Shelton, El Cajon’s assistant city manager, said he will likely avoid layoffs even as he deals with a current year budget deficit of $6 million. Anticipating more than $8 million from the sales tax increase in the next fiscal year, the city in the meantime will not hire any staff or contribute to a few of its savings funds as it bides its time until the new tax takes effect.

At that point, should a deficit still arise, there is no untouchable expenditure in El Cajon, Shelton said.

“Everything is on the table,” he said.

Chris Zapata, city manager in National City, said the 1-cent sales tax increase that city’s voters passed in 2006 had contributed more to the city coffers than he’d hoped, and had helped bridge the gap between lost sales and property tax revenues and the city’s expenses. In the last two years, the special tax garnered $8 million for the city, which added $8 million to what was an operating budget of about $31 million previously.

“That is the saving grace in National City,” Zapata said of the one-cent tax, which voters this week voted not to repeal. “[Voters] are understanding what we’re trying to do with the funds.”

Still, the city’s sales taxes were down 15.4 percent in the second quarter of this year compared to the same quarter a year ago.

Now cities are watching the economy with bated breath, hoping to avoid deeper cuts to city services.

“I’m really curious to see what happens in the third quarter,” said Graham Mitchell, city manager in Lemon Grove. “We’re being super cautious with the mid-year budget that we’ll present to the council in January.”

While Lemon Grove saw year-over-year sales tax declines of 14.7 percent in the second quarter this year, Mitchell said the tight budget has allowed the city to build some reserves. He said an earlier budget deficit forced the city to deal with reduced services.

“When we were hit four years ago, we went about as bare bones as we can go,” he said. “We’ve been building reserves for rainy days, and I think we’re in a storm.”

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