Civics 108: America's Cities and Their Budgets

By Roger L. Kemp

It should be remembered that government organizations, like their business counterparts, have distinct life cycles. During their lives, public organizations generally go through four phases: growth, stability, retrenchment, and revitalization. Different political and management strategies are needed to set the course and properly guide an organization through each phase of its development. Strategy is concerned with defining purposes and developing goals and plans for an organization’s future direction and growth. While some cities, particularly those in suburban areas with an expanding tax base, are in the growth or stability phase of their life cycle, many others have entered the retrenchment or revitalization phase of their development. Sound budget reduction strategies will assist public officials in this latter category as they debate and adopt policies that ultimately lead to the financial self-help and renewal necessary for the future.

• Language: English
• Publisher: AuthorHouse
• Release date: Jul 24, 2022
• ISBN: 9781665565301

Roger L. Kemp

Roger L. Kemp has worked in city government for a quarter century, serving nearly two decades of this time as a city manager. He has served in cities in California, New Jersey and Connecticut. He holds a Ph.D. degree in public administration from Golden Gate University, and is a graduate of the Program for Senior Executive in State and Local Government at Harvard University. Dr. Kemp has written, edited, and has been contributing editor of over 50 books dealing with numerous aspects of local government. One of his most significant books, Managing America’s Cities: A Handbook for Local Government Productivity, was published in 1998 - - many years ago. Additionally, he has had over 500 articles published in leading professional journals throughout the world. During his career, Dr. Kemp has served a dozen mayors, several city councils, and scores of elected officials. His experience was gained from many years of public service in politically, economically, socially, and racially diverse communities on both the East and West Coasts. He is frequently called upon to speak about cities and how they work before various community groups and professional organizations, both nationally and internationally. This volume reflects the insights gained by Dr. Kemp from his 25-year career of first-hand experience working in cities, and his dealings with their elected officials and citizens during this time. He resides in the City of Meriden, Connecticut. Dr. Kemp has worked in the following cities, in those states noted, during his public service career: California City of Oakland City of Seaside City of Placentia City of Vallejo New Jersey City of Clifton Connecticut Town of Berlin City of Meriden Roger can be reached by telephone [phone]) or by e-mail ([e-mail]). He is available for speaking and consulting assignments. His personal website shows additional information about his background (http://www.rogerkemp.org/).

Book preview

© 2022 Roger L. Kemp. All rights reserved.

No part of this book may be reproduced, stored in a retrieval system, or transmitted

by any means without the written permission of the author.

Published by AuthorHouse  07/21/2022

Library of Congress Control Number: 2022913420

ISBN: 978-1-6655-6529-5 (sc)

ISBN: 978-1-6655-6530-1 (e)

Any people depicted in stock imagery provided by Getty Images are models,

and such images are being used for illustrative purposes only.

Certain stock imagery © Getty Images.

Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed

since publication and may no longer be valid. The views expressed in this work are solely those of the author and do

not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

DEDICATION

This book is dedicated to those public officials throughout the country who may have to cope with revenue-reducing mandates similar to California’s Proposition 13, and to taxpayers in general so they may gain insight into the difficult process of reducing governmental budgets.

CONTENTS

Preface

Acknowledgements

LESSON ONE

Introduction

Introduction

The Jarvis-Gann Initiative

Taxes and Public Services

One Government’s Response

Implications

National Taxpayers’ Revolt

Purpose of the Study

LESSON TWO

Property – Tax Relief

Property-Tax Relief

Introduction

Proposition 13

Senate Bill 1

Proposition 8

Analysis of Proposition 13 and Senate Bill 1

The Voters’ Decision

The Supreme Court Ruling

LESSON THREE

Advance Planning

Introduction

Preliminary Financial Analysis

Legal Analysis

Final Financial Analysis

Senate Bill 1 Analysis

City-Council-Budget Mandate

City Council Opposes Proposition 13

Commentary

LESSON FOUR

Anticipated Impact

Introduction

Alternative City Budgets

Proposition 13 Budget Hearings

City Council Adopts Proposition 13 Budget

Anticipated Financial Impact

Anticipated Public-Service Impact

Informing the Public

Commentary

LESSON FIVE

Actual Impact

Introduction

State-Surplus Revenues

Council Approves Replacement Revenues

Additional Proposition 13 Budget Hearings

City Council Adopts Revised Proposition 13 Budget

Actual Financial Impact

Actual Public-Service Impact

Continued Impact

Commentary

LESSON SIX

Statewide Reaction

Introduction

Commission on Government Reform

State Legislature’s Response

The Taxpayers’ Revolt Continues

LESSON SEVEN

Conclusion

Conclusion

Proposition 13 in Retrospect

Coping with Revenue-Reducing Mandates

The Budget-Reduction Process

Taxes and Public Services

Appendices

About The Author

PREFACE

It has been a while since the passage of California’s now famous Proposition 13. Since 1978 virtually every state has undergone some form of self-imposed or citizen mandated taxing and/or spending limitation. Such financial constraints, coupled with the limited growth of revenues, increased citizen demands for services, continued economic inflation, and fewer state and federal grants, have focused national attention on ways to balance public budgets. Gone are the days of calculating budgets and merely adjusting tax rates to generate additional revenues. Public officials in local governments must now determine how much money is available first, then prepare budgets within available financial resources.

Since the passage of Proposition 13, many studies have been conducted, nearly all of which deal with the impact of revenue reductions on specific public services or ways to generate additional tax dollars. The sensitive issue of developing a rational administrative process for reducing public budgets is ignored. Although revenues have been limited, the demand for funds continually outstrips the availability. Even with a renewed emphasis on generating more tax monies, enhancing program productivity, and the greater use of technology, many budgets must be reduced to make financial ends meet. This study, for these reasons, has greater relevancy now than ever before. Public officials in local governments throughout the nation can learn from the experiences of other cities as they coped with the Jarvis-Gann Initiative.

The public sentiments that led to the passage of Proposition 13 have manifested themselves in voting booths across the country. No one would argue that the political arena, especially public finance and taxation issues, has become more turbulent. This change in attitude has led to a dramatic shift in public policy, as politicians and administrators are forced to react to the populist taxpayer movement. It is a common practice nowadays for elected officials, rather than to increase taxes for a good cause, to place the issue on the ballot for the voters to decide. No politicians, regardless of the office they hold, want the wrath of the electorate directed at them for raising taxes.

These commonly held attitudes on the part of elected officials and administrators have led to greater government belt tightening, a thorough review and evaluation of existing public programs, and closer scrutiny of new public services. As public finances become increasingly scarce, selected public programs and services will have to be reduced in order to balance budgets. Unlike the federal government, local governments are constitutionally required to balance their budgets each fiscal year. Deficit financing is not permitted. The era of unlimited revenues, brought about by ever higher taxes, has come to an end. This is now a political fact of life in cities and towns throughout America.

The budget cutting process will be hard fought when conflicting values are publicly debated and program priorities are established. As the purse strings become tighter, special interest groups will attempt to influence public officials in order to maintain their pet programs. Public officials cannot merely yield to the pressure brought to bear by these special interests. They must instead devise practical strategies that enable budget reductions to proceed in a logical and defensible manner. This process must take into consideration community-wide interests, as opposed to the narrow concerns of special interest groups. If politicians do not become financially responsible, citizens are likely to continue to vent their frustrations at the polls by mandating additional government taxing and spending controls. Nowadays, elected officials––local, state, and federal––are under increasing public scrutiny by a fiscally conservative and tax conscious citizenry.

It should be remembered that government organizations, like their business counterparts, have distinct life cycles. During their lives, public organizations generally go through four phases: growth, stability, retrenchment, and revitalization. Different political and management strategies are needed to set the course and properly guide an organization through each phase of its development. Strategy is concerned with defining purposes and developing goals and plans for an organization’s future direction and growth. While some cities, particularly those in suburban areas with an expanding tax base, are in the growth or stability phase of their life cycle, many others have entered the retrenchment or revitalization phase of their development. Sound budget reduction strategies will assist public officials in this latter category as they debate and adopt policies that ultimately lead to the financial self-help and renewal necessary for the future.

The budget reduction process outlined in this book will help public officials across the land develop sound strategies for coping in an era of limited financial resources. The passage of the Gramm-Rudman-Hollings legislation at the federal level will continue to exacerbate the financial plight of local governments. Politically and administratively sound budget reduction strategies must be developed to restore public confidence in government. The level of public trust in local government can only be restored through the prudent and financially sound practices of elected officials as they grapple with the dilemma of balancing budgets in the future.

Roger L. Kemp

ACKNOWLEDGEMENTS

Grateful acknowledgements are made to the elected officials, appointed officials,

and citizens of those cities that I have worked and lives in during my over a

quarter-century public service career on both coasts of the United States.

These states and cities include the following:

While I served as a full-time City Manager, I taught public administration courses in graduate programs at universities located close to where I worked as a City Manager. In one or more cases, the school was a distance away, but the courses taught were on-line.

These universities include the following:

LESSON ONE

INTRODUCTION

Introduction

The fiscal and operational adjustments local governments have to make in response to Proposition 13, or similar revenue-reducing legislation, have complicated effects on elected officials, governmental administrators, and citizens. Local governments must assess such legislation to determine its financial impact upon public services, placing emphasis on alternative strategies to cope administratively with such mandates. The fiscal analysis of proposed legislation must be made far in advance of the legislation’s scheduled implementation date.

Proposition 13, formally referred to as the Jarvis-Gann Property-Tax Initiative, was passed by California’s electorate on 6 June 1978, and became effective on 1 July 1978, only three weeks after its adoption. Needless to say, a local government cannot wait until such legislation is adopted before analyzing its financial and operational ramifications on public services. These implications, and the political and administrative responses used to cope with them, pose a challenge to both local legislators and governmental administrators. These implications, an analysis of the Jarvis-Gann Initiative, including the revenue constraints imposed by this mandate and how they were dealt with by one municipality, are the subject of this study.

The Jarvis-Gann Initiative

The Jarvis-Gann Initiative severely restricts the revenue-generating ability of both state and local governments. One of the major sources of revenues to local governments, the property tax, was the revenue source hit hardest by this initiative. On a statewide basis it is estimated that about $7 billion annually in local property-tax revenues was taken away from California’s local governments. The major provisions of this initiative, which became effective on 1 July 1978, are briefly outlined below.

1. Establishes a ceiling on ad valorem property taxes.

2. Mandates limitations on the full cash-value increases on real property.

3. Prohibits future real property taxes of any kind.

4. Imposes increased requirements on the implementation of new state taxes.

5. Requires a two-thirds voter approval of all new local taxes.

6. Prohibits the use of property-tax-supported bond issues in the future.

7. Excludes bond indebtedness having previous voter approval from the provisions of this initiative.

The implications of this initiative are far-reaching. Both state and local governments are restricted from implementing future taxes, regardless of the justifications involved. Prior to 1 July 1978, general obligation bonds required a two-thirds approval by those voters actually casting ballots in an election held for that purpose. The new provision, requiring a two-thirds vote of the qualified electors, may further impose restrictions upon the revenue-generating ability of local governments. It has not yet been determined if the phrase qualified electors refers to those individuals registered to vote or to those actually voting in an election. One ramification of this initiative is that local governments, in an effort to offset revenue losses mandated by the Jarvis-Gann Initiative, sought to implement alternative revenue sources prior to 1 July 1978. After this date, the implementation of new taxes at the local level requires voter approval. This provision is bound to adversely affect the revenue-generating capability as well as the delivery of public services by local governments in California in the years ahead. A more comprehensive analysis of Proposition 13, including an analysis of the California Legislature’s counterproposal, Senate Bill 1, is contained in chapter 2.

Taxes and Public Services

It appears that most of California’s citizens, having felt the financial pressures of increasing property taxes for a number of years, plus the highly publicized fact that large state-surplus revenues had accumulated, were eagerly awaiting the opportunity to express their desires for reduced taxes, whatever the form. This was the basis of the argument used to qualify the Jarvis-Gann Property Tax Initiative for the state ballot. This argument proved successful. Approximately 0.5 million signatures were needed to qualify this initiative for the state ballot; nearly 1.3 million signatures were obtained. Citizens could only perceive the short-term effects of such legislation: the hard-dollar tax savings. The long-run implications, however, are more significant and may involve a substantial reduction in selected public services in the years ahead because of decreased revenues.

The majority of citizens usually only identify themselves with those specific public services they directly utilize. Public services not used directly by the majority, such as those offered in many cultural, recreational, and social programs, are typically considered as the fat in government. These programs, however, also have many beneficiaries and cannot be reduced without affecting the lives of many individuals. All public services have their constituents, many of whom comprise only a small minority of a governmental jurisdiction’s total population.

By far the most visible of public services offered by local governments appear to be police and fire activities. In fact, the state legislation authorizing the distribution of California’s surplus revenues (Senate Bills 154 and 2212), which amounted to $5.1 billion, expressly stated that police and fire services could not be reduced below pre-Jarvis-Gann funding levels, except for economies that could be achieved without disrupting the level of these services.

Of the total state-surplus revenues, $4.2 billion was distributed as financial aid to local governments; the remaining amount, $0.9 billion, was placed in an emergency loan fund for local governments. The purpose of this fund was to act as a lender of last resort to purchase local government tax-anticipation notes. The state legislation mandating the distribution of state-surplus revenues is examined in greater detail in chapter 5.

One Government’s Response

In the city of Oakland, California, soon after the Jarvis-Gann Initiative qualified for the state’s ballot, the city council directed the professional staff of the city to assess the potential financial implications of this measure on the city’s revenue base. This financial analysis was presented to the council in January 1978. The revenue loss to the city was determined to be in excess of $35 million.

After reviewing this report, the city council directed the city manager to prepare an alternative city budget, assuming that no replacement revenues would be received to offset the projected revenue losses. At that time, the council felt that if the initiative was passed by the voters, the city should be prepared to implement an alternative budget based on the substantial reduction in revenues and a corresponding decrease in public services. Furthermore, additional revenues were not then certain. Moreover, if the Jarvis-Gann Initiative passed in June, the city’s electorate would not want other taxes or nontax revenues to be increased to compensate for the property-tax-revenue loss. Therefore, the council indicated that this budget should provide for a level of public services to meet available, or post-Jarvis-Gann, revenues.

In April 1978 the alternative city budget was presented to the city council. As soon as this budget was prepared, the reductions in public services became apparent. The $35-million-revenue loss meant the closure of fire stations, branch libraries, parks, and recreation centers, and a decrease in police services. This alternative city budget necessitated the elimination of approximately 1,300 positions: about one-third of the city’s total labor force. Due to the magnitude of the revenue loss, which amounted to nearly a third of the city’s discretionary funds, service reductions could not be made only in selected public-service areas. Instead, public services had to be reduced, by varying degrees, in virtually every city department. Subsequent refinements were made in this budget at the request of the city council. This alternative city budget was approved by the council in early May 1978. A hiring freeze was also imposed by Oakland’s city manager during the council’s deliberations on the Jarvis-Gann Budget.

In addition to this budget, the city manager prepared a short publication titled Public Service Impact Statement, describing in detail the public services that would be affected by the passage of the Jarvis-Gann Initiative. This analysis set forth service reductions on a citywide basis, by department. The budget document, along with the Public Service Impact Statement, was distributed to the city council, the local news media, interested community groups, and concerned citizens. Prior to the election, notices were also placed on those public facilities which would be either closed or reduced under Proposition 13. These signs, titled Notice of Possible Closure, and Notice of Potential Reduction of City Services, explained how passage of the Jarvis-Gann Initiative on June 6 would affect public services. These actions enabled the public to relate to specific public-service reductions rather than just to think of reducing the fat, a term which was frequently heard during the debates on the merits of this initiative. A more insightful perspective of the actual impact of this initiative on public services was gained by the citizens of Oakland as a result of these public-informational efforts.

On 6 June 1978, Proposition 13 passed by nearly a two-to-one margin on a statewide basis. Oakland, however, was one of the few cities in California that voted against this initiative. The statewide vote was approximately 4.2 million in favor, 2.9 million against. The Oakland vote, on the other hand, was 42,060 in favor and 46,118 against. The timely analysis of the impact of this legislation by city officials may have been a decisive factor in this voting pattern. While Oakland still had to cope with the passage of the Jarvis-Gann Initiative, it could do so in a more positive and constructive manner. Rather than merely reducing public services en masse to meet the anticipated level of limited resources imposed by the initiative, selected revenue sources were increased to mitigate estimated revenue losses. Additional revenues were subsequently approved by the city council. These included the use of one-time city savings, elimination of the Convention Center Fund, and increases in the transient-occupancy tax, the business license tax, and the real estate transfer tax. The additional taxes were all approved prior to the 1 July 1978 deadline imposed by the initiative.

The additional revenues, coupled with the city’s estimated receipt of the state’s surplus revenues and other revenue adjustments, reduced the magnitude of the city’s financial deficit from $35 million to slightly over $14 million. The receipt of supplemental revenues from the state enabled the city of Oakland to spread its revenue loss under Proposition 13 over a two-year period, thereby minimizing service reductions and reducing the number of city employees to be laid off. Under the original estimate of revenue loss, over 1,300 positions were scheduled to be eliminated. Once additional revenues were mandated and the amount of the state’s surplus revenues was determined, only 227 positions were actually cut—only a fraction of the original number. Due to the hiring freeze, all but seventy of these positions were vacant by the beginning of the city’s new fiscal year, 1 July 1978.

During July and August, the city council scheduled a series of public workshops to further review departmental budgets. These meetings were designed to explore additional areas for possible future budget reductions. Given the uncertainties surrounding the continued receipt of state-surplus revenues and grant funds under certain federal programs, such as the State and Local Fiscal Assistance Act (revenue sharing) and the Public Works Employment Act (antirecessionary payments), the city faced a future budget deficit in fiscal year 1979-1980. The amount of funds estimated to be received from these sources during fiscal year 1978-1979 was $9.3 million, $5.9 million, and $4.2 million, respectively. These efforts were intended to facilitate future budget reductions which had to be made.

Implications

The short-term implications of Proposition 13, or similar revenue-reducing legislation, are obvious. Government officials must direct their staffs to provide timely analysis of the impact of such legislation on their governmental jurisdiction’s financial condition as well as on its public-service levels. This action was taken in Oakland six months in advance of the scheduled implementation date mandated by the Jarvis-Gann Initiative.

Additionally, it is incumbent upon elected officials and appointed administrators alike to educate the citizenry as to the impact such legislation may have upon existing public services. In Oakland, the Public Service Impact Statement objectively described such service reductions on a departmental basis. Several public hearings were also conducted by the city council to further review the impact of Proposition 13 on city services. Educating citizens as to the possible service reductions under this type of legislation may prove to be a vital and decisive factor in influencing public sentiments. These actions enabled Oakland’s citizens to relate directly to specific public services that would be curtailed or eliminated, rather than merely to identify such legislation with the elimination of the so-called fat in their government. This is not to say, however, that certain economies cannot be achieved without adversely affecting the prevailing level of public services.

In the long run, local governments will have to place greater emphasis on increasing operational productivity; identifying revenues, particularly user fees, with specific public programs; increasing user fees to make as many programs as possible self-sustaining; and analyzing the financial implications of new public services.

Emphasis should be placed, whenever possible, on financing new public programs on a user-fee basis. A public program entirely financed out of the revenues it generates is not likely to be curtailed. On the other hand, citizens increasingly do not like to subsidize many programs they do not directly utilize. This is not to say that all public programs should be financially self-sufficient. It should be kept in mind that many programs exist for the betterment of the health and welfare of the entire community, such as police, fire, public works, and many cultural and recreational programs, to name a few.

Above all, the financial posture of local governments should be austere. Excessive surplus revenues should not be permitted to accumulate. If such revenues exist, taxes should be reduced accordingly. These long-run implications should be the goals of local legislators and administrators alike, regardless of the governmental entity in which they serve. This is the challenge which faces public officials at all levels of government. Only responsible actions in these areas may change prevailing public sentiments and place local governments in a more positive perspective. Until this happens, the taxpayers’ revolt is likely to blossom to national proportions.

National Taxpayers’ Revolt

The taxpayers’ movement is not limited to California. Riding the crest of what many observers have termed a wave of taxpayer revolt, supporters of tax reform have generated numerous proposals in many other states throughout the country. Now that most of the state legislatures have met and adjourned for the year, it is apparent that the trend toward reducing or repealing taxes and imposing spending limits on state and local governments has been a strong and pervasive one. Virtually all states have curtailed revenues or spending, or both, to some extent. The taxpayers’ revolt shows no signs of abating. Another round of referendums and initiatives similar to that of the 1978 elections is being planned for next year’s elections.

In addition to the reductions and spending limitations authorized last year by state governments and by ballot initiatives, official action so far in 1979 includes the following:

1. Twenty-two states have reduced property taxes with actions ranging from across-the-board rebates for homeowners to limited relief for the elderly and disabled.

2. Eighteen states have reduced income taxes, either through a rollback in rates or by increasing certain deductions and credits.

3. Fifteen states have curtailed, in some fashion, the collection of sales taxes on certain products and services.

4. Eight states have voted spending limits that will result in leaner state and local government budgets in the future.

5. A dozen states have repealed or reduced assorted other taxes. Iowa, for example, is gradually ending its personal-property tax, while Nevada has repealed its tax on household goods.

Scattered through these actions has been specific relief for commercial interests. In Maine, for example, voters approved a sales-tax exemption for farming and fishing equipment, while North Dakota removed sugar-beet-refining machinery from the property-tax rolls. In a number of other states, tax relief was voted for citizens at the lower end of the income scale. Maryland, for example, rolled back property taxes applicable to lower-income homeowners. In Nevada,