The purpose of a baseline budget forecast is to project the cost impacts of current levels of staffing and services, including cost increases beyond the City’s control, and reasonable estimates of costs that are within its
control. Similarly, a baseline forecast projects a reasonable rate of growth for each of the General Fund’s revenue sources given past history and likely economic trends. Alternative assumptions for the major revenues and expenditures with the greatest financial significance can then be tested to show their impact on the forecast’s bottom line.
Revenues
Management Partners evaluated the City’s current budget and recent history and concluded that the following revenue factors are the most important for purposes of long-term forecasting.
• Sales tax growth rate • Property tax growth rate • Utility users tax growth rate • Retirement tax rate level $401 $277 $233 $232 $230 $222 $201 $0 $50 $100 $150 $200 $250 $300 $350 $400 $450
Inglewood Pomona West
Covina Downey Whittier SouthGate El Monte
El Monte is somewhat unique in having a special property tax to fund retirement costs. Proceeds are retained in a restricted retirement tax fund from which CalPERS retirement costs are paid.
Figure 9 shows the major revenues for the combined general fund and retirement tax fund. Of special note is that just three sources – property tax, sales tax and utility users’ tax – comprise 78% of the total.
Figure 9. El Monte Combined General Fund and Retirement Tax Fund Revenues by Type for FY 2014-15
Sales Tax
The Great Recession had a significant negative impact on El Monte’s sales tax revenues, which fell from almost $24 million in FY 2006-07 to just over $16 million in FY 2008-09. Sales tax revenues, including Measure GG, are projected to be approximately $19.4 million in FY 2014-15.
Figure 10 presents El Monte’s sales tax revenues by economic sector. It shows the City is heavily reliant on revenues from the transportation sector, i.e., vehicle and fuel sales, which comprise 64% of sales tax receipts compared to the statewide average of 25%. El Monte has been hurt by the consolidation of automobile dealerships in response to the poor economy.
Figure 10. El Monte Sales Tax by Economic Sector
General retail is only 12% of El Monte’s sales tax base, compared to 28% statewide. The over-concentration of vehicle-related sales combined with the low level of retail sales increases the City’s economic risk and revenue volatility. The sales tax is closely linked to trends of economic growth, unemployment, and inflation.
Several factors are or will be negatively influencing sales tax growth. • Trends toward purchasing non-taxable services versus taxable
commodities. According to the State Board of Equalization (BOE),
taxable sales as a percent of personal income have dropped from a high of 53% in 1979 to 32% in 2011, a trend exacerbated by an aging population. Taxable sales in California today, adjusted for inflation, are 28% lower than in 2000.
• Taxable sales growth limited to top income earners. From 2000 to 2010
household spending increased 27%, but all of the net gain is for the top 20% of household income earners. This has ramifications for lower-income communities such as El Monte. According to the U.S. Census Bureau, California real median household income level (adjusted for inflation) has fallen 13.5% from its 2006 peak, nearly back to its 1994 level.
• Increasing levels of non-taxable sales. Catalog and internet sales are
rising. In fact, they are projected to be 9% of all retail transactions by 2016. In addition, compliance with the self-reported use tax remains low. Future retail trends are for downsized “touch and feel” stores or even “virtual” stores. These factors are likely to
result in a shift in the actual point of sale from local stores to fulfillment distribution centers located in other cities.
• Technology and lifestyle changes resulting in lower sales tax revenues.
One example of technology changes affecting sales tax is the availability of 3-D printers. These printers can fabricate products to order on-site, but under existing BOE regulations the sales tax applies only to the raw materials used instead of a finished product. This results in a lower tax being paid. Another example is the growing popularity of food trucks. Rather than the tax being generated by brick and mortar restaurants where the city reaps all of the local tax, the sales tax generated from food trucks is allocated by county or state pools resulting in the city receiving only a share of the total.
These factors will act to dampen the expected rate of sales tax growth over time, compared to historical levels.
In 2008 voters passed Measure GG, an additional half-cent sales tax, to support City services. This results in a local sales tax rate of 9.5%, higher than all but three of the cities in the state (all within Los Angeles County). Measure GG is set to expire in 2019. Voter approval would be needed to extend the tax beyond that date.
Property Tax
Property tax has a built-in lag time due to its annual reassessment and semi-annual payment schedule, and a backlog of assessment appeals. Unless a property changes ownership or is newly-constructed, market- level price changes do not influence its assessed value unless its “true” market value falls below the already artificially low Proposition 13 value for the property. Some of this value reduction will be restored as market prices of such properties rise. However, the credit market has changed significantly and may not support the level of median home prices El Monte enjoyed at peak 2006 levels.
The supplemental tax roll accounts for new construction and transfers; however, mid-year changes in revenue are distributed according to the
The property tax also includes the “property tax in lieu of Vehicle License Fees (VLF),” which is allocated by the County and increases in
accordance with growth in the secured roll, and the Community
Development Agency (CDA) residual property tax revenue allocated to El Monte after the elimination of redevelopment by the state.