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Wednesday, Sep 27, 2023

Cities Look to Business to Bail Out Budgets

Cities Look to Business to Bail Out Budgets


Staff Reporter

Faced with a loss of funds due to the state’s budget crisis, L.A.-area cities are now targeting businesses in their scramble to find new sources of revenue and resorting to drastic cost-cutting measures such as turning off streetlights.

It’s part of the tightening fiscal squeeze that makes even the most business-friendly cities in the county less attractive to companies.

Next month, voters in four L.A. County cities Azusa, Monterey Park, Palos Verdes Estates and South Pasadena will go to the polls to vote on increases in utility taxes.

The utility tax vote in Azusa contains a twist: the residential tax would be reduced from 5 percent of a customer’s monthly bill to 4 percent, while the commercial utility tax would be increased from 5 percent to 8 percent. It’s similar to a proposal that failed last November in Irvine.

“With these huge state budget cutbacks looming, anywhere cities can raise fees, they will,” said Larry Kosmont, president of Kosmont Cos., which this week is releasing its annual business cost survey in conjunction with the Rose Institute of State and Local Government at Claremont McKenna College. “And they will raise them on business rather than on residents who cast votes.”

Kosmont’s findings show that Los Angeles, already the costliest city in the county to do business because of its gross receipts tax, has little room to maneuver to capture greater revenue.

Even slight increases in locally imposed fees and taxes are compounded by the prospect of rapidly rising costs levied at the state level. As state officials look at new fees and taxes to close the gap, other costs, such as workers’ compensation and unemployment insurance, continue to soar. Higher sales or personal income taxes in Gov. Gray Davis’ proposed budget could only worsen the situation, said Stephen Frates, senior fellow at the Rose Institute.

“The state costs are going so high that even local bargains aren’t much bargains any more,” Frates said.

There’s also concern about the costs of new state-mandated programs, like employee-funded paid family leave that was passed last year and will result in temporary staffing needs.

“That really served as a wake-up call to companies looking at their California operations,” Kosmont said. “It’s going to be an unpredictable additional cost, and that’s precisely what businesses are going to try to avoid.”

Leaving California?

As a result, he said, companies are carefully evaluating their presence in California.

“It’s not a case of companies packing up and leaving altogether, although that will happen on occasion,” he said. “Rather, it’s how companies can have the minimal presence, the smallest footprint, in California. They’ll keep the 10-person front office, but the 100-employee back office or the 150-person manufacturing facility could be moved elsewhere.”

The trend also shows up in what has emerged as a coastal-inland divide within the state, Kosmont said. Los Angeles and other coastal cities tend to have higher land costs, less available space and higher taxes and fees.

“Many companies with facilities in the coastal cities will look at cheaper space and lower-cost cities in the Inland Empire,” Kosmont said.

This puts pressure on cities like Los Angeles to cut costs on business. But attempts to cut L.A.’s gross receipts tax have dragged out over the past seven years and there is little sign of progress thanks this time to the state budget deficit.

With the city of Los Angeles facing the prospect of $300 million in state funding cuts and other revenue reductions over the next 18 months, Mayor James Hahn has said that substantial business tax reform will have to wait until the city’s budget situation improves.

Cities across the region are bracing for millions of dollars in state funding cuts. Besides expected deep cuts in transportation programs and the diversion of local redevelopment dollars to state coffers, Davis has proposed eliminating $4 billion in state funding to cities and counties to make up for the loss of revenue from lower vehicle license fees. (Democrats in the state Legislature tried to stop these cuts by raising the vehicle license fee, but so far have been unsuccessful.)

The likely loss of millions of dollars in state funding is forcing cities to tighten their belts, particularly in areas of infrastructure that businesses rely on. In Culver City, for example, officials moved to turn off 20 percent of its streetlights. Other cities are putting capital improvement projects on hold.

Relying on sales taxes

Local governments also are seeing their own revenue streams pinched. With property taxes capped by Proposition 13 and new taxes increasingly harder to impose, there has been a greater reliance on sales taxes, although this past holiday season was one of the slowest in years.

About the only bright spot is coming from an unlikely source: voter-approved bonds. Despite the slow economy, voters have approved billions of dollars in bonds for school construction, trauma care and other projects.

“There is a mountain of money out there now as much as $25 billion available to California cities,” Kosmont said.

The catch: local governments have to compete for most of it. Those that closely track the bond fund application process and meet the regulatory requirements speedily stand the best chance.

“A city manager who is on the ball and knows exactly what levers to push will get those funds for his or her city, while those cities that often have trouble getting their act together like Los Angeles has in the past will miss out,” Frates said.

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