Westminster’s Sales Tax Increase Offers Reprieve From Crisis

The one-cent sales tax increase passed by Westminster voters in November means for the first time in years, the city won’t need to draw from reserves to balance its budget, although long-term, the tax increase won’t save the city from budget shortfalls.

City officials say the tax increase brought in an additional $2.5 million in the first quarter of 2017, and expect an additional $13.9 million in the 2017-18 fiscal year and $14.7 million the year after.

“We’ll actually be able to book a small surplus in 2017-18, for the first time in ten years,” Assistant City Manager Chet Simmons said in a telephone interview Tuesday. “It’s a good day for us.”

The City Council will vote on its 2017-2018 budget June 28.

The new budget is a stark contrast from just one year ago, when staff projected the city would exhaust its reserve fund by 2018 and potentially go bankrupt.

But the city’s pension costs are expected to increase by nearly $8 million over the next six years. By 2019 the city will begin seeing deficits again, although there will be enough money in reserves to cover it.

“While balanced, the City will need to continue to take actions internally to reduce costs, while externally supporting development and the business community to increase revenues,” according to a staff presentation.

Despite that caveat, this year’s budget includes new spending already approved by the City Council, including two new police officers geared toward homelessness, two new code enforcement officers, and a $600,000 car rebate program for Westminster car buyers.

Staff also have requested $1.01 million in additional spending, including a new police officer to help with hiring and a second deputy police chief.

Reliance on Reserves

Westminster has been in financial trouble since 2011 when Gov. Jerry Brown eliminated redevelopment agencies statewide. The agencies diverted property tax dollars toward special economic zones to reduce blight.

The city relied unusually heavily on its redevelopment agency – drawing a redevelopment zone over the entire city – meaning the elimination of their agency left a $10.4 million hole in the city’s budget and resulted in 67 layoffs.

Many of the cuts have not been restored.

The city has since depended on its reserve fund to balance its budget each year, and was projected to empty that fund by the 2018-2019 fiscal year.

Without the funds from the sales tax increase, the deficit would have been $11.4 million in 2017-18 and $13.8 million in 2018-19.

The council is likely to adopt a formal reserve policy this year which would require the city to maintain a rainy day fund equal to 17 percent of total expenditures.

Pension Increases

In Westminster, like cities across the state, the annual costs for public pensions keep rising.

The California Public Employee Retirement System, or CalPERS, is taking steps to reduce the discount rate to seven percent by 2020, effectively raising the cost of public pensions for agencies that contract with CalPERS.

For Westminster, that will mean an estimated $8.1 million increase in the city’s unfunded pension liability over the next six years, or $16.3 million by fiscal year 2022-2023. The majority of those costs are for public safety pensions.

Westminster recently established two trust funds dedicated to paying future pension costs.

Will the Sales Tax Save the Day?

The sales tax increase, which will sunset after six years, was approved by 60 percent of Westminster voters in November. 

Proponents of the sales tax initiative billed it as a necessary evil to save the city from a budget crisis that could ultimately result in bankruptcy.

Critics of the sales tax measure have argued the increase will suppress buying in Westminster.

City officials argue their sales tax projections – which assume an economy on an upward trajectory – are accurate, pointing to a study by the auditing firm HdL, commissioned by the city, which found no “measurable and ongoing negative effect” on revenue in eight cities where there was a sales tax increase.

“The data to support a claim that people will stop shopping in a city that increases its sales tax is unfounded,” Simmons said. “It’s simply not there.”

Although a majority of council members opposed the tax increase ahead of the election – Mayor Tri Ta and Councilmembers Tyler Diep and Kimberly Ho – arguing that the city should make cuts before passing a tax increase, since its passage the council has approved several new spending plans.

Earlier this year, the council approved the hiring of two new police officers to focus on the city’s homeless population as well as a contract with the nonprofit CityNet to provide homeless outreach services.

It also hired two new code enforcement officers as part of that same plan.

In May, the council approved an economic development package that included plans for the car rebate program, business improvement loans and tax incentives for hotels.

Simmons said those economic development initiatives will help increase the city’s revenue and has hired a firm, Management Partners, to conduct a $99,000 citywide efficiency study.

City staff have also requested nearly $1 million in new spending next year, including the addition of six full-time positions, one part-time job and upgrading a part-time position to full-time.

That includes a senior administrative analyst for the city manager’s office, three new positions in public works, and a part-time building inspector.

Police Chief Ralph Ornelas is also requesting a new police officer to help with administrative duties and the addition of a second deputy chief position.

The deputy chief role has remained vacant after the last two officeholders left to become police chiefs for other agencies: Tim Vu to the city of Alhambra and Dan Schoonmaker to Poulsbo, Washington.

Contact Thy Vo at tvo@voicecofoc.org or follow her on Twitter @thyanhvo.