An Overview of the Causes Behind Redwood City 's Budget Deficit

(Updated ~ June, 2004)

Cities throughout California continue to suffer financial difficulties, and those in the Bay Area are suffering perhaps worst of all. For most of these cities, including Redwood City, the budget deficit has four basic causes: 1. The overall slow economy and its local effects, including loss of sales tax and businesses leaving Redwood City; 2. The trend to sell software electronically (non-taxable); 3. Increases in our required PERS (Public Employee Retirement System) program contributions; and 4. The continuing State takeaways of local funding.

1) The economy is something we can do little about, except try to draw more business to Redwood City . But in a slow economy, not many businesses are in a position to expand or move; in fact most are still hunkering down. As a result, annual sales tax revenue has dropped significantly from a high of $20 million down to $15 million. This drop is largely due to the dot-com bust - there is less "business-to-business" sales activity and therefore less sales tax revenue. Some businesses have downsized, some have moved, while others simply no longer exist.

Also related to the economy is our property tax revenue, which is currently the largest single source of revenue for the City. It went up significantly during 1999-2000, but has leveled off since then (increasing residential values are offset by decreases in commercial values), and we project only a slow increase in upcoming years.

2) The electronic delivery of software is a trend whereby vendors deliver software in an electronic format, and thus the sale is not subject to sales tax. For large-scale software sales, this has a significant impact on the City's sales tax revenues.

3) PERS retirement program expenditures are increasing on an annual basis. As the economy and the stock market went down, the value of our investment in PERS also went down.

As this occurs, PERS requires us to put more money in to make up for that reduction in value. Additionally, contract amendments for our public safety employees have also driven up our PERS rates.

This year, our PERS-required employer contribution is $4 million. Next fiscal year it will nearly double, to $7.3 million , and then go up to $8.2 million the year after that.

 4) The State continues to take funds from local governments. This began in 1992 with the so-called Educational Revenue Augmentation Fund (ERAF) property tax "shift," continued with State-mandated programs that the State neglects to fund, and more recently includes the State seizure of local funds, including Redevelopment Agency funds and Vehicle License Fee (VLF) funds.

The State has taken an astounding $35 million from Redwood City taxpayers since 1992 through the property tax "shift." Each year, the State takes more ($4.4 million this year alone) right out of your City services. Add to this another $440,000 that the State is now taking from our Redevelopment Agency, its failure to reimburse us for mandated programs in the amount of at least another $200,000, and $1.5 million lost from the reduction in the VLF and the State's failure to keep its promise to fully "reimburse" the cuts.

In summary, for this fiscal year that's over $6.5 million that the State has taken . And as part of the State budget "deal" with cities, the State will take an additional $1.5 million in each of the next two years.

The City of Redwood City believes that its constituents should be well-informed of these aspects of the State budget, and that they should let their State elected officials know of their opinions on the matter. Redwood City urges interested citizens to contact their local members of the State Senate and Assembly, as well as Governor Schwarzenegger, and clearly articulate their thoughts and outlook on the State budget situation.