The Fiscal History of San Jose — or – Why does the City always seem broke?

Any grassroots, community or neighborhood activist who has struggled to get the City of San Jose to expand public services has likely encountered a perennial refrain – We’d love to help but the money just isn’t there.

A year ago, my think tank, Working Partnerships USA, and SPUR, a Bay Area urbanist organization decided to take a cold look at the city’s finances since the passage of Proposition 13 in the late 1970’s. Our goal was to determine just what were the problems, what caused them, and what could be done about them? You can check out the entire report here. In this column, I’ll just point out my interpretation of some of the major findings.

 

THE PROBLEM

Contrary to the hysterical pronouncements that emanated from the Reed Administration, San Jose isn’t Vallejo or Detroit, and bankruptcy isn’t imminent. However, the city does confront some significant fiscal difficulties. Compared to other cities, San Jose does poorly as regards property tax and sales tax receipts – the bed and butter major revenues for urban California. So the city has to scramble to patch together other revenue streams to compensate. Because the patchwork is only of limited effectiveness, San Jose is vulnerable to economic downturns – which translate quickly into painful service reductions. Also, San Jose’s service levels rarely get very high even in good times; it’s staffing levels are noticeably lower than other places. Together these factors mean when you look at San Jose in relationship to its nearby competitors, Santa Clara, Sunnyvale, Palo Alto and Mountain View, San Jose seems underfunded and understaffed with lower service levels and less financial stability.

WHY?

Again, contrary to the recent mythmaking, San Jose wasn’t a happy and prosperous town suddenly plundered by evil city employee pension recipients. The roots of the city’s fiscal challenges go deep, and they have multiple tendrils. Some of them weren’t the city’s fault – or anybody’s fault. The unalterable fact is – Silicon Valley as a dynamic regional economic cluster started at Stanford University and not San Jose State. Once it began, new firms had every reason to want to stay near the core of the cluster. That’s where the top engineers and entrepreneurs, the venture capitalists, the legal and organizational experts on start-ups and IPO’s could all be found. Growing Silicon Valley businesses had no major reason to leapfrog over Sunnyvale and Santa Clara to rush to San Jose – and they didn’t.

However, a number of decisions that city leaders did make contributed to San Jose’s fiscal woes.

*The city’s rapid, sprawling low density expansion was a recipe for disaster once Proposition 13 passed, and the City Council could no longer adjust property tax rates to pay its bills. San Jose was left with hundreds of miles of roads to maintain and hundreds of thousands of service demanding residents combined with grossly inadequate property tax revenues.  Even today, over 30 years later, San Jose’s property tax revenues from all sources – residential, commercial, and industrial – barely pays 75% of the cost of the police department.

*San Jose created one of the largest Redevelopment Agency (RDA) programs in California. Until its termination by Jerry Brown, redevelopment tax increment financing in San Jose generated about $2 billion in capital for public investment. While the city did earmark some of these funds for industrial development in North San Jose, the vast majority of the RDA capital was employed to resurrect San Jose’s decaying downtown. In many respects, the downtown revival was a success; it dramatically reduced blight and it brought recreational and cultural amenities to the city. But it failed to produce substantial increases in general fund revenues needed to pay for basic services. A number of factors explain this. For example, sales taxes aren’t levied on tickets to events; a major portion of transiency occupancy tax revenues is directly allocated to pay for the convention center and never reaches the General Fund.

*Like many jurisdictions in California, San Jose acted as if the boom of the late 1990’s would never end, and it made pension decisions that reflected this misjudgment. When its pension funds were strong, the city took a partial pension holiday and failed to pay the full, annual “normal” costs that keep a pension fund in the black. It provided bonuses from surpluses to retirees instead of creating reserves. It increased pension benefits. When the boom was replaced by the worst recession in 50 years, the pension funds experienced serious losses leading to high General Fund payments just as recession induced tax receipts declined. Severe service cuts resulted.

 

WHERE DO WE GO FROM HERE?

During the next 10 to 20 years, it is unlikely that economic growth in itself will resolve the city’s lack of fiscal resources. Stated bluntly, San Jose needs more regular, general fund revenue to provide the level of public services that the public wants and the quality of life that potential business investors insist on. That means putting taxes before the voters. Measure B, the ¼ cent sales tax, on the June ballot and a modernization of the business license tax scheduled for November are, in fact, just what the fiscal doctor would order.

Looking further into the future, San Jose, in coordination with other cities, needs to take seriously the challenge of reforming California’s public finance system. Property taxes should start providing at least a meaningful share of the services that property requires. Also, under the current arrangement, brand new firms with great job creating potential must pay substantially higher property taxes than older firms that haven’t added a new worker in decades. That makes no economic sense.

Sales taxes need to be reformed too. They are levied only on tangible products in an economy that is increasingly dominated by services every year. This means that government revenues are no longer linked to the expansion of the economy. Moreover, sales tax receipts have no relationship to the residence of the purchaser, creating a situation in which one jurisdiction gets the revenue from a household’s spending and a different city has to respond to the service demands the household generates. San Jose loses millions because of this arrangement.

Finally, the two-thirds requirement for approval of bonds virtually guarantees serious underfunding of infrastructure. Fifteen years ago the voters wisely reduced that margin to 55% for school bonds. It is time to make the same change for other sectors. Affordable housing should be first on the list.

Moving San Jose safely and successfully through the turbulent fiscal waters that lie ahead will require people to be rowing in the same direction. With the new administration in place, there are encouraging signs that collaboration can begin to happen again. The politics of blame has been proven to be useless; it’s time for the politics of problem-solving.

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