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In the Money
By Douglas P. Shuit and Julie Ha and Ioana Patringenaru, Times Staff Writers,
Friday, July 23, 1999

REPORTGood times have left many cities with budget surpluses. Officials are funding projects and services slashed amid recession, but--fearing another slump--also building reserves. That prompts calls for tax cuts.

With the stock market booming, property values rising and cash registers ringing up healthy sales, the treasuries of many Southern California cities are bursting with cash--and a host of new problems, mostly of the happy variety. Just a few years away from steep budget cuts triggered by the recession of the early 1990s, many cities have almost an embarrassment of riches. Budget year surpluses created by the infusion of sales tax dollars, building permit fees and sometimes hefty interest earnings have presented cities with a new set of questions, including: What should they do with all the money? Spend it? Save it for a rainy day? Give it back to taxpayers?

Perhaps more important, how do cities convince skeptics that all the poor-mouthing they've done in recent years still holds, even with soaring tax revenue?

"Cities are always raising this question: Do they have enough money to stay afloat?" said Jon Coupal of the Howard Jarvis Taxpayers Assn. "Clearly, they do."

Here is a sketch of what is going on in some cities across the region:

* In Orange County, Costa Mesa, Buena Park, Irvine, Laguna Niguel and Anaheim are among cities with surpluses. Irvine, helped by a surplus of $13.9 million in the 1997-98 budget year, is devoting $3.8 million to its reserve, $2.4 million to street and building repair and $1 million to fighting the proposed El Toro airport.

* Riverside is showing a surprisingly hefty surplus of $10 million. The money has helped add $5 million to the cash reserve and will help pay for repairs to city buildings, expand library hours trimmed during the recession, and provide city employees, who haven't had a pay increase in two years, with raises of 8% to 10% over the next two years.

* Cerritos is sitting on a $150-million cash reserve, enough to generate $11.5 million a year in interest and help pay for a host of new programs, such as 300 new senior housing units and a state-of-the-art city library.

* Camarillo, considered Ventura County's cash cow, has amassed reserves of $54.5 million but still has enough available cash to realign streets for better traffic flow, spruce up downtown and plant 2,000 trees to celebrate the year 2000.

* In Los Angeles County, L.A. is considering using part of its windfall to build a new police station in the San Fernando Valley. Pico Rivera, with a $7.2-million surplus, is launching beautification and anti-cruising campaigns and other projects. Manhattan Beach, which ended the last budget year $3.5 million in the black, will put $3 million of that toward a new $23-million police and fire station. In Compton, the improved economy contributed to a more than 20% budget increase this year, with money being used to improve basic services, such as pothole repair, graffiti reduction, trash collection and tree trimming.

* Both old and new cities in the Valley are sharing in the upsurge. Burbank, home to a number of movie industry firms, tallied a $2.5-million surplus and is forecasting annual revenue growth of 4% over the next five years in part because of the film industry. Calabasas, incorporated in 1991, has an $8-million reserve already, helped by a $1-million surplus in its last budget, a figure that represents 10% of its budget.

The California Taxpayers' Assn., a business lobbying group, has assigned someone to clip news reports of municipal budget surpluses. The reports are put into a newsletter, which gets distributed in the state Capitol.

"We have been surprised, because up here in the Capitol we see lobbyists for the cities pleading for more money," said the association's Stephen J. Kroes. "Yet everything we see looks positive." Memories of Bad Times

Despite what seem like boom times, budget writers are striking a cautionary note, mostly because of still-fresh memories of deep cuts.

"Things are improving, but they are still not as good as they should be," said Assemblyman John Longville (D-Rialto), chairman of the Assembly Local Government Committee and former mayor of Rialto in San Bernardino County. "They simply are not as bad as they were."

As a result of the economic boom of the 1980s, cities hit record sales tax collections in 1990 and 1991. Then they spent most of the 1990s digging themselves out of a hole created by the worst recession in decades.

Exacerbating the problem was the Legislature's massive transfer of property tax dollars from cities, counties and special districts to schools, estimated at $3.6 billion annually. Long Beach, for example, estimates it is losing $15 million annually in property taxes it would have received had the tax shift not occurred.

Struggling to make ends meet, cities cut library hours, reduced or eliminated park programs and slashed staff through early retirement programs and layoffs.

"We were in a recession and now we're seeing some growth," said Steve Dunn, Buena Park's director of finance. "[But] there will [eventually] be a downturn, which will last several years, so let's be very wary of what we're spending."

The city reported $1.8 million in surplus for 1997-98, mostly due to an increase in sales tax revenue. Dunn says he anticipates another surplus for this year. But three years ago, the city's financial reserves were at an all-time low and officials are eager to rebuild them. As a result, $1 million of the surplus was earmarked for the expansion of the city's civic center.

Building reserves is also the main objective for officials in Anaheim, which reported a $1.9-million surplus.

Costa Mesa has experienced both flush times and hard times, and City Manager Allan L. Roeder said he is is "cautiously optimistic" for the future.

"We've experienced a lot of turnover and reinvestment by private industries, and that's directly related to the performance of California's economy," he said.

Costa Mesa chose to allocate its surplus directly to capital improvement projects, like street maintenance. The surplus was generated mainly by an increase in sales tax revenue coming from the South Coast Plaza mall and car sales, as well as cost savings due to a hiring freeze, Roeder said.

The city also will report a roughly $2.1-million surplus for the 1998-99 fiscal year, Roeder predicted.

Laguna Niguel is also reaping benefits from the state's economic prosperity. The city had a $4.9-million surplus in 1997-98, mainly because of additional revenue from sales taxes and state car tax funds as well as property taxes, said Dennis Muira, the city's finance director. Laguna Niguel has accumulated $29 million in surplus since its incorporation in 1989, Muira said. The surplus for this year was placed in investment funds, and the interest earned will finance a street maintenance program.

It is too early to suggest that conditions in the state are similar to those of the mid-1970s, when rising taxes and huge surpluses piling up in Sacramento spawned a rebellion climaxed by Proposition 13, which reduced property tax collections the first year by 50%. But support is building for a California constitutional amendment that would permanently realign local government financing.

Some lawmakers and lobbyists in Sacramento are using the surpluses to argue that cities may be crying wolf when they plead for more aid from the Legislature.

Assemblyman Bret Granlund (R-Yucaipa) said that when he researched local government budget numbers nearly two years ago, he found that California's cities, counties and special districts were sitting on cash reserves of $23 billion.

"I suspect that number has gone up quite a bit because of the good economy," said Granlund, arguing for a tax cut. "No matter where you look, you will find vulgar displays of cash sitting around."

David Jones, revenue expert for the League of California Cities, responded that municipal fortunes can change suddenly with the next recession or tax shift proposed by the Legislature.

"We are living in fear that as soon as the state catches cold, we become the state's emergency robbable bank," Jones said.

Exactly how much money cities are sitting on is hard to determine. Most cities' fiscal years run from July 1 to June 30, and it often takes months for them to make a final accounting.

Not all cities are sharing in the good fortune, and even among those that are, the situations can vary widely. And some cities, such as Hawaiian Gardens, still have chronic deficits. How Much Is Enough?

In Long Beach, even though tax collections are coming in better than forecast, there is still a structural budget deficit left over from devastating recession-era hits, such as a dramatic downsizing at the city's largest employer, McDonnell Douglas. Aerospace and defense cutbacks led to the loss of more than 58,000 jobs in the city.

Long Beach may be Exhibit A as to why cities like large reserves. It first ran into serious budget problems in the mid-1980s and was forced to use all of its $40-million reserve. Once that was gone, the city had to cut programs, eliminate services and begin raising fees to stay afloat.

Just how large reserves should remain is a matter of debate within cities.

Los Angeles, even though it has by far the largest operating budget in the region, at $2.8 billion annually, has one of the lowest reserves proportionally--about 2%. Another 2% is in a liability claims account to pay off adverse court rulings or other claims against the city.

With pressing needs, such as catching up with street repairs, Chief Administrative Officer Richard Hart said the city would be hard-pressed to explain why it wants to keep more money in the bank.

"There are a lot of demands for the money," he said. "You have to decide how much you can afford to set aside and balance that against the city's needs."

The source of the new money flowing into city treasuries is as varied as the cities themselves.

Many report large gains in sales tax collections, much of that spurred on by their courtship of big retailers, multiplex movie chains and restaurants.

Auto sales in Glendale increased 10% last year, the city said. Calabasas has seen a jump of 50% in its sales tax earnings since the upscale Commons shopping center opened.

Mayor Robert Sibilia said he was "flabbergasted" by Calabasas' $1-million surplus. "It came at a really good time," he said. "We just bought a park and bought the property for our City Hall. We wouldn't do this if our reserves weren't so strong."

Property values and construction, particularly in outlying suburbs, are also generating hefty returns.

Santa Clarita's biggest revenue increase, about $5.8 million in the just-completed budget year, is from construction-related fees, such as building and engineering permits, and inspection fees, the city says.

On its shopping list: a new auditorium at College of the Canyons and expansion of the emergency room at Henry Mayo Newhall Memorial Hospital.

Manhattan Beach Finance Director Bruce Moe said the city collected an unusually large surplus of $3.5 million.

He attributed the windfall to rising property and sales tax collections but said he didn't expect the good times to continue.

"Ordinarily, you might expect a couple hundred thousand dollars [surplus], not anything like what we saw last year," he said. "My guess is we won't see another big surplus like that again."

Times staff writer Monte Morin in Los Angeles and correspondents Michael Gottlieb in Thousand Oaks and Nancy Forrest, Roseann Langlois and Brynn Mandel in Ventura County contributed to this story.

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