California’s counties, municipalities, schools and special purpose districts will soon face budget season. It may be the most difficult time that any Marin elected official will experience.
The national shutdown and resulting economic upheaval means California will either be facing a deep recession or a depression. The difference is a matter of duration. A recession lasts six months to a year while a depression is a multi-year financial calamity.
This is the “unpreparedness tax” we’ll now all pay as our overall net wealth decreases. That’s the cost of not being prepared. Doing nothing in the face of repeated warnings, whatever the risk, is rarely free.
Governments will see declines of all revenue streams. Sales taxes will crater as retail shoppers facing continuing safety risks turn even more toward online shopping. That’ll blow up budgets in communities dependent on sales taxes including Corte Madera, San Rafael, Novato, Sausalito and the SMART train. Transient occupancy tax revenue will sharply decline as cautious and newly frugal travelers will stay closer to home.
It’s too soon to know if real estate values will substantially decline. If they do, as happened during the 2008 Great Recession, shopping centers whose valuations have plunged, will petition for downward reassessments, lowering their property tax obligations.
State government doesn’t have the resources to bail out jurisdictions facing big hits despite its substantial Jerry Brown-crafted rainy day fund. The Golden State’s revenue is disproportionately based on income and capital gains earned by the top 1% of earners. With declining stock and bond markets and fewer initial public offerings, much of those capital gains and associated tax revenue will vanish.
The federal government won’t help California as its largess is aimed at Republican states. That could change after November’s presidential and senatorial election. It’ll be interesting if Democrats then do a tit-for-tat. A new administration could easily follow Donald Trump’s blueprint by aiding deep blue coastal states including California while neglecting red states like Sen. Mitch McConnell’s Kentucky, long dependent on federal generosity.
Declining revenue isn’t local government’s only worry.
Public employee pension funds rely on high risk, high reward stock and bond market earnings. We’ll soon know the fate of those investments. It’s risky to believe they’ll soon bounce back to pre-COVID-19 levels. Market valuations are dependent on underlying corporate earnings. Presuming there isn’t a second virus wave this fall, the shutdown guarantees depressed earnings for the remainder of 2020 — at a minimum.
All Marin governments are bedeviled by their need to fund current pensions and post-retirement health care costs, along with paying down unfunded obligations promised to current retirees. The market’s crash will deplete the pension plan’s investments, making mandated payments larger. That’ll divert evermore cash that otherwise pays for needed services. Pension reform to relieve this burden is unlikely due to public employee labor’s clout in Sacramento.
This pension Armageddon was long predicted by reformers, including Marin’s Citizens for Sustainable Pension Plans. It’s finally happening, precipitated by a global natural disaster.
Marin’s historically generous, but newly financially stressed, voters will be reluctant to bail out underwater school districts or municipalities by passing more parcel taxes. It’s now obvious that proceeds from these special taxes aren’t going for art classes or better parks, but to fund unsustainable pensions and retiree healthcare.
It’s quickly going to get ugly. With revenue down and pension obligations skyrocketing, something has to give. Other than lowering current staff salaries, agencies will have to furlough employees and reduce services when demand for governmental services and quality education is increasing.
The skill for well-managed schools, special purpose districts and municipalities is not to fire rank and file front-line employees. Instead, cut mid-management and senior administrators while eliminating programs that are worthwhile but not essential.
