Scotts Valley City Council takes hard look at “fiscal cliff”

At the last Scotts Valley City Council meeting on Jan. 23, council members discussed at length one of their most important goals for the new year — engaging and informing the community about the city’s dire fiscal outlook, and what needs to done to avoid a “fiscal cliff” that is clearly on the horizon.
According to fiscal projections, the city is facing a “fiscal emergency” in the next few years if a current half cent sales tax is not extended, or hopefully increased to three-quarter cent sales tax.
Extending or increasing the current .5 cent sales tax approved by Scotts Valley voters in 2013 for a limited period of eight years will require similar voter approval by at least 50 percent of Scotts Valley voters. This proposed ballot measure was discussed by the city council for either the primary ballot in March, or General Election ballot in November 2020.
Council members discussed how to begin “engaging and educating” Scotts Valley residents about this pending fiscal emergency, and how best to reach out and inform the community about the necessity for the proposed ballot measure. According to a Fiscal Sustainability Plan adopted by the council last spring, despite the city’s best efforts to cut costs, approval of such a ballot measure is necessary avoid a “fiscal cliff” of projected budget deficits.
Former mayor Jim Reed called for a public outreach campaign modelled after the Scotts Valley School District’s campaign for Measure A, which successfully achieved 70.69 percent voter approval in November for a parcel tax to help fund schools. Reed explained the preliminary polling in that campaign revealed just how little voters understood the dire financial situation the school district was in, and it wasn’t until teachers actually began getting laid off that the outreach campaign for the parcel tax began getting traction.
“I think we’ll need a prolonged, systematic education campaign for the community to understand what’s at stake here,” Reed said.
Newly elected city council member Derek Timm, who led the Measure A campaign for the school district, agreed.
“I don’t think there is public awareness of how bad our budget situation is, as was the case with our schools,” Timm said. “How you convey that … might begin by polling the community on the perception of the financial situation of the city.”
“People care very much about public safety, they care about our recreation, our streets, our parks, and we need to somehow bring that alive. … It might be a harder sales pitch than with the schools, but I think we can make the case,” newly appointed mayor Jack Dilles said.
Driving the projected deficits is the expiration of Measure U, a half-cent sales tax approved by Scotts Valley voters in 2013, scheduled to expire in 2022. Measure U increased the sales tax from 8.25% to 8.75% in Scotts Valley, increasing the city’s “general purpose” revenue by about $1.2 million each year for eight years. Coupled with the expiration of Measure U are increasing CalPERS pension liability costs for the city, projected to increase by about $1 million through fiscal year 2021/22, and up to $1.9 million by 2024/25.
In a discussion of the recent and projected increase in CalPERS pension cost, Administrative Services Director Toni McFarlan explained the current cost of CalPERS pension liability is almost $1 million, or about 10 percent of the city’s budget, and these cost will almost certainly increase in the years ahead. CalPERS pension costs have dramatically increased for public employers over the last few years due to drops in discount rates, resulting from decreases in the rate of return on the CalPERS portfolio of investments made with pension funds.
“My expectation is that the current one million dollars is going to get close to doubling, so you’re probably looking at about 20 percent of the city’s budget. And if the discount rates drop again — double it again,” said City Manager Jenny Haruyama.
Despite voter approval of Measure N in the last election that increased the hotel tax in Scotts Valley from 10 per cent to 11 percent, projected to add more than $1 million in city revenues by FY 2021/22, projected budget deficits without the Measure U sales tax revenue indicate general fund reserves are likely to be exhausted by FY 2021/22, and deficits will “structurally” increase to more than $2.16 million by FY 2026/27.
After his reelection to the council in November, Reed spoke of the projected fiscal crises as the number one challenge the council will face in his new term. Reed explained that similar to the school district, the City of Scotts Valley faces fiscal deficits through no real fault of its own, but by the way property taxes are distributed. Not long after his reelection, Reed said he saw the near future for the city council as “a two year conversation with the people on how the city is run, the services we provide, and if people are willing to pay a bit more for those services.”