As the November election approaches, voters in California are not only casting their votes on two bond measures across the state but also paying close attention to local tax increases or bond proposals on the ballot. These types of proposals require approval from a majority of local voters to be implemented.
In Orange County, voters have noticed proposals for new sales taxes or increases in sales tax rates on ballots in cities such as Orange, Buena Park, La Habra, and Seal Beach.
The Z measure in Orange calls for raising the current 7.75% sales tax to 8.25%, which would generate approximately $19 million in additional revenue for the city annually. The R measure in Buena Park also seeks a 1% increase in local sales tax, bringing in around $20 million in additional revenue each year.
In Los Angeles County, cities including Artesia, Hermosa Beach, Manhattan Beach, Azusa, Downey, Glendora, Irwindale, and El Monte have similar proposals on the table.
The HB measure in Hermosa Beach asks voters to consider a 0.75 cent sales tax increase, generating $3 million in additional revenue for the city annually. The city estimates an additional $3 million in income is needed each year to meet infrastructure and service demands. Failure to pass the proposal would deplete the city’s reserve funds of $10.6 million within three years.
The Z measure in Glendora would go into effect only after the expiration of the H measure passed in Los Angeles County in 2017 (September 2027) or its repeal, imposing a 0.25% transaction tax on tangible personal property for 10 years. This measure would increase the city’s revenue by $3 million annually to support county-wide homeless initiatives and services.
However, increasing sales tax is not the only method to boost local revenue. Some cities, such as San Marino in Los Angeles County, are considering increasing property taxes, while Mission Viejo in Orange County proposes a hotel tax hike.
Inflation is one of the reasons local governments are looking to boost revenue, along with factors like increased employee numbers, rising wages, and considerable pension expenditures.
According to the Orange County Register, over the past decade, the bill for the California Public Employees’ Retirement System (CalPERS) has surged from $8.8 billion in 2014 to $24.2 billion in 2023, a 2.75-fold increase. Employee wage expenses also jumped from $3.8 billion in 2014 to $5.7 billion last year, a 50% increase.
CalPERS states that some of the funds contributed by cities go towards filling pension debt. The extra costs beyond the current expenses have more than doubled in just a few years. For instance, Fullerton’s CalPERS bill for this year is expected to be $22.4 million, nearly matching its annual payroll expenses for employees. Next year, the pension bill is projected to rise to $24 million, surpassing the city’s annual payroll for staff.
A similar situation is seen across California, as raises provided by many organizations to employees over the years also raised pension bills. According to the California State Auditor data, in 2014, cities had 311,404 worker positions, paying out $25.1 billion in wages and benefits. By 2023, with the state’s population growing by only 1%, employee positions in cities grew by 10.5%, with expenses increasing by 48.4% (approximately $37.25 billion). However, the 32% rise in inflation over that decade cannot solely be blamed on increased hiring and salary adjustments.
To address the pension issue, some cities are issuing Pension Obligation Bonds (POBs) to borrow at low rates to repay pension debts and invest the money for returns. In the following years, they repay the debt, with cities like Buena Park needing to pay around $6.6 million annually, La Habra close to $5 million annually, and Manhattan Beach around $5.5 million annually.
According to the Pew Research Center’s recent assessment, in 2020 and 2021, cities, counties, and special districts in California collectively issued around $7 billion in pension bonds, the largest scale of issuance in years. The report states that participating in this strategy to reduce pension costs, all levels of government have collectively placed huge bets on the financial market. Since 2019, approximately 88 different public entities in California have issued bonds to control pension debts, including cities like Orange, Buena Park, El Monte, and Manhattan Beach in Los Angeles County.
The Pew Research Center believes that as long as investment returns exceed costs within the bond term, significant savings can be achieved in the long run; however, this saving isn’t guaranteed.
In 2021, Buena Park issued $96.4 million in pension bonds with a 2.36% interest rate, one of the lowest in California, to repay all debts owed to CalPERS by 2046, amounting to $177 million, with an annual repayment of around $6.6 million. The city’s finance director, Sung Hyun, stated that as long as the debt interest rates to CalPERS are not lower than 2.36%, the investment risk will be minimized.
The Government Finance Officers Association argues that California and local governments should not issue POBs, as returns on investing in pension bonds may not surpass the interest payments within the term, potentially increasing the overall government debt load. Furthermore, some critics view this as passing today’s overspending burden onto the next generation.