State's Solution To Budget Deficit May Have Long-Term Consequences
When you've got a $14 billion deficit, everybody's ox is going to get gored. So the question for the planning and development community in California is not really whether something bad is going to happen. The question is whether it matters very much.
Gov. Arnold Schwarzenegger has proposed a 10% across-the-board cut in all state spending for the 2008-09 fiscal year. The betting line in Sacramento is that he's not really serious about an across-the-board cut, but only wants to goose the Legislature to come up with creative budget solutions.
Here's a prediction: There isn't much left to take away from local governments, so the 2008-09 budget won't have much of an effect on the way the locals view development. The housing market and the general economic slowdown are much bigger concerns.
But here's another prediction: There will be a temptation to use the state's ample bond funds to pay for things that might otherwise have come out of the annual budget. That could mean less infrastructure construction, which, in turn, is likely to have a big effect on growth patterns.
Let's start with local government funding. During the past 20 years, the state has often balanced its own budget by fiddling around with the allocation of property taxes – giving more to schools and less to cities and counties. On occasion, the state has also taken property tax increment revenue away from redevelopment agencies as part of the same kind of deal.
The net effect of practically everything during this period has been to give cities and counties less property tax – and thus increase the trend of "the fiscalization of land use." According to the conventional wisdom – promoted in no small part by yours truly – the less property tax local governments get, the more they must rely on sales tax. Therefore, they compete with one another more intensely to obtain retail stores and repel housing projects.
In the last few years, however, this trend has changed. Local governments are getting a lot more property tax from housing than they did even a few years ago. Partly this is because of the so-called "triple flip" budget shift enacted in 2004, in which the state gave the locals more property tax in exchange for some sales tax and also to "backfill" lost car tax revenue.
The triple flip, along with the housing market, clearly had some impact on local government decisions. Between 1998 and 2006, housing prices tripled. The rising prices, among other things, increased the market for high-density condos. The combination of higher densities (meaning more revenue per acre), higher home prices (meaning revenue based on new assessments or reassessments), and the triple flip (meaning cities and counties get a greater share of the property tax) greatly improved the fiscal impact of housing on local governments.
On top of that is Proposition 1A, the local government-sponsored initiative that passed four years ago. Proposition 1A eliminates the state's practice of balancing the budget by shifting property tax revenue away from cities and counties. The state can "borrow" the funds in a fiscal emergency but must pay the money back eventually.
This has given local governments more confidence that they are going to get to keep property tax revenue created by new development. It's changed local government behavior a little – they are more willing to consider housing projects – but the fundamentals of "the fiscalization of land use" haven't really been altered. A Costco is still a much better deal for a city than anything else.
At any rate, it is unlikely that the state will balance the budget this year by stripping local governments of their property tax money; and so it's unlikely that anything in the state budget mess will affect how the locals approach land use – at least compared with the past.
The only exception might be if the state declares a fiscal crisis, which would give Sacramento the power to borrow property tax money as well as transportation funding otherwise guaranteed under Proposition 42. The state would have to pay this money back sooner or later – but that may not stop the legislators and the governor from taking it now.
But there's another subtle – even insidious – trend developing in Sacramento, and that has to do with how the bond money is spent.
The general fund may be bleeding red by billions of dollars, but at the same time the voters have approved many tens of billions of dollars in bonds to pay for capital projects, mostly for schools, roads, parks and flood control projects. There's a relationship between the budget deficit and the bonds, of course.
When voters approve state bonds, they are not voting for a tax increase, as they are when they vote in favor of local bonds. Rather, they are voting to pre-allocate a small portion of the state general fund to make the bond payments. This is not the main reason that there's a budget deficit, but it's a contributing factor.
The state pays for infrastructure projects – and other planning and development related projects – two different ways. Sometimes the money comes on a "pay-as-you-go" basis from the general fund or special tax sources, and sometimes it comes from bond money. During hard budget times, it can be very tempting for the state to use the bond money instead of tax revenue.
For example, after Proposition 46 passed in 2002, the state quietly began to use bond money to pay for some housing programs that had previously been paid for out of the general fund. It is worth noting that with gas tax revenue down, the state's transportation funds are nearly empty. It seems likely that the state will start using bond funds more frequently for things that used to be paid for out of the annual budget.
That means less infrastructure investment from the state government, which will put more burden on the locals and developers to figure out how to accommodate new growth.
So the game may be changing. It's less about "what they take from us," which has been the local governments' mantra the last few years. The concern of local governments is how they handle what is coming their way. That may not be a problem in a year when nobody is building much of anything. But it is likely to be a problem down the line.