Faced with rapidly declining revenues and extremely difficult budget choices, local governments are starting to invent their own economic stimulus programs. Cities have begun loaning money to car dealerships, cutting development fees, promoting buy-local programs and undertaking new redevelopment projects, among other things.
Although many cities and counties have engaged in economic development activities for a long time, the newest efforts are more creative than ever and are mostly aimed at getting an immediate payback.
As consumer spending has dried up and housing values have dropped like an anvil in Lake Tahoe, local governments have seen revenues fall dramatically. The revenue reductions are so severe that cities and counties have started slicing law enforcement, fire protection and other public safety services, which are typically the last areas to be cut.
With a state unemployment rate in January of 9.3% – the fourth highest in the country – building activity at its lowest postwar level and an ongoing drought threatening California's gigantic agriculture industry, there is little reason to believe local government revenues will not continue sliding. One bright spot may be the 17-month state budget approved in February. Unlike state budgets passed during previous crises, this spending plan does not shift local revenues to state coffers. That's a tremendous relief, said Megan Taylor, a spokeswoman for the League of California Cities.
"The focus at the city level has not been so much on economic stimulus as on dealing with falling revenues. That's the lion starting at cities right now," Taylor said. Because the economy is so uncertain, it is difficult to make economic investment decisions, she added. "Cities are trying to right the ship, but the waters are really troubled."
The Obama administration's "American Recovery and Reinvestment Act" should aid at least some local governments. The $800 billion program contains no money for zoos, aquariums, golf courses, swimming pools or casinos, according to a League of California Cities analysis, but it does provide money for myriad other things ranging from affordable housing to transit and highway projects to clean water programs. The League has compiled a guidebook for cities wanting to access the federal monies.
Some jurisdictions, however, are not waiting for a federal bailout and have taken immediate steps to help stabilize revenues. At least two cities – Norco and Victorville – have made loans to automobile dealerships, which always rank among the largest sales tax producers. In January, Victorville made a $200,000 line of credit available to Victorville Motors, a 40-year-old, family-owned business that has long been a community booster. The loan carries a 5% interest rate and is due in five years. Meanwhile, Norco has provided $500,000 lines of credit to two car dealerships, Norco Mazda and Frahm Dodge. Frahm has already drawn the full amount, and the Mazda dealership has tapped about $350,000, according to Norco City Manager Jeff Allred. The loans, which are coming from redevelopment funds, carry a 5.15% interest rate and are due in seven years. Norco has two other dealerships, but the city has not had formal talks with them, Allred said.
The city offered the loans "to let the dealerships remain in business," Allred explained. "We did a lot of due diligence, and we believed them. They were going to close their doors. They had no capital. They couldn't get new inventory."
Norco receives approximately 40% of its sales tax revenue from the car dealerships, which Allred concedes is out-of-balance. But the city needs to preserve what it has, he said, noting the city has already eliminated 24 of 105 positions during the last few years. The fee-supported planning and building departments have shrunk by about two-thirds.
The City of Redlands has offered to defer the business license fees for automobile dealerships in town – worth $127,000 this year – but the dealerships have not accepted the offer yet, according to Daniel Hobbs, Redlands redevelopment director. The city has not been willing to make the sort of loans provided by Victorville and Norco, Hobbs said. Instead, the city is placing in utility bills "Buy Redlands" flyers that promote local car-buying by explaining how much the sales tax from a car purchases in city road maintenance, law enforcement and other services. The city is also starting a new program on its cable television channel that will feature local businesses, and the first installment will focus on car dealers, Hobbs said.
While the automobile promotions are relatively inexpensive, Redlands is beginning a $3.25 million redevelopment program that will not only help improve the north part of town but provide jobs. The redevelopment agency is offering qualifying households in owner-occupied single-family residences $10,000 grants to repair their properties. The city is starting with a 16-block area and intends to expand the program outward until the agency awards 300 grants, according to Hobbs.
"We are going to restrict the list of contractors to Redlands-only contractors, and we are going to require they use Redlands suppliers and subcontractors," said Hobbs, who maintained the city has the authority to impose such restrictions. "This is sort of a mini local stimulus program. It's a way to keep the money in the community." Because of the restrictions, Hobbs said, the $3.25 million investment should have a local economic multiplier of at least 5 and possibly as high as 9.
Redlands will also invest redevelopment and Community Development Block Grant funds in neighborhood improvements such as sidewalks and drainage facilities in the targeted neighborhoods, Hobbs said.
The City of Beaumont has taken a different approach, but one also focused on construction. In February, the city cut development impact fees by about 30%, or about $5,000 per unit. No one believes that amount is going to turn around the moribund homebuilding industry, admitted Beaumont Economic Development Director David Dillon, but the fee reduction should affect the residual value of raw land and boost builder confidence.
"It's a temporary reduction. We'll monitor the situation. We think the market will normalize by about 2012, so we'll ratchet up the fees as needed," said Dillon, who noted housing Beaumont's housing starts dropped from 2,400 units in 2005 to 350 units in 2008.
"Beaumont has never relied on impact fees for revenue, per se," Dillon added. Rather, the city has a comprehensive public infrastructure finance program that provides bond revenue for up-front improvements. A community facilities district tax assessment on new homeowners retires the bonds.
If the fee reduction applies to 2,000 housing units, the city would see a reduction of $10 million in revenue. "What we're really talking about here is deferring construction of some of the facilities," Dillon said. "We think ultimately it will pay for itself. By increasing jobs and employment and spurring retail sales activity, all of these things will be a positive impact on the city."
Beaumont is also expanding a neighborhood improvement program in which the redevelopment agency will cover 80% of the cost of improvements associated with existing uses, such as sidewalks, curb and gutter projects and alleyway upgrades. Previously, the agency paid 50% of costs. The property owner is responsible for the remaining 20% under the expanded program, which covers about 1,700 acres in a redevelopment project area.
Beaumont's redevelopment agency also is subsidizing half the cost of building, grading and other permits taken out by property owners anywhere in town, Dillon said.
Beaumont is one of dozens of cities and counties that are now allowing builders to defer payment of impact fees until just before project occupancy – a concession sought by the California Building Industry Association to aid builders' cash flow.
Local government representatives may also get a say in how the state approaches the federal economic stimulus package. The same day that President Obama signed the recovery and reinvestment act, Assembly Speaker Karen Bass (D-Los Angeles) announced the formation of a "task force to develop a blueprint that identifies a comprehensive approach for spurring the state's economic recovery." Bass said the task force would work with local government, as well as business, labor and community groups, on identifying the best ways to leverage the federal money. The task force has already begun meeting.
League of California Cities federal economic stimulus analysis
David Dillon, City of Beaumont, (951) 769-8520.
Jeff Allred, City of Norco, (951) 270-5617.
Daniel Hobbs, Redlands Redevelopment Agency, (909) 335-4755.