Surprise! Budget outlook = grim

In a refreshing turn of events, the City Council will begin this year’s budget discussions on January 12th (PDF), instead of in mid-May, like last time. The budget office has produced a five year financial forecast (PDF) for discussion at the meeting, and it’s…well, it’s grim. Grim, like, a forecasted $50.3 million deficit for FY09-10, $57.8 million for FY10-11, $112.5 million in FY11-12, $107.8 million in FY12-13, and $101.8 million in FY13-14.

I’m sure Dellums is relieved that he’s not going to be around to have to deal with the really nasty mess starting in 2011. Unfortunately, we’re stuck with him for this cycle, which means we have to live with his budget balancing strategies, which include just totally giving up on staffing the police department at the levels we’re paying for. He also has apparently finally noticed that Measure Y cannot produce enough revenue to pay for the officers it’s supposed to fund. Too bad we had to go out and spend all the reserves that were supposed to cover the shortfall. Now, unsurprisingly, we’re screwed.

Anyway, the Mayor and the Council are going to have to get together and find a way to cut costs. Strategies mentioned in the forecast included increased employee retirement contributions, medical benefit cost sharing, and additional city closures. Strangely, reduction in the number of City personnel is not mentioned in the document, but that needs to be on the table.

So, in the immediate future, balancing our budget needs to be about reducing spending. But we also need to be thinking about how to deal with our problems in the long term, and there’s no way to do that without talking about increasing revenue. The revenue enhancement ideas listed in the forecast go basically like this: raise fines, raise fees, raise taxes, raise taxes, and raise taxes.

We need – and I’m not saying that budget deliberations are the appropriate forum for this, because I don’t think it is – a serious, long-term strategy for increasing City revenues that does not rely on increasing existing costs to our already overburdened residents and businesses. What can we do to create new sources of revenue? How much can we realistically expect to bring in based on strategy x, y, or z? Where are other cities getting all their money, and how can we emulate that? Why is it that Portland, OR has only about 35% more people than Oakland, lower household and per capita incomes, but their annual budget is like $2.4 billion compared to our $1 billion? How does that happen? And what can we do to make it happen here?

I’m thinking that, for starters, we might want to experiment with not doing our best to drive away industries that we keep saying we want to attract.

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68 thoughts on “Surprise! Budget outlook = grim

  1. len raphael

    The projected revenue from real estate and sales tax is nearly flat instead of dropping for several more years; Dellums is not proposing anylthing close to 20% layoffs of city workers. The suggested cost cutting measures would be significant, but don’t come close to filling a 100mil plus annual hole.

    Dellum’s team must be praying for fed grants and loans.

    -len raphael
    temescal

  2. Patrick

    Proposition 13 is what separates us from Portland.

    Before Proposition 13, street and sewer repair, police and fire, street lighting (and other public city utility costs), schools and libraries were all, for the most part, paid for by property taxes. Now, 30 years later, we have virtually no street or sewer repair (well, once every 200 years), we are asked to approve parcel taxes for police and fire (we’ve seen how well that works), LLAD parcel tax fiascoes, school funding that was average in 1978 now ranks near the bottom and, well, my local library is open 45 hours a week. Total. Oh, and the sales tax was 5% in 1978.

    Proposition 13 sets the assessed value of a home at the time of purchase by the acquisition method – which is to say the price paid. Prop 13 caps the tax at 1% of assessed value AND allows the value of the home to be raised by a maximum of 2% per year (barring remodeling reassessments that generally depend on permits being pulled to sound the alarm). Sound good? The average home in 1978 cost roughly $60,000, for a tax bill of $600. Add 2% annually to that $60,000 assessment and you have a 2008 valuation of $108, 681.70 and a tax bill of $1086.81. (Actual tax bills in Oakland are at a rate of 1.32 due to voter-approved millage rate changes.) With the exception of the past two years, property values in throughout California easily outpaced 2% on average. This may be an extreme example of time frame, but it is illustrative of the problem.

    I’ll use my home as another example. It was purchased in 2006 by a “flipper” (bad timing). The price paid was $395,000 and the tax assessment, prior to my purchase, was about $5200. Due to the drastic change in market conditions, the previous owner went into foreclosure and, prior to losing the house, stripped it of everything from furnace to doors/trim to kitchen cabinets, appliances and sinks…leaving an empty shell. Replacement of all of these items was a relatively modest $35,000. But, I purchased the home for $180,000 and my tax bill is based on the acquisition cost plus improvement cost for a total of $215,000 – and an annual tax bill of about $2800 a year – $2400 a year less than the previous owner paid.

    So, long term owners have an incentive to keep their property taxes artificially low by not moving. And, I would think, most foreclosures are people who paid outrageous sums for their homes in the last 8 years or so, but paid close to market rate as far as taxes go. Those homes are being sold at current market rate, and taxes drop as a result. Oakland loses either way. Incidentally, these tax rules apply to commercial properties as well.

    Disclosure: Oregon has a similar voter-approved property tax amendment to ours, Measure 47 (clarified by Measure 50). However, it was passed 18 years after Proposition 13 (so, a smaller time frame for the problems to compound) and it allows a 3% annual increase on property values, which is closer to reality.

    California voted away the ability of our government to set tax rates that accurately reflect the current needs of the state, counties and cities. It has also changed property taxes from a method of taxation that mirrored a person’s ability to pay to a regressive plan that does just the opposite. The only current solution is more regressive taxes in the form of parcel and sales taxes.

    As far as Oakland goes, I see bankruptcy on the horizon. The only way to make the massive cuts necessary is to get our payroll costs in line with reality, with a full 40-hour work week expected. As the unions will never agree to this (Hello, Vallejo!), bankruptcy will become necessary.

  3. Carlos Plazola

    V, I’m with you. I think you’re heading down exactly the right path. If we commit to turn off the “spigot of new taxes” on residents and businesses, it will force us, as a city, to see how we can increase our revenue stream through growing our own assets.

    Consider this, Oakland is situated in one of the most valuable places on Earth (the Bay Area). And even within this area, we are one of the best situated cities, with the best climate, views of SF, an inland lake, rolling hills, great transportation, a port, 18 miles of waterfront, and a rich diversity of cultures.

    Our budget should be 2-3 times larger than it is, given this valuable asset base. So, what ‘s the problem?

    I believe there are two principle problems:

    1. Our leadership that has not painted a clear picture of how to get us out of our morass.

    2. polarization between interests in Oakland that causes us to spend time on extremes, rather than workable ideas (spending 2 years on Inclusionary Zoning and getting nothing is the most concrete example of this).

    We need a clear vision of progress for Oakland that can lead to massive growth of revenue and jobs over the next 3 years, 6 years, and 10 years. And I’m not talking about opening up a new business center, or creating a retail hub in neighborhood x in Oakland.

    I’m talking about a bold, comprehensive city-wide vision for Oakland that includes attracting massive retail that stops our $1B in leakage, modernizing our industrial base to create blue-collar jobs, creating mixed use, dense, green neighborhoods around commercial and transit corridors in Oakland, creating a vibrant, walkable downtown, creating a world-class, pedestrian filled waterfront, and reducing crime.

    This vision must come from the top, with clear goals, time-lines, and deliverables. The entire city apparatus must be re-aligned and re-organized toward implementation of this vision. There must be complete impatience from the top with anything less than high efficiency in getting us there. And the leadership must have the back bone to stand up to nay-sayers that will criticize every step of the way.

    And then we need to focus on attracting investment from around the world to make the vision happen. We must market ourselves far and wide. And then we can use the revenue that gets created from all of this to fund crime reduction/prevention efforts, affordable housing, arts programs, libraries, museums, youth programs, great pubic realms, etc.

    It can happen. Why the hell not? What stops us, more often than not, is our own self-doubt, that then leads to cynicism, that then leads to fear, that then leads to “no”, that then causes all of us to fight with each other over scraps. That has been the story of Oakland, all too often.

    Maybe now the situation in Oakland will get so bad that our leaders will have no choice but to think boldly, stop the in-fighting, and petty disdain of anyone who disagrees with them, and instead, help foster a collective vision of what Oakland can be.

    Next year, the Oakland Builders Alliance will have, as one of its highest priorities, encouraging the development of this grand vision for growing Oakland’s potential–through forums, media, focus groups, and creating the pressure for the excellent leadership that Oakland deserves. We’ll also be reaching out to as many groups, individuals, and leaders as we can.

    Wishing all of you a happy and prosperous New Year.

    Carlos

  4. Max Allstadt

    I really am curious if there have ever been serious attempts to revise Prop 13. I can understand that the argument about keeping poorer older people in their homes. I can’t understand how nobody is willing to revise Prop 13 to exclude second homes, income property, commercial landlords.

    I don’t know how much more it would bring in to have a realistic assessment on Tahoe ski cabins and the like, but it would certainly be something.

    Also, considering the disaster that local Ballot-Box budgeting has been, couldn’t we try and get a city ballot measure that requires a supermajority for set-aside measures as well as for parcel tax hikes?

    Unfortunately, these are really just pipe dreams in some sense. Government has repeatedly been part of the problem. Perhaps the solution will have to come from the business, labor, non-profit, and art sectors acting without government help or sanction. If our leaders aren’t delivering, perhaps there are ways that we can do their jobs for them.

  5. James H. Robinson

    Instead of trying to abolish Proposition 13, maybe the state of California and cities like Oakland should try to reign in spending. Why is fiscal conservatism verboten around here? Why do the mayor and the city council have so many staff? Why can’t the city rely on fewer union city employees and instead use more non-union contractors?

  6. V Smoothe Post author

    The City Charter prohibits outsourcing work previously done by union employees, and as for the Council – their staff hardly seems excessive to me. Even if you eliminated it entirely, which would be terribly counterproductive, you wouldn’t save enough money to make a dent in the City’s shortfall.

  7. James H. Robinson

    Where else can cuts be made? I find it odd that Oakland has the largest transfer taxes in Alameda County (which somewhat offsets Proposition 13) plus other taxes, yet has relatively little to show for it. There has to be some waste somewhere that can be cut. Where are the auditors?

  8. 94610BizMan

    Is there an easy location to find the totals for Oakland budgets by year going back to say 1990 (1978 would be even better).

    Based on any believable financial time series, since about 1993/4, the Bay Area has had a financial bubble economy. Normalizing the City budget growth first for CPI inflation and then again for financial bubble and leverage (say using median real estate price increase minus inflation) would be a quick way to see if Oakland’s budget has grown faster than a non inflated or non-sustainable bubble growth rate.

    The point is that the adjusted budget number will show if the city budget has depended on the financial bubble for funding its growth. If it has, then that budget will not be sustainable and bankruptcy will be the painful result. If the adjusted growth rate is neither inflated nor bubble-financed then maybe consider how to finance the budget.

    A quick back of the envelope calculation leads me to a preliminary conclusion that Oakland and CA have depended on the financial bubble to fund their respective budgets.

  9. Max Allstadt

    James,

    And why, every time I bring up amending prop 13, do fiscal conservatives answer as if I’m talking about eliminating it entirely.

    I can think of no easier measure to pass during a recession, and during a period of a spiraling obscene wealth gap: Restrict 13 to first homes. That’s a statewide fight that’s winnable and worth fighting.

    Also, outsourcing city work, which V already mentioned was against the charter, isn’t necessarily fiscal conservatism. Contracting is just as good a way to waste money as over paying union workers in semi-skilled jobs.

    The difference is really just about class. Which class gets to walk away with money they don’t entirely deserve. Conservatives would have the rich take this money. Liberals want to give it to the middle class. Same waste, different beneficiary.

    Me? I’d try to cut salaries for low skilled city jobs to a reasonable level, but keep benefits. People deserve health care. They don’t deserve to be paid 60k to fix parking meters or trim trees.

  10. Robert

    Many of the older budgets are available in the public library. Some of hte more recent ones can be obtained through the city.

  11. das88

    The only way I can see avoiding the ticking time-bomb of public pensions short of bankruptcy is by massively increasing growth to offset promises already made and reigning in future giveaways..

    JB had his concrete plan of adding 10k to downtown. Without squabbling over whether it was a good idea and if he actually made it, I think the important underlying point was that it was simply stated easily understood goal that all major policies could be evaluated against — e.g. “will doing such and such help attract residents downtown.”

    I think Oakland needs to set a goal of 500k residents counted in the 2020 census.

    More people = More taxes.

  12. Robert

    There is little evidence for any large expansion of the city government since the ealy 90′s, at least as measured by number of employees/10,000 residents. The numbers are pretty consstanct between 110 employees per 10K residents in 1991, and 107 employees per 10K in the 2007 budget. However, there was a large increase from 1980 to 1991, up from 89 per 10K in 1980.

    Old budgets are available through the budget director, the city cleark and the library.

  13. 94610BizMan

    I’ll probably be able to get to City Hall next week. The spending increases won’t be directly in people at City Hall, it will be in pensions health and program funding.

    I’ll see what I can find and start with looking at the current budget to familiarize myself with the financial statements.

  14. Patrick

    The reason no one talks about repealing or even amending Proposition 13 is because of comments like James’. “CUT CUT CUT”, they cry, but usually absent any particulars and a complete disregard for the facts. The current 08/09 budget was originally $486.12 million for 400,000 residents and works out to $1215.30 per person. THAT’S NOTHING! Do people really expect pothole-free streets, a stellar police force and fire department, excellent libraries, subsidized public transit, parks, children’s programs, art subsidies, AIDS funding and on an on and on for $101.28 a month per person? My Comcast bill is larger than that (by the way, can anyone recommend a broadband ISP?).

    The State is going to have to revisit Prop. 13. And I agree: I think that limiting Prop. 13 to a single primary dwelling would not only go a long way towards solving our budget problems, but would be a fairly easy sell due to the economic mess we’re in. Oh, we’ll hear all sorts of whining about people having to sell their vacation homes and businesses will claim they’ll move out of the state. But, if they balance the changes to Prop 13 with repeals of some of the transfer taxes (to appease businesses), parcel taxes (to appease lower income home owners) and lower the sales tax rate (to appease people who actually have to think about how much they have to spend on groceries), I think it would fly.

    Questions for discussion: What about renters? If rental property were not shielded from market rate ad valorem taxes, should landlords be allowed to increase rents to compensate? Or, should we consider rental property as “primary residences”? Also, should a Prop 13 revisit include a provision that states that property value for ad valorem purposes cannot not fall below a certain threshold (i.e. 75% of market rate)?

  15. Patrick

    And while my blood is boiling, is everyone aware that property can be “transferred” to a family member to avoid a change in the ad valorem tax? In other words, my parents could transfer their home to me before they die, and I would inherit the home with its built-in Prop 13 advantages.

  16. Patrick

    Major transgression: I used the figures for the GPF, not the total budget. Total budget was actually 1.1billion for the current year…still nothing compared to what we expect from government and still less per person than I give Comcast and T-Mobile each month.

  17. 94610BizMan

    Patrick some of us might argue that your list is a little long. “pothole-free streets, a stellar police force and fire department, excellent libraries, (and good schools) would be where my list stops.

    Sorting this out will be the political issue of the next five years.

  18. Robert

    Good luck to you BizMan. My recollection is that it is extremely difficult or impossible to figure out the total salary and benefits from the budget. And if you go with total spending, you will have to deal with the growth of the restricted funds over the last 30 years relative to the GPF. Which is why I went with head count.

  19. James H. Robinson

    Yes, I say “cut.” The problem with Oakland is that there is no middle class. Instead it is becoming a dumping ground for Alameda County’s poor. Until it can be demonstrated that a middle class family can get its tax money’s worth in Oakland (lower crime and better schools would be examples), it will be hard to draw more middle class folks to this town and it will be harder to sell tax increases to the current middle class.

  20. 94610BizMan

    It’s the total government spending that is the problem and “restricted funds” aren’t restricted if the government goes bankrupt. The point is that if the real economic long term growth rate (adjusted for inflation) is around 2% to 5% across CA and the adjusted government growth rate is even a little higher, over a generation the economy can’t support the government spending due to compounding.

    For Oakland, CA and even the USA the question is how far out of financial balance is the government relative to future economic growth and tax revenues.

    A recent example is NY and NYC government tax numbers forecast that due to the drop in Wall Street bonuses there will be a $180 million drop in taxes in the first quarter that the government had baked into the government budget.

  21. len raphael

    Robert makes a good pt that the budget is much more transparent on the 500mill general fund than the other restricted half.

    If the restrictions are externally imposed say by the feds, then not sure what the point of analysing them other to examine how inefficient they might be. ie. doubtless millions of bucks are ineffectively/inefficiently spent on say training for jobs that go nowhere, but we couldn’t use any money left over from those funds for the general fund.

    bizman’s analysis would be very helpful for the post mortem we need. meanwhile you could just see by the internal salary survey which V dug up months ago that Oakland total compensation is at or close to the highest in the country. The over spending was paid for by a result of bizmans coastal city bubble revenue increases, supercharged by Oakland (and Berkeleys) extraordinarily high real estate transfer tax rates., and understated by unrecorded retirement benefit obligations, and neglected road, sidewalk, sewer etc maintenance and replacements, and just lousy service quality.

    My recollection is that transfer tax revenue dropped from 70mill two years ago to 30 something. That info wb found on (http://oaklandnet.com/budgetoffice/Budget_Facts.htm). Bubbly

    Prop 13 revisions, politically feasible for non residential commercial properties, but only after the real estate prices stabilize.

    Since many commercial leases pass thru all property taxes to tennants, that would immediately force businesses to cut other costs, and ultimately lower rents causing commercial property values to drop (further). Not what dto needs right now.

    Taking away prop 13 from second homes isn’t worth the administrative hassle. Most vacation homes rise and fall back down to fairly low levels compared to other residential real estate. ( the most expensive Tahoe stuff is in Incline Village, NV, and even that’s dropped a bunch).

    Patrick, if you don’t want to give your house to your kids, when you’re over 55 or so you can move to several other counties in California and if you don’t trade down in price, you get to keep your Prop 13 valuation. (ISP: Speakeasy has great service re. outages, but AT&T is probably cheapest. dslreports.com gives reviews).

    Bankruptcy won’t be needed this time (revisit topic in 10 years). We’ll limp along with wage and hiring freezes, weekly shutdowns, library and rec center restrictions, only emergency infrastructure repairs, and very likely the Feds will lend us enough cheap long term money to get thru. The weekly shutdowns will encourage the better younger Oakland employees to quit for jobs in cheaper areas. That might be how we eventually cut costs to where we can afford to balance budget again.

    As far as increasing revenues by development, emulate Emeryville: encourage all types of commercial development before you encourage residential development.

    -len raphael
    temescal

  22. 94610BizMan

    pensions, benefits, mandated and restricted would be my guess as to the cause of any bankruptcy. With CA broke (because CA government based budgets on the bubble) and the USA printing money, high to hyper inflation would be the other alternative to bankruptcy.

    Right now I’m just curious as to the “financial bubble delta”. I’ll post some plausible financial indexes tomorrow. Then I can compare it to the transfer tax.

    After that the total city budget

  23. len raphael

    JHR,
    Oakland, Richmond, and Pittsburg previously were the storage facilities for the Bay Area’s poor people. While that started to change for Oakland and even Richmond, that hangs in the balance now.

    Not sure it would make a difference to builders and labor unions whether it’s high end condos and apts or low income housing. Private developers might be squeezed out by non profit housing groups. Depends whom the Feds decide to bless this time with cheap financing.

    All that’s needed to get upper middle class residents to vote overwhelmingly for higher parcel taxes to directly fund more cops would be a few bad home takeovers, car jackings, violent muggings in the right sections of town. Ok, maybe some better assurance that the parcel tax would actually increase the number and quality of the opd.

    might go for another LLAD tax increase also. harder to say.

    -len raphael

  24. James H. Robinson

    I voted for Measure NN, but I understand why many did not. Basically, 2004′s Measure Y promised roughly 803 police. We didn’t see that number until 4 years later. So what happened to all that money? I think middle class voters are tired of seeing money squandered.

  25. VivekB

    I’m a social liberal, but fiscal conservative. (ie, do what you want, but don’t make me pay for it).

    I think that over the last few months/etc, i realize more & more what Max is saying about revising ” to exclude second homes, income property, commercial landlords”, and I think now that’s dead right. The intent of Prop 13 was to keep folks in their houses and eliminate that risk. The folks that Max mentions shouldn’t be able to cap off & transfer the property tax risk to the public, while still enjoying the upside of income explosion through increased rents/etc.

    I still think budgetary containment is a good approach as the CA senate, Oakland city council & oakland mayor have proven to be dipwads in that area, but let’s not cut off our nose to spite our face.

    Thanks to Max for helping me understand that better.

  26. len raphael

    easier than changing prop 13, would be for the legislature to delete conformity of calif personal income tax law with the federal rule that exempts 500k of profit (250k if unmarried) from calif state income tax upon sale. at least that way some of the prop 13 benefits are recovered when a person sells a house when prices when low.

    it wouldn’t automatically get more revenue to local govt, but that could get worked in.

  27. 94610BizMan

    Interesting rough preliminary analysis based on data from the city website.
    1. average Oakland city revenue growth 1992 to 2002: 4.6% per annum
    2.In Rob’s 2002 report projected go forward revenue growth predicted to be: 3.6% per annum
    3. Total city budget growth per annum averaged:
    Baseline 1999-2000 to 2007–2008 5.9% per annum
    4. Approximate Oakland budget shortfall listed above $$ roughly equal to the difference between a 5.9% growth rate from a 1999 base and a 3.6% growth rate from a 1999 base

    so I was wrong in my first hypothesis, not much of a bubble effect (outside of dependence on transfer tax). But it looks like my second hypothesis is likely correct, consistent growth in budget greater than the economic or projected revenue base.

  28. 94610BizMan

    len:
    “few bad home takeovers…”
    My year end project is a major upgrade to my home security/protection systems, bullet proofing my safe room and taking urban defense training for moderately disabled old coots. (I am not joking).

  29. len raphael

    Bizm,
    The other way that the city fathers and mothers openly hid their shortfalls of the last couple of years was interfund transfers/loans. bernie madoff would feel right at home here.

    This situation will be the first time we can use Dellum’s alleged talents: to convince the feds that oakland is too big too fail, with all the baggage that entails.

    yeah, looking like a good year to start a security patrol service for the hills.

    -len raphael
    temescal

  30. VivekB

    94610: If you’re doing a major upgrade, you may want to check out the Security Systems 101 and CCTV 101 guides I wrote up at http://www.rockridgeresidents.org/crime . Look on the right. My own system is relatively robust. Relatively because there’s always more you can do, but I spent a few thou at DIY-price levels, ADT/etc would have charged >$15K for what I put in myself.

    In addition to the standard stuff (which required around 65 different wire runs), I put in magnetic locks on certain doors & gates, and the system pages my cellphone every time someone arms/disarms it along with whose code was used. I can also pull up the security cameras on my cellphone from anywhere on the AT&T cellphone network.

  31. 94610BizMan

    VivekB
    Thanks for the tips. I’m actually upgrading to multi-zoned military technology spin off intrusion equipment. I’m a computer security expert and my property is already completely networked and covered with commercial quality security.

    I’m working on the design with a terrific boutique physical security consultant based in Oakland. His business is U. S. Government certified training and design for physical security, police training, counter terrorism, urban self defense, etc.

    Staff background with international military, IDF, etc.His group is way better and way cheaper than the ADT guys, Oakland based and they are great to work with.

    Len:
    Regarding the patrol service, very tough to do right. I actually have discussed this in depth with the security consultant as an investment opportunity. Training, liability, regulatory requirements, etc. make it a quite expensive to provide a for profit solution. There is a BIG gap in requirements to deter the random street criminal and really planning a defense for a determined home take-over.

    Most people aren’t home-take over paranoid. My preliminary discussions with a few hill home owner associations aren’t encouraging. Bay Alarm drive by patrols are available and cheap (and I recommend them) However, all they really do is keep the high school amateurs away and call the cops if your alarm goes off.

    Perhaps because i was doing consulting throughout South America during the 70′s I have a higher level of both paranoia and willingness to live with a high level of crime.

    Serious neighborhood watch is more practical than a for profit service. I’m training my HQ staff as well as my wife and I.

    “When seconds count, the police are minutes away”.

  32. 94610BizMan

    BUBBLES BUBBLES BUBBLES

    Here are the indirect numbers for the impact of the bubble on Oakland, CA and the USA.

    Case Schiller inflation adjusted index is readily available on line and CPI adjusted House prices for the Bay Area shows a Peak to trough of -30%. The Bubble started in about 2001 and the crash should result in CPI adjusted house prices in 2009 falling to 1999 levels. Big hit to wealth and transfer tax.

    Even worse, according to analysis by the St Louis Fed the refinancing boom where folks used their houses as ATMs combined with the building boom likely contributed more than 100% of the economic growth rate since 2001. That means that the USA has been in a recession for at least the last five years and it could be argued that the economy did not recover from the dot com crash.

    Therefore in the aggregate, it is very likely there has been no actual real economic growth for the last decade. The perceived growth has all been from financial leverage.

    The recovery was completely based on financial leverage. So instead of 3.5% growth rate, absent the bubble, the economic growth rate was ZERO

  33. Navigator

    BizMan,

    Great point. I agree with you entirely. Taking all of that into account makes me worry even more about the long-term prognosis for our economy.

  34. len raphael

    Bizm, what’s the link to st louis fed analysis. some large piece of post dot com growth was consumer based, and some large piece of that was housing refi’d funded, but a few years after dot com bust, there was substantial growth in business spending, that was wasnt construction/real estate related. and weren’t there large increase in tech and agriculture exports?

    if you said the good times was financed by low interest rates for any kind of financing, definitely.

    I was half kidding about the security patrol biz. When residents with higher net worth or income do the cost/benefit math, they’ll vote for a well drafted $400-500 parcel tax for more cops if they had a credible mayor.

    -len raphael
    temescal

  35. 94610BizMan

    I’ll vote for a parcel tax if I thought the cops would get hired and get decent leadership.

    I’ll look for a link, I got it in hard copy. This is macro economic analysis so it is top down. The point was that the financing from re-fi and construction provided the capital and spending to finance the other activities for the recovery from 2002 on and there was no NET new growth.

    Hard to directly map to Oakland but I got some 94610 zip code numbers from a quick Experion database run by piggy backing on a friend’s commercial access. It looks like about 30% of the single family homes (not condos) were re-fied, with cash out but without a sale in the 5 years ending 2006.

    With half of the houses in the zip code having an estimated value of between 400K and 1 million, that’s a lot of money flowing into Oakland residents

  36. Patrick

    When the city eliminates things like pay-go and automobile allowances, and makes the unions decide between gold-plated salaries and gold-plated pensions, I will consider voting for a parcel tax. Until then, the answer is no, regardless of what it’s for.

  37. V Smoothe

    Patrick, what’s wrong with pay-go? Why on earth would you want to get rid of it? You do realize that would directly result in reduced funding and additional layoffs for public works, right?

  38. 94610BizMan

    Numbers in $ billions
    GDP table from US Gov BEA
    Mortgage Equity Withdrawal I pulled from Bloomberg Data. The equity numbers vary by source but the pattern is the same.

    YEAR GDP Growth Mort. Equ. Withdrawal

    1999 9,268 $521 $250
    2000 9,817 $549 $250
    2001 10,128 $311 $400
    2002 10,469 $341 $500
    2003 10,960 $491 $500
    2004 11,685 $725 $800
    2005 12,421 $736 $800
    2006 13,178 $757 $900

    Totals 4431 4300

  39. Patrick

    Whatever benefits are derived from pay-go expenditures specifically are outweighed, imo, by the political advantages Council member’s reap. Too many fiefdoms.

  40. 94610BizMan

    Len:
    I didn’t add the conclusion. That is that the “normal” economy is considered to be about 70% consumer driven (plus or minus) depending on how you interpret the governments BEA figures.

    The Mortgage equity withdrawals are consumer transactions. Since 2001 these withdrawals have been over 100% of the total $$ growth in GDP. What is even scarier is that if you believe the “standard macro economic models”, $1 of new consumer spending should have a multiplier effect on GDP growth.

    Final point, those “standard macro economic models” are the ones used by all concerned in the Federal government as well as state governments. Then the cities use the derivative works from the Feds and the state to make budget, taxation and “stimulus” decisions.

    There isn’t going to be much spare change for Oakland over the next few years.

    This does not even consider the government pension liabilities that were probably a bomb waiting to explode even before the finincial crash.

  41. VivekB

    So who wants a good laugh? I just analyzed the Mayors economic report for the “Ready to Go” Jobs & Infrastructure report that will be submitted to President-elect Obama.

    Turns out Oakland barely edged out Tracy, but did do 35% more than Alameda. Unless you consider $$ per citizen, in which case we’re at the far bottom of the local barrel. Isn’t Dellums supposed to be some fancy pants at getting Federal $$? I’m not seeing it.

    Top line #s for Oakland:
    CDBG: $8M, 119 jobs
    Energy, $8.8M, 105 jobs
    Public Safety, $38.5M, 458 jobs
    Streets / Roads, $9.5M, 73 jobs
    Water, $24M, 288 jobs

    Oakland Request per citizen: $222.
    San Fran: $2870.
    San Jose: $503
    Tracy: $1027
    Alameda: $961

    The detailed list of projects for Oakland is pretty interesting, though. Waaay too much detail for a comment here, though.

    http://www.rockridgeresidents.org/forums/showthread.php?t=370

  42. len raphael

    VB,
    It appears that Dellums is not Ready to Go, in more ways than one. I can see why sewer mains are ready to go, because many of them are >70 years old and made out of clay that would crack apart in a moderate quake. ie. that project was probably compiled years ago. can you tell if water mains are included in that figure? seems too low. or are water mains funded by ebmud?

    BizM: startling that the refi cash out amounts were so high relative to gdp growth for those years. wonder where the excess cash went, it wasn’t savings since i thought consumer debt went way up during that period.

    for past several years i expected the crash would come from overseas buyers of us debt pulling out of the us securities, but looks like that shock is yet to hit. could be the big aftershock after the current bloodletting.

    what were historical averages for mortgage and business equipment loan rates? weren’t they closer to 9pct for mortgages and 12 pct for business loans?

    even without that future shock, sacramento airport muni bond pays something like 5.25% compared to was it under 4% a year ago? i didn’t see anything in the budget deficit projection re financing costs, maybe because that only affects restricted funds.

    -len raphael
    temescal

  43. len raphael

    looking at the list again, doesn’t seem that replacing sewer mains is even on dellum’s list?

    on the crime list, why 1.x million for local police recruiting when we’re laying off cadets before they even start? that whole recruiting thang was a boondoggle.

  44. Patrick

    After reading the Five Year financial forecast back-to-back with the “Ready To Go” list of infrastructure improvement requests…it’s just infuriating! I could come up with $19 million dollars in infrastructure improvement suggestions just in my own neighborhood! The cost to fix McKillop Road, as a result of the landslides caused by seepage from the Central Reservoir, is estimated (currently) at $4 million, not including landslide abatement. And what about shoring up the Reservoir’s earthen dam? Granted, it is owned by EBMUD, but as thousands of people live in the flood zone created by this 100+ year old structure, and the city sued EBMUD regarding its safety, you’d think someone would have put “failing dam”, “earthquakes” and “infrastructure improvement” together. Thanks, Ron!

  45. VivekB

    Patrick/Len: Nothing really to add other than “yep”. Seriously Mayor Sleepy could only come up with $89M, of which
    - $20M is for “Oakland Community Land Trust”
    - $20M is for “Oakland Inner Harbor Tidal Canal Easement” (btw, i had to derive that #, it wasn’t visible on any of the reports”.)

    so really, only $49M of original thought. I also seriously question whether some of those would be actually funded by the intent of the economic stimulus ( and don’t nobody blast me on the value, i’m just saying that my understanding of the stimulus is that it’s for infrastructure & green). Some of these also beg the “who’ll pay for this in 2010 and beyond”, they seem more like gov’t expansion than infrastructure:
    - $1M for Fruitvale latino cultural and performing arts center
    - $1M for Automatic Vehicle Locating Systems for all public vehicles
    - $1.7M for 30 new patrol cars
    - $2M for “Grow our Own” Police Recruitment Program
    - $4M for an Oakland Fire Boat
    - $5.6M for Surveillance Camera Network

    So, of the $49M remaining, $15M is a stretch. I can see us getting the $20M for the Tidal stuff, but the land trust is also a strech. Hence my projection of what we’re actually asking for that fits within the parameters of the stimulus is $54M.

    Pretty sad, considering how much of an infrastructure need we have around here.

  46. 94610BizMan

    Len:
    “it wasn’t savings since i thought consumer debt went way up during that period. “…when a consumer closes on a mortgage that increases consumer debt as reported in the aggregate.

    “where the excess cash went”… from talking to my neighbors it was things like college tuition, sports cars, new kitchens, trips to Tahiti, condos in Tahoe, media rooms, etc. Not too surprising that according the the WSJ luxury goods sales are down about 25% year over year.

  47. len raphael

    BM, what i meant by excess cash pulled out via refi, was it looked like in some of those years refi cash > growth in gnp; and especially since a chunk of the gdp growth was from business investment.

    regardless, the city’s reasonable revenue projections don’t look reasonable. maybe half transfer taxes from the projected already halfed number of 30something. is the assumption that real estate taxes won’t plummet correct? probably. but biz taxes and sales tax re. car purchases and restaurants (saw that breakdown in the bway retail report?). fees and penalties will probably be stable because that’s the one revenue ehancement our city employees and our council and mayor has down cold. some guestimates for further revenue declines?

  48. len raphael

    one of my neighbors very rationally pulled 200k out four years ago, put her two sons thru college, bought herself and them new cars, then turned off the lights, locked the door and moved in with elderly mom below shattuck. mailed the keys to the bank.

    another acquaintence from richmond cashed out 150k and build a large home in the philipines. he looks at his payments here as rent. he’ll walk away from his home loan here in a few years.

    but another neighbor who would have qualified for fixed medium rate loan 3 years ago, and asked his local loan broker to do that, didn’t read what he signed. again, he probably didn’t want to read it because the teaser rate was fairly low.

  49. len raphael

    from the mayor’s 5 year projection document (see link in v’s article) the crux of how reasonable it is to assume “In the second year of the forecast, FY 2010-11, as the economy is assumed to bottom out and begin to
    recover, revenue growth begins to improve slowly. The revenue growth forecasts for the remaining outyears
    reflect a continuing recovery and eventual return to normalcy and economic expansion.”

    Perfectly reasonable for a normal recession.

    GPF REVENUE (in
    $millions)
    Oct. 2008
    Revised
    Budget Forecast Forecast Forecast Forecast Forecast
    Revenue Type FY 2008-09 FY2009-10 FY2010-11 FY2011-12 FY2012-13 FY2013-14
    Property Tax $ 138.3 $ 141.1 $ 143.9 $ 148.2 $ 154.9 $ 161.9
    Sales Tax 48.1 46.7 47.1 48.1 50.0 52.0
    Vehicle License Fee 1.3 1.3 1.3 1.3 1.4 1.4
    Business License Tax 52.0 51.3 51.0 51.7 52.7 54.4
    Utility Consumption Tax 54.0 54.5 54.9 55.9 56.9 57.9
    Real Estate Transfer Tax 35.1 29.1 30.0 34.2 36.0 39.6
    Transient Occupancy Tax 11.7 11.4 11.5 11.7 12.2 12.7
    Parking Tax 8.5 8.5 8.6 8.8 9.1 9.3
    Licenses & Permits 1.6 1.7 1.7 1.8 1.8 1.9
    Fines & Penalties 29.3 32.1 28.3 28.3 28.3 28.3
    Interest Income 2.3 2.3 2.3 2.3 2.3 2.3
    Service Charges 47.4 47.9 49.1 51.7 53.0 55.7
    Grants & Subsidies – - – - – -
    Miscellaneous 11.9 0.7 0.9 0.4 0.4 0.4
    Interfund Transfers 23.4 12.6 12.3 11.6 11.0 10.4
    Total $ 465.0 $ 441.1 $ 442.9 $ 456.1 $ 470.0 $ 488.2

    So maybe reasonable for next three years wb 20% drops from fye 08/09 of 20% for Biztax (10Mill), 40% transfer tax (14Mill), 5% prop tax (7), 20% sales tax (10); 20% hotel (3Mill). Total additional shortfall per year of 44Mill.

  50. 94610BizMan

    Yes Len, my only point with all the numbers was that “the city’s reasonable revenue projections don’t look reasonable” … and neither do the State of CA at least not to me.

    All of the folks you referred to had significant assets by global standards but relatively modest by Bay Area standards. Irrespective of one’s political opinions, the easy solution to CA and Oakland’s financial problems is not just massive tax increases.

    Even those with moderate assets by Bay Area standards have relatively easy financial strategies to avoid major tax increases as your examples indicate. For the truly wealthy it’s even easier.

    Encouraging investment to create additional economic activity which generates tax revenue is what is needed. However my pessimism about the politicians makes me think bankruptcy is more likely.

    We shall see.

  51. len raphael

    another unintended consequence of Prop 13 was it’s depressing effect on sales of larger properties not held within legal entities that can transfer ownership without triggering county reappraisal.

    it lowers the costs of sitting on a vacant lot or underdeveloped lot and simply holding.

    in particular on upper upper broadway, there are a bunch who are either either very optimistic about the future of their property values and as such price the lots too high, or maybe don’t have a better place to invest their money. unlike Telegraph, much of upper bway didn’t have effective neighborhood barriers to building. strictly long time owners who could afford to wait for the bubble to reach upper bway.

    -len raphael
    temescal

  52. 94610BizMan

    Found a decent link on why I’m pessimistic about the state and local budgets:

    Jim Spiotto is a partner with the Chicago-based law firm of Chapman and Cutler LLP which specializes in the law of finance: banking, corporate finance, securities and public finance:

    “Consider this staggering comparison: State and local public employees comprise approximately 12 percent of the U.S. workforce and have an estimated $800 billion or more of unfunded pension liabilities (not counting other post-employment benefits). By comparison, employees in the private or corporate sector make up about 78 percent of the U.S. workforce with an estimated $450 billion of unfunded liabilities.”

    http://www.muninetguide.com/articles/Vallejo-Bankruptcy-Filing-Garner-282.php

  53. len raphael

    BizM, the link to that muni site was informative. darn, it was skimpy on detailed info on muni bankruptcy.

    that article and the rarity of muni’s declaring bankruptcy, supports the argument that muni bankruptcy, unlike the ways that biz and personal bankruptcy can, does not make you a more attractive borrower to lenders. not sure why it would be any different, but it’s just that unlike individs or businesses, muni’s should able to predict their income and expenses and adjust accordingly or wade into reserves.

    if oakland could hold on till obviously better run cities went into bankruptcy, then oakland might not get hammered on future borrowing interest rates for infrastructure.

    if we were able to use bankruptcy to cut contractual retirement obligations, we are going to get a seriously pissed off muni work force. i don’t think we could accept long muni strikes here without caving.

    much of our current deficit re real estate revenue was obvious by late 2006, and unfunded retirement costs was obvious several years previously. There was time to freeze wage increases but there was no political support by the voters for laying off employees at that time. that wasn’t unique to oakland.

  54. Patrick

    As of 2006, Moody’s still bond-rated Oakland as A1…which is “upper medium”, below Aaa, Aa1, Aa2 and Aa3. Bankruptcy would lower that rating, but with our city finances as they are, our borrowing prospects are nil regardless of ratings.

    When faced with the option of a viable police and fire force, adequately funded schools, and an attempt at maintaining our infrastructure vs. the union contracts that mandate pay, benefits and pensions that are in the top, what, 5% in the entire country, I think Oaklanders will choose the former and brave the strike threat. What’s going to happen? Rampant crime, a clueless government and a deteriorating city? We already have that.

  55. Tony Montana

    The abolish prop 13 people don’t get it. I pay $16K a year in property taxes, and what do I get? I get crappy schools and $25K per year per child for private school. Oakland simply isn’t sustainable for families if you jack taxes but don’t provide the services to back them up. As a parent and homeowner, that’s the problem with Oakland. Lots of tax money paying for inadequate services.

    I read the recent budget memorandum, as sfgate.com provided the link. In the budget, it shows $350M per year for city employee benefits, salaries and retirement funds. Cut that 15%, and there’s your $50M. Do you seriously think any Oakland employees are going to quit their job over a 15% pay/benefit cut with the current economy? I doubt it. Most of them seem to be very well paid to begin with. Time to share the pain.

  56. 94610BizMan

    Here are thirty pages of details and procedural discussion:

    http://w3.uchastings.edu/plri/fal95tex/muniban.html

    I. Introduction 1
    II. Federal Bankruptcy Law Requires that the State Specifically Authorize a Municipality to File for Chapter 9
    A) State Consent is Critical to the Constitutionality of Chapter 9
    B) Under Federal Bankruptcy Law, the State Specifically Authorizes a Municipality To File for Chapter 9, and Consent May Not Be Implied
    C) A State May Deny a Municipality Authority to File for Chapter 9
    D) Federal Bankruptcy Law Probably Does Not Prohibit a State From Forcing a Municipality to File for Chapter 9

    III. The State May Attach Preconditions to State Authorization as Long as Such Requirements Do Not Undercut the Efficacy of Chapter 9
    A) Federal Bankruptcy Law Limits Judicial Interference into State and Municipal Governance Thereby Allowing the Municipal-Debtor to Maintain Control of Its FiscalAffairs During Bankruptcy
    B) The State May Appoint a Trustee at Anytime
    C) A State May Control the Formulation of the Debt Readjustment Plan
    1) The “Debtor” has the Exclusive Right to Propose a Debt Readjustment Plan in Chapter 9
    a) Courts Have Construed State Authorization to File for Chapter 9 As State Policy Favoring the Pre-emption of Federal Bankruptcy Law Over State Policies Which Undercut the Efficacy of Chapter 9
    b) The State May Enact State “Bankruptcy” Procedures Which Don’t Impair Contracts in Violation of the Contracts Clause

    IV. Conclusion

    Appendix A. Relevant Federal Constitution Provisions

    Appendix B. Survey of Authorization Statutes in Various States

    Appendix C. Survey of California Legislative Proposals State Authorization

  57. VivekB

    Tony: It’s not “abolish Prop 13″, it’s “Abolish Prop 13 on 2nd homes and on commercial real estate”. First homes should be kept under the protection, but an investment property has no business being protected while there is so much pain.

  58. Max Allstadt

    And Ski Cabins never should have been protected in the first place, they should have been targeted like yachts are in most states.

  59. Patrick

    I lived in Florida for many years. I think they’re system (previously, now they have one like ours) worked well. The State offered a “Homestead Exemption”, which eliminated property tax obligations on the first $50,000 (at the time) of everyone’s home. So, if your house valuation was $100,000 you were taxed on half of it, and so on. The Exemption amount was altered relatively frequently to account for a rise in home values. But, EVERYONE got the benefit of the Exemption.

    Here’s another question, one which involves a 7.3 earthquake along the Hayward and your house burning down – total loss. What prevents State Farm from saying “OK, you’ve lived in your 5 bedroom 4 bath Montclair home for 30 years…you probably should have updated your insurance policy but didn’t…I see the State has valued it at $200,000 – and we’re willing to pay that. Good luck!” Although only a guess, I would imagine there are plenty of people in Oakland alone who have not updated their insurance policies recently to save money (though probably not so much in Montclair). When it comes time to pay up, they have an outdated insurance policy valuation and a completely arbitrary assessment due to Prop. 13. Who do you think is going to “win”?

  60. 94610BizMan

    The disaster scenario happened in the firestorm of 1991. The insurance companies and CA reg’s tightened up on what was, “replacement value” and “replacement cost”.

    Replacement cost isn’t the sole insurance reg anymore. There is a dollar amount limit as well as language about code upgrades. If i recall correctly (don’t have time to track down the regs right now) Prop 13 doesn’t kick in if you rebuild, that was also settled as a side effect of the firestorm

  61. len raphael

    not possible or very expensive to get full replacement insurance now. you tell them the value when you buy or modify your coverage, the insurance co has the option of sending out an appraiser or accepting your value.

    so the county tax appraisal is irrelevant for most purposes except sometimes business/rental income tax situations where the allocation of land vs building can matter.

    there is a homeowner exemption for all owner occupied property but it’s miniscule.

  62. 94610BizMan

    Depends on what you call expensive to protect your home. Owning in CA is expensive. Without very high expected rates of appreciation renting is cheaper on an IRR basis.

    I have full replacement (including code upgrades and hand crafted detail replacement) on a very unusual Schirmer designed Mediterranean Revival home. Allstate or State Farm won’t write something like this but Safeco, Chubb etc will.

    I paid a builder to do an estimate and the insurance companies did an inspection with their builder’s estimate. I got a very large choice of menu items. I also got earthquake insurance based on my engineering retrofit to an agreed to lateral g force calculation. Also have guaranteed inflation/building cost escalator for 10 years.

    Disasters are probable in CA so disaster insurance is expensive. TANSTAFL

  63. Patrick

    So, the water department managed to come up with a draft list that is EIGHT times the size of Oakland’s?

    Can anyone name an infrastructure project in their neighborhood that could have been on Oakland’s list – but isn’t?

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