 Well, good morning. Good afternoon. Good evening. Whenever you're listening, this is Davisville on KDRT LP 95.7 FM in Davis, California We live at KDRT.org online. I'm Bill Buchanan, the host, and thank you for tuning in to what is our second program recorded remotely since the pandemic temporarily shut down our recording studio at KDRT. If the program sounds a little different than usual today, that's why we're recording via computer without the benefit of the KDRT studio. Anyway, today's guest is Bob Leland, and our subject is the effect of the coronavirus pandemic on city finances and the services they pay for. Bob is well known in municipal finance circles as an expert on that subject. He lives in Davis. He was the finance director for the city of Fairfield for 26 years, and he has been a consultant since retiring from that job in 2010. Among other jobs after working in Fairfield, he analyzed Davis's finances in 2017, and that's among the things that I hope we'll be able to talk about today. The health of the budget at City Hall, of course, affects all the things that we rely on the city to provide from police and fire to recreational and social programs and parks and functioning streets. So, Bob, thank you for taking the time to talk with us today. Well, thank you for having me. So, you know, the pandemic and the restrictions on public activity have hammered the economy. How bad does it look for local governments in California? Well, that is the challenge right now. There's been a lot of attention focused on unemployment and the small businesses that have closed, and so mainly the impact on the private sector, but more and more there is attention being focused on what's happening with the public sector. Most of the revenue that a city receives is from the taxation of economic transactions that occur in the community. So, they could be sales tax for purchasing a commodity at a store. It can be selling a house and having a property transfer tax applied. It can be staying in a hotel room and having a transient occupancy tax applied. That's about half of the revenue of a typical city, and since the social distancing orders and stay-at-home orders came through, most of that economic activity has ceased. And the grocery stores are open, but a lot of what they sell is not taxable. So, this quarter's worth of revenue is going to be pretty well wiped out. Even going back to the Great Recession, there was serious revenue losses there, and they grew year by year for four years until they began improving. But during that period, you weren't prohibited from going to a store. You might not have had the income if you'd lost the job, but the shopping opportunities weren't closed off, but that's been a pretty profound impact right now. And so, in a lot of cases, certain revenue sources, about a quarter of it, is being wiped out for the year. I was sort of doing the math while you were talking. I mean, I think if I understand correctly, you said, you know, half of a revenue comes from those categories. Those categories are pretty much going to be flat for the quarter. So, that would be roughly an eighth of the city's... Oh, flat or wiped out. Oh, yeah. That's what I mean. I got flat lines. Yeah, flat lines. Hotel tax, for example, there are a few rooms open and being rented. Some motels are being turned into homeless shelters, and those aren't going to generate tax. So, yes, a number of the revenue sources, including things like recreation programs, programs are shut down, so no revenue from that. So, if a city loses that kind of revenue, and of course, I'm interested most in Davis, what happens? How does the city react to that? How do they respond to that? Well, nobody's ever had to respond to anything profound as this. The Great Recession is the last example of a major economic downturn that we have, and it happened for a number of different reasons. That was a collapse of the housing market, and so there was a big impact on the property tax in most communities. Now, property values actually stayed pretty high in Davis, but in some places in the Central Valley, they dropped in half. So, we're not looking at the property tax being hit hard. That's not an economic transaction in the same way that sales tax is. That's the fundamental value of the property. And if it doesn't go down, property tax won't be hit as badly. But as I said, everything that's transaction-based got wiped out, is being wiped out in this fourth quarter of the fiscal year that ends June 30th. The real question is what happens next year? When will the social distancing be eased up? And when it does, are people going to flock back to shopping opportunities? I mean, in a lot of cases, businesses will have gone out of business in the meantime, and I think a lot of businesses will be cautious about rehiring, because they're not sure if there's going to be a second wave of the virus. I was reading about that just today, that the head of the CDC thought that we might get another wave next year in the winter, combining with the flu. Which is, yeah, the flu season typically starts up in the fall, so that could happen. So there are a lot of reasons why next year may not be a pure recovery year. It may be half still suffering from lower levels of economic activity, and maybe only later in the year does it begin to improve. And it will probably take a few years after that to get back to where we would have been otherwise had there been no recession. So I guess if you kind of boil this down, and I realize the city will be the one making decisions, you're not on the council, you're not part of the administration. But cuts seem inevitable. I mean, do that seem reasonable, a reasonable scenario? Yeah, local governments are going to find that the taxes that are the lifeblood of the services that they offer are being severely affected, and then sort of to add insult to injury. CalPERS is going to lose a significant amount of money this year on their investments. And when their investment return goes down, the rates that employers are required to charge by CalPERS to collect an adequate amount of money to keep the system funded will go up. And so the cost will go up. We should explain CalPERS is the state retirement fund. And part of the way they pay for the pensions of every public employee who's retired is they get money from the employers, in this case the cities. Right, they get about two-thirds of their total income from investments. And of the remaining one-third, most of that comes from the employers, the cities, the counties, the schools, in the case of the STRS, the state teachers retirement system. And then a portion comes from the employees, but that portion's fixed. So when investments go down, the only place to go to make up the difference is the employer. And so the city's rates go up. And as those rates go up and the amount that a city pays for pension goes up, that tends to crowd out the ability to pay for anything else. So this just sounds kind of grim, honestly. Well, it's going to be a real challenge. We've been comparing what cities went through in the Great Recession to where the various scenarios are for revenue loss right now. And the COVID-related losses don't tend to be as high as the Great Recession, mainly because the property tax, we're not really viewing that as getting engaged in revenue loss the same way it was with the Great Recession. Of course, remember the Great Recession was in 2008, 2009, housing market collapsed. And unemployment got higher and higher, but it took years to get to the level that unemployment already is right now, given the losses that we've had just in a few weeks. So there's a lot of unknown as to what we're facing. The other unknown is whether the federal government who's been handing out a lot of money one way or the other for businesses has been urged to make money available for government. So far, there's a portion that may be available for cities over 500,000 population. Of course, Davis is much smaller than that. So they're not eligible for the initial round and whether they receive aid elsewhere is an unknown at this point. And of course, it's a moving target. We're talking on April 21st. And in a week or two, it could be very different. I know that the Congress has been looking at money for smaller cities and counties and so on. But yeah, that's not part of the plan yet, as I understand it. Really, things are changing day by day. So what should cities be doing? What should the city of Davis be doing? Well, what every city has to do at this point is remember the old adage cash is king. And so you want to preserve cash and you want to stop hiring new employees. You're going to have to get by with a higher level of vacancies. And of course, that affects service levels, but it's better than laying off employees. As far as part timers go, most cities are laying them off because the programs that they serve, recreation programs, let's say, aren't functioning. And so with no program, there's both no revenue and no need currently for the employees. There's going to have to be curtailment of planned capital projects unless they're really important. It's always good that capital investment helps spur the local economy as well. But when your primary consideration is saving cash for the general fund until you know a little bit more about what's going on, you really want to hold off for the next probably six to 12 months until you get a better idea what's going on. Well, in fact, the city is constrained from taking on a lot of debt, right? Well, yeah, there has to be a way to pay for it. If the voters approve a separate property tax, well, that takes care of itself. But typically, when you're issuing bonds, if they're for the water system, then the water rate payers will pay for it. But otherwise, if it's coming from a general source, there has to be the revenue to pay for that. This is not a really good time to sell bonds. Typically, you can only sell bonds for capital improvements anyway. One of the things that is being looked at is to try to come up with a sort of a medium term borrowing right now, unlike the private sector, which borrows all the time to pay for operations. In government, you can only pay for operations for the current year, and you have to pay back what you borrow by the end of the year. Well, this is a situation where to get by, if you could borrow enough money and pay it back over, say, seven to 10 years, then that might be a situation that could help you get by. You could borrow enough money to bridge this gap, but cities aren't going to be in a position to pay it back by the end of the year, or even maybe within one or two years. So there needs to be some legal things done to enable California cities to borrow for a longer period, and that would help. So I was about to ask, it sounds like that would require a change in state law to allow a city to do something like that. It does. And then I can imagine that might get considered, you know, whether voters would want that, I don't know, but I can imagine that could get evaluated in a time like this because, well, there's still a lot of unknowns except that the trajectory is down, right? Right. So it's, you know, just in March, the city voters approved really overwhelmingly an extension of the city's 1% sales tax. But I suppose that doesn't really help here, right? That just keeps the pain from being worse. It's not, because it's tied to sales and sales are down. Well, it helps for the long run because it was going to expire in a year. And so now the city has the security of knowing that it's permanent. However, at this point in time, people aren't buying things locally. So it's not generating the amount of revenue that we might have expected. So for the short term, that's a problem. I think it was forecast for, I have the number right about $8.6 million per year. And who knows what that will really come down to. We are talking with Bob Leland. He is the short way to say it, he is an expert on municipal finance and he lives in Davis. And we are talking about the effect of the pandemic on local government finance, particularly here in Davis. This program is Davisville and Bill Buchanan. Are there any bright spots you're seeing? Well, you know, it's interesting. We're all in the space right now of creating new habits. We're communicating right now, not face to face, but from a respective living room, so to speak. And I guess one bright spot is people are beginning to understand the real capabilities of virtual communication that may lead to some increased telecommuting in the future. And that may result, for example, in less air pollution. But on the other hand, people are getting into new habits in terms of people might have gone out to dinner all the time. Now they are learning to cook. So for the long term, that may have implications for local restaurants. There may be issues in terms of how UC Davis provides education in the future. It's always been a model where people show up in person to the extent that they people phone it in virtually. Then there may be fewer students at any one time in town. So, I mean, there's a lot of unknown. That's not really good news. There's just a lot of unknown. Yeah. Obviously, the short term goal is to get through the pain and the disruption of this and to try to come out the other side in as good a shape as we all can. But it seems to me that this is going to reshuffle, rebuild, recreate a lot of things, either because of ways that people are adapting now that maybe they'll want to keep that way, keep going that way. And that's got to have an implication, I'm sure, for things like city revenue, right? I mean, depending on what you tax and how people are organized and even where they are, I can't begin to imagine what kind of changes that might lead to. Well, there's some practical changes just in the workplace. I mean, I've spoken with a lot of city officials throughout the state. And one of the things that they're planning for at the same time that they're worrying about their loss of revenue is how ultimately they get a workforce to agree to come back to the office. Some people, certain jobs that are more information technology related or, you know, processing information on a computer, say you're an accountant, that can be done, they're finding from home. But if you are doing street repair, you know, that's something that has to be done in person. So some people are going to have to come back to work. But there are a lot of people in a typical office setting that are to accommodate them, you may need to space desks farther apart, you may to feel safe from interacting with the public, there may be plexiglass screens all over the place. And some people are going to say, you know, I had to commute to get to my job before I kind of like working from my home office. And so I don't really want to come back, or at least I don't want to come back every day of the week. So that has implications for the workplace of the city itself. It has implications for the businesses in the downtown that serve City Hall, as well as other businesses that are going through the same questions as to what does the future look like? Yeah, we have about 10 minutes left. There's a couple of the subjects I want to get to. One is a few years ago, you did a report for the city of Davis where you sort of analyzed the finances at that point. In fact, Dan Carson, who at the time was chair of the City Finance and Budget Commission, said it was a plainly written, well documented and concise explanation of the state of the city's finances. What I'm wondering is if you could recap briefly what it is you found and how far we had come before the pandemic hit. Obviously, that's changed things. But the general goal right was to try to get Davis on the right road financially. And so you took a look at where we were and what was coming. And prior to the pandemic, Davis was doing a good job. Three years ago, we put a long range budget model together. We are firm and the staff have updated it every year since. We've stayed in close contact. One of the things about Davis that sets it apart from other cities is that they were very concerned about infrastructure, maintaining the investment that the city has in streets and parks and facilities. And they've identified those needs and have been putting money to the best that they can and into those needs. Most cities are afraid to even ask the question as to what that unmet need looks like. And so they don't ask to Davis's immense credit they have asked. They have a very active finance and budget commission and they have encouraged this kind of emphasis. They've also encouraged so basically conservative outlooks such as assuming that the pension costs will go up over time due to lower investment returns at the state. And so we've built that in. They have very carefully adopted each year's budget in concert with that long range plan. And I give them a lot of credit for doing that. The council and the staff have been very supportive. And so they have a model already in place, which we have adapted to give them scenarios for kind of a blow by blow account of what the COVID-19 impacts may be. So they're in much better shape than most cities to do the financial planning to get through this. Do they have some numbers already or have you seen some numbers that might give some indications what the city is looking at? Well, the type of indication I gave you at the beginning comparing to the great recession, the impact is close to being comparable in the beginning because the loss of income up front right now due to the social distancing orders is much greater than what happened in the great recession. But we don't expect the property tax to get engaged and we expect there to be a phase out of the loss over the next several years to where the city would then be back where it started from. So the challenge is going to be to get, you know, to bridge that gap of the next couple of years. And they're going to be looking at possibilities of debt financing and they're going to be looking at possibilities of curtailing revenues because probably increased revenues are not an easy sell at this point. They were fortunate that they got the the sales tax made permanent, but it's not any higher rate than it was before. So it's what it's capable. Yeah. What do you mean increased revenues in this case? You're talking about like revenue from city programs or tax revenue, things like that. That's not likely to grow. And I'm sitting here trying to remember how bad the impact was 12 years ago in the recession and I didn't look it up. I know it was severe, but I don't remember if the city had a 10% hit or 15% hit something like that. You know, most cities suffered about a 15% reduction below what revenues would otherwise have been. So over a couple of years it went from sort of six to nine to 12 to 15. And then that was the peak. And then over the next five or six years, it gradually reduced until there was no loss compared to what they'd had before. And so again, I don't, I don't want to concoct any numbers here. But if we're looking at an impact of about the same as the great recession, would that mean roughly 15% right now, given all the caveats, all the unknowns? And given the property tax would be different, obviously, it's more of a hit to sales tax and use tax, I think, than it is to property. But it's probably, it'll probably be about a six to 8% loss for the year that'll be ending June 30. And then the question is, for the second year, will it be higher? Because as bad as things have been for this fiscal year, there's only three months in which it can be bad. Whereas next year, there's an entire fiscal year of 12 months, all 12 months could be bad, in which case, obviously, the loss would continue to grow. Yeah, I mean, there's, there's a little trick of, not a trick, but I mean, a condition of the math in there that I want to be sure we don't miss, that if the year ending June 30, it is down 6%. Well, that's down 6% in just three months. Right. So in other words, if it was an annualized drop, that would be much larger. But because there's only three months left, you had nine good months, three bad months. Right. Your point next year is they could all be bad. Yeah, it could be. The other thing I wanted to ask about was about Prop 13. And this is because I understand from your biography, when you were getting started in 1978, you were a staff consultant at the Assembly Revenue and Taxation Committee when Prop 13 passed. And for those who may not know, because it was 42 years ago, this was a proposition that basically its chief selling point was that it greatly curtailed increases in property taxes. And it sort of signified a tax rebolt in California. You know, Jerry Brown became a famous, or an again tax cutter, as he called it after he was governor before and after it passed. This is pertinent now partly because this fall, there will be a ballot measure to require commercial and industrial properties to be taxed according to their market value as opposed to their purchase value. That's one way, I guess, the difference between the two. Prop 13, your tax on purchase value, and there's a limit to how much the tax can increase each year. That's true right now for all types of property, but the measure this fall would say, no, we'll have commercial and industrial be taxed according to their current value, basically. Homes would still be taxed based on Prop 13. It's called split roll. It's a complicated subject, as you can see. Just explaining that, trying to simplify is a difficult thing to do. But I'm wondering, and as I say, we have just a few minutes, but what's your sense of the impact of Prop 13 on city finances? And then what do you think about this ballot measure this fall? Is split roll a good idea? Going back to the beginning of Prop 13, it had a huge impact. It was two thirds of the revenue from the property tax vanished overnight. But over the years, it's grown back, not as high as it would have been if all property were still taxed at fair market value. The proposal for this initiative is to take commercial industrial property and put them back on the pre-Prop 13 footing. And I think the rationale is that there's normally a 2% cap in terms of what value can go up each year unless you build something new, or in the case of an existing parcel if it sells. So residential property is much more likely to sell and be brought up to current market value, because that's what happens when you have a sale. It's taxed at not at its artificially restricted low Prop 13 value, but what it's truly worth on the marketplace. But commercial industrial properties, corporate ownerships have creative ways of avoiding a legal change in ownership. And so the concern has been that over time, residential properties on the whole are bearing a greater share of the property tax than commercial industrial. Now, this is an interesting time for this proposal to come through, because who knows what kind of election we're going to wind up having this fall, depending on what the health considerations are. But that measure will be on the ballot. And if it passes, it's expected to generate in the neighborhood of $8 to $11 billion more in property tax than the current system. That's a lot of money. Given what we were just talking about, governments might certainly feel like that would be a very timely arrival of additional money. It would be split between the state and the schools and local agencies. So it may well be that if it passes that local government will receive extra revenue at a very important time for them financially. But of course, the opposition argument is that this will discourage businesses from remaining in California and will drive them to other states. Do you have an opinion one way or another on the measure or on the idea of the measure, maybe? Well, it returns commercial industrial property to the basis that they were used to paying, granted 40 years ago, but at the time they were used to paying that kind of a burden and were capable of doing it. Obviously, any incremental change from where you are now is tough and a lot of businesses are going through an existential crisis right now. So finding out that your tax burden goes up is probably not going to be welcomed in the business community. And it's by no means assured that it will even pass. If people are concerned and fearful of things, they may not decide that that's worth the risk. Well, and I suppose you made a point there, I think that the impact would be very different on a small business than it would be on a large one. I mean, if you own a shop in town and you own your building and you're assessed at Davis property values, that's a real hit to a small business, very different than if you have the oil refinery in Venetia. All right. Well, Bob, thank you for talking with us today. We've been talking with Bob Leland who lives in Davis and knows municipal finance, and we've been talking about that subject. So I appreciate your time, Bob. Well, thank you for having me on, Bill. And folks, this is Davisville. Again, we're recording differently, so it sounds a little different, but we'll see you again soon. Thank you.