Atwater reflects wider trouble among cities

Some Valley cities stabilizing, most 'under a lot of stress'

mnorth@mercedsunstar.comSeptember 15, 2012 

Rapid building, beefed-up police departments and surging general funds marked the good times for Merced County cities up until the 2007-08 fiscal year.

Then the bottom fell out.

What followed was a trip down the other side of the fiscal mountain, which included layoffs, furloughs and ceased revenues for cities that had gotten so used to growth and climbing reserves.

Atwater faces a fiscal crisis with severe cutbacks and reductions as officials try to remedy a general fund that's more than $3 million in the red, but its hardships aren't unique.

Jeff Michael, director of the Business Forecasting Center at the University of the Pacific in Stockton, said cities throughout the Valley have faced relatively similar financial struggles and recovery will be gradual.

"Cities are under a lot of stress," he said in a phone interview from Stockton, which filed for bankruptcy earlier this year. "The problems that have afflicted Stockton have afflicted all cities in the Valley to some degree, but they've all been somewhat different."

Although some cities have had success negotiating with employee groups to resolve budget shortfalls, others have had to resort to stronger measures.

"Most cities have made substantial layoffs, sometimes 20 percent or more," Michael said. "Many of them have used furloughs. Some cities have used fiscal emergencies to impose pay cuts on employee groups."

While the economy was booming, cities became dependent on fees from new construction for financial support before the bottom fell out, Michael said.

"That was pretty much it," he said. "Some cities anticipated streams of money from those fees and have got themselves into trouble. Other cities were more 'pay as you go.' "

Borrowing against those streams of funding got some cities, including Stockton, into trouble, Michael said.

"The stream of funding from new construction stopped and they were left with the debt," he said.

A number of city leaders, such as Los Banos City Manager Steve Rath, saw it coming.

In 2007, Rath worked with a local economist to create a projected graph of the looming foreclosure crisis. He gave the document to the City Council in 2008, and the hard times followed.

Los Banos went through with layoffs in 2008. The city hasn't issued a residential building permit since January of that year.

"You can't build a home for what you can buy one for now," Rath said.

Though property taxes will continue to lag, most cities should be seeing modest growth in sales tax, Michael said.

"Most cities in the Valley now are seeing some recovery in sales tax (and) some continued deterioration in property taxes," Michael said. "Property taxes tend to lag behind due to the assessment process as well as the re-evaluation process as (homes) are sold and reset to their new values."

Property taxes could continue to decline even as market values stabilize or improve.

Sales and property taxes are offsetting each other in some areas, Michael said. Most Central Valley cities are seeing stabilization rather than recovery at this point.

"Revenues have somewhat stabilized, but they're not growing rapidly yet," he said.

In addition to a drop-off in property taxes and an overall poor economy, the loss of redevelopment agencies also hit Valley cities hard.

Dan Carrigg, legislative director for the League of California Cities, said the economic crisis has been hastened by several factors, including state decisions and increased foreclosures.

"It's been difficult throughout the state, but I would say in the Valley it's been accelerated, probably because they've typically always had a bit higher unemployment rates than elsewhere in the state, and I think it's been magnified by the foreclosure crisis," he said.

Because of the economy, cities are finding themselves in "uncharted territory."

"It's forced a lot of belt-tightening at the local level," Carrigg said. "Just in the last four or five years, you've seen cities do things that I would say four or five years ago would have been almost inconceivable. They've been laying off police and fire, closing parks, doing lots of things that, I think, people thought they wouldn't really see."

The loss of redevelopment agencies for cities was also a big blow to finances and curtailed the ability of municipalities to spur growth by reversing blight, he noted.

"It was really an important tool, especially for downtown development, because cities don't really have many options when it comes to financing infrastructure and repairing some of the old infrastructure -- the water, the streets, the sewers -- in downtown areas," Carrigg said.

Despite the argument that "all boats rise" when redevelopment projects come to fruition, the state still decided to get rid of redevelopment agencies to help balance its budget, a move that halted funding for new redevelopment projects.

Carrigg thinks the drawbacks from that move will be played out for a long time.

"The lack of the investment, we believe, will have long-term negative ripple effects in our economy," he said. "I think when we look back on this five or 10 years from now, the way this was handled will be viewed as a major mistake."

But redevelopment is only one piece of the local fiscal puzzle.

The economic collapse had a magnified impact on Valley cities, since many of them were in growth spurts at the time, Carrigg said. More affluent communities along the coast saw less of a decline in property tax.

"Some of these Valley cities are more in their growth phases, where some of the more established cities that have a more diversified economy maybe have been able to weather it differently," he said.

Many Valley economies relied on housing starts in several ways.

"A lot of times, as I understand it, businesses will say, 'You need the rooftops before the other investments come in,'" Carrigg said.

And while some may have seen a downturn coming, few could have predicted the depth and breadth of the trouble.

"This economic downturn has been probably deeper than most people expected," Carrigg said.

Reporter Mike North can be reached at (209) 385-2453 or mnorth@mercedsunstar.com.

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