Stanislaus County hit by sales tax slump

The signs of the recession in the valley are everywhere: vacant storefronts along Modesto's McHenry Avenue, an unemployment rate approaching 20 percent and a record number of people lining up at food banks.

The economic downturn also has struck at one of local governments' most critical revenue sources: sales taxes.

In the past three years, Stanislaus County and eight of its nine cities have lost $16.74 million in sales tax revenues -- a 22.9 percent decline -- as residents have spent less at the mall, bought fewer new cars and trucks, and not filled their gas tanks as often. (Hughson, the ninth and smallest city, did not provide data for this story.)

Sales tax often is the No. 1 revenue source for a city's general fund, making up 20 percent to 30 percent of the fund. The general fund pays for basic services such as parks and recreation, libraries, police and fire.

And unlike other government revenues, sales taxes are discretionary, giving local governments wide latitude in how they are spent, such as in beefing up public safety or youth programs.

The county and its cities have laid off workers, trimmed payrolls with furloughs and wage reductions, and curtailed or eliminated services as they struggle to balance budgets during the worst economic downturn since the Great Depression.

"When we take these hits of millions and millions of dollars in a relatively short period of time, that hits the services people are concerned about," said Cynthia Gale, acting budget manager for Modesto.

The downturn has hit local governments differently.

Less to be gained from big boxes

For instance, Modesto, the county's retail center, has seen a huge drop in sales tax from department, furniture and clothing stores, consumer electronics retailers, and drug and sporting goods stores.

For the county, the sales tax drop was fueled by about a 40 percent decline in new auto sales and in construction.

Oakdale relies heavily upon cars and trucks with more than 36 percent of its sales tax dollars coming from service stations, new auto sales and auto parts and repair businesses.

The city's sales tax revenues have dropped 28.6 percent in the past three years as fewer travelers stopped for gas and snacks on their way to Yosemite and the Sierra, and fewer people bought cars and trucks from the city's new auto dealers.

Tiny Newman in western Stanislaus County has taken the worst beating, losing 38 percent of its sales tax revenue. It took in more than $515,000 in sales taxes in the 2006-07 budget year and expects to finish the 2009-10 budget year on June 30 with $320,000.

Losing its last new auto dealer in 2009 didn't help. But City Manager Michael Holland said Newman also is losing $50,000 to $60,000 a year because of a tax-sharing deal Modesto struck in 2008 with an oil distributor.

That deal also is costing Oakdale sales tax money.

But Holland said Newman has weathered the recession well by restricting spending and relying on reserves it built up during the boom times. Newman has about $2.4 million in reserves against a general fund budget of about $3.5 million.

Newman has laid off a couple of workers, not filled some vacant positions and converted some jobs from full to part time to help balance its books.

Riverbank hanging in there

Riverbank was the only one among the eight cities and the county to see its sales tax revenues hold steady, primarily because of its Crossroads shopping center, which draws shoppers from Oakdale and east Modesto.

Riverbank also doesn't have new auto dealers, so it didn't see a revenue drop when people started holding back on car purchases.

Crossroads boasts three bank branches, a dentist's office, big-box retailers such as Best Buy and Target, a supermarket and restaurants.

"Whatever you need is pretty much there," said Edward Tung, the center's property manager. "It's one-stop shopping."

But one day, Crossroads could have company. Two shopping center developers have expressed interest in that area, but on the Modesto side of the city limit. That means Modesto could recoup some of the sales tax revenue its residents are giving to Riverbank.

But, says Brent Sinclair, Modesto's community and economic development director, there are enough Riverbank and Modesto homes in that area to support more retail and commercial development.

"There are enough rooftops right now," he said. "But no one is willing to invest and money is not free enough. Until things turn around, no one is going to invest."

Ceres City Manager Brad Kilger said this is the worst recession he's seen in his 30 years working for local governments in California.

In past downturns, he said, sales tax revenues might drop 5 percent to 10 percent while property taxes held steady. But this time, both have taken huge hits.

"In every other recession," he said, "with the budget reductions we've made at this point, we pretty much were stabilized and rebuilding. This is the first time we don't know if we've hit bottom, and we're still five years away from recovery where we may approach where we were in 2006."

Local governments have taken steps to tackle the sales tax decline.

For instance, Modesto officials have been meeting monthly for the past year with officials from the Chamber of Commerce, the Downtown Improvement District, the Convention & Visitors Bureau and the Stanislaus Economic Development and Workforce Alliance.

"It's about, 'How can we pool our resources to promote Modesto as a place for business and to retain businesses?' " said Laurie Smith, the city's administrative services officers in community and economic development. "We also are positioning ourselves to be more effective when things turn around."

And in Riverbank, city officials are promoting local businesses. For instance, City Manager Rich Holmer said the city included The Home Depot on a downtown mural because it donated $2,000 toward the city's recent spring cleanup.

Riverbank also will find a way to promote Best Buy. The retailer is donating $10,000 toward consumer electronics for the city's teen center, which is scheduled to open early next year.

"We are being creative in how we market our stores and stores that help us," Holmer said.

Stabilizing trend predicted

But the worst may be over.

The cities and the county are projecting that sales tax revenues for the 2010-11 budget year, which starts July 1, won't change much from the current year. The county and some cities also are predicting a slight increase in revenue.

Modesto expects 2010-11 sales tax revenues to be $22.8 million, just $100,000 less than the current year but nearly $7 million less than what the city took in five years ago.

Turlock expects its sales tax revenues will stop declining after falling more than 22 percent in the past three years.

"It's not good news, but it's not worse news," City Manager Roy Wasden said. "That's what the sense is. There just comes a point where people still have to live and buy certain things. We may not see a lot of new car sales, but maybe more car repairs."

California -- including the Northern San Joaquin Valley -- has turned the corner on the recession, experts say. Californians are more optimistic and are spending more, said Brad Kemp, director of regional research for Los Angeles-based Beacon Economics.

But he worries whether this uptick in spending is sustainable. And the recovery will be checked by high unemployment, tight credit and more foreclosures.

The valley in particular will need to be patient, Kemp said, because it's one of the hardest-hit areas, and unemployment will remain in the double digits until at least 2013.

"Just because the worst is behind us, does not mean hard times aren't ahead," he said.

Bee staff writer Kevin Valine can be reached at or 578-2316.