By Douglas W. Schultz
The Escondido City Council is considering putting a revenue measure or sales tax increase on the ballot this November.
This information is an impartial, non-partisan presentation of the facts as they are today. It is intended to lay out these facts on what could be proposed, their impacts and lay out a few ideas I have spoken to staff and council about as possible solutions.
This is an attempt to honor my campaign promise of full transparency.
First, a brief background. The reason we have a massive deficit in Escondido is due to the city’s obligations to CalPERS due to the discount rate being lowered.
The discount rate is the assumed rate of return CalPERS will earn on their investment portfolio on an annual basis.
Back in the 1990s, CalPERS modeled what the rate of return would be using the portfolio returns at the time. While hindsight is always 20/20, it’s clear these figures were over-estimated.
With the reality of what we see in the world today, CalPERS lowered this assumed rate of return down to 6.8% per year from 7.5% per year, thereby creating this debt obligation.
Our deficit comes from being forced to pay the CalPERS pension obligations because the estimations first used in the ’90s were too high.
Here is a graphic representation from the finance department of exactly where we stand currently:
I am a “numbers guy.” When I look at issues, regardless of politics, and see where we can generate revenue, I feel it is one of my responsibilities as your City Treasurer, to present possible solutions to a problem when I see a problem exists.
I have heard various solutions on the CalPERS issue, but upon closer examination, I feel only two of these possible solutions could come close to being able to make up a deficit this large. One possible solution that has been discussed is a sales tax increase or expanding cannabis sales, which is a politically charged topic.
Roughly two or three years ago, I approached city staff and the mayor about this issue. While staff was doing their own research. I also put together a different model for cannabis sales.
At that time, I proposed doing a trial run of allowing cannabis sales within Escondido using four cannabis companies.
I was able to find four potential candidates that would each pay a flat fee of $500,000 for a one-year period of time.
After year one, it was estimated that these operations could have generated a net revenue for the city of approximately $1.3 million to $1.5 million and over time, possibly ramp up to $4 million-$6 million/year in revenue. At the time, no one wanted to consider this.
While I still believe cannabis could be a viable solution from a numbers perspective. The council considers cannabis sales a moot point in solving the deficit.
Which leads us to the next question, what other possible solutions exist? I have heard and looked at other possibilities from:
• annexing all available property parcels within the city limits but are currently outside the city property rolls (which could possibly bring in an additional $500,000/year, with a possible cost upwards of $3 million dollars to accomplish)
• issuance of various types of obligation bonds. This is a complicated process and only helps the issue but does not solve it.
In examining these options, one can see why the City Council is debating a revenue measure that would increase the sales tax anywhere from 7.75% to 8.25% to 8.75%.
What does a “yes” vote on a possible measure mean? It would mean Escondido would receive the additional increase of sales tax annually to be used to meet obligations, assist in operations of the city, and allow the city to make some improvements in municipal infrastructure projects.
Here’s how it would directly affect you; for every $100 you might spend within Escondido limits an additional $1 would be added that would go to the City. (This example is purely illustrative.)
What does a “no” vote on a possible measure mean? The City of Escondido is legally obligated to pay CalPERS pension obligations. If a possible sales tax measure does not pass, the City Council could be forced to make drastic cuts to police, fire, and other services to meet these obligations over the coming years.
For a possible sales tax measure to even be considered, I believe some critical components would need to be a part of the measure. The possible measure would need to:
• be endorsed and examined by the San Diego Taxpayer’s Association
• be endorsed by multiple bi-partisan groups and organizations
• have a sunset clause
• contain provisions as to how the funds are to be used
• I believe at minimum, 25% of all funds generated would need to be placed in the reserve account.
I hope this has shed some light on what our City Council is currently deliberating and the challenges we face as a city.
Douglas W. Shultz is the treasurer for the City of Escondido.