The economic decline facing many California Counties and Cities can seem daunting. County and City Officials are faced with decisions that can either uplift the County or City, or cause more damage; sometimes making a decision feels like you’re between a Rock and a Hard Place, and the rock is moving fast.
If you raise property taxes, some will sell or not renew the leases, and move to another County or City with lower property taxes increasing the flight of people and businesses out of your County or City. If you raise the sale tax people many will start shopping in a neighboring County or City with a lower sales tax, causing a decline in sales tax revenue and affecting the elderly and disabled living on fixed incomes and low-income families with limited transportation. If you raise permit fees, it will lead to a decline in home construction causing deeper issues with needed affordable housing and decrease the development of new businesses to the County or City.
Now, I’m not suggesting raising taxes and permitting fees is not a possibility, what I’m suggesting is they should not be your “go to.” Keep in mind, raising taxes and fee will simply accelerate the rock. So, what can you do slow the rock down and even possibly halt the rock altogether? I think looking over regulations is a stating point, a good second set is to look over the budget, and do a little analytical work to determine:
The General Fund Reserve Score: You calculate this score by dividing general fund unrestricted fund balance by total general fund expenditures less transfers to other funds. You are looking for a high score, above 1; the larger the general fund reserve ratio (say a ratio of 2.5), the better, because this indicates sufficient reserves. Low reserve ratios, such as 0 or 0.2, indicate a receive low score, and plans need to be made to increase the score.
Debt Ratio: This ratio is calculated by Total Liabilities/Total Assets. A good debt to revenue ratio for a city is between 0.3 to 0.6 [30% to 60%]; while a ratio of 0.4 or lower is considered the County or City is safe. Any ratio of .06 or higher can make it harder for a County or City to borrow, because it shows questionable debt management.
Debt to Net Position Ratio: The Net Position of a County or City is calculating the difference between total assets and total liabilities, it’s the net worth of the County or City and is a critical financial metric, Once you have the Net Position divide Total Liabilities / Net Position to get the ratio. The lower the Net Position [can be negative], and the Net Position ratio, a low [or negative Net Position, and the ratio, will help determine the need to additional revenue. The Net Position is governed by the Governmental Accounting Standards Board (GASB) and is designed to provide a clear understanding of the County’s of city’s financial condition. Assesses the extent to which net position can cover liabilities, providing insight into financial leverage and long-term solvency.
Net Position to Total Asset Ratio: This Ratio measures the proportion of total assets financed by net position, indicating financial stability and solvency. Net Position / Total Assets.
Liquidity Ratio: This Ratio measures the ability of the County or City to meet short-term obligations with the most liquid assets. The Liquidity Ratio can be determined with the following formula, Current Assets / Current Liabilities. A Liquidity Ratio under 1.0 indicates the County or City does not have enough liquid assets to pay current liabilities.
Tax Collection Rate: This rate measures the effectiveness of taxes collected. A higher rate indicates effective tax collection processes. The formula to determine the rate is Collected Taxes / Total Taxes Levied: Measures the efficiency of tax collection efforts.
Keep in mind, not all liabilities are inherently bad, and the key to understanding their impact lies in how they are managed and how they originated. Liabilities can be “good” if , for example, they are used to finance growth-generating investments, such as infrastructure or capital improvements that support economic development. However, liabilities incurred for short-sighted or poorly planned purposes may become “bad” liabilities, weighing down the financial health of an entity.
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