In the wake of strong regulations compelling cities to get voter approval for new fees and levies, Californian municipalities have turned to declaring fiscal emergencies to pass the taxes they want. Californian municipalities declare a fiscal emergency even when they are not insolvent. These “emergencies” allow them to pass the new taxes. With limited consequences beyond their resident’s frustration, Bloomberg reports that California investors have grown accustomed to their state’s behavior to the extent that many will disregard fiscal emergencies.
For example, the city of Santa Cruz has declared a fiscal emergency three times in 13 years while its bond rating improved during that timeframe. Santa Cruz followed their most recent fiscal emergency in February 2018 with a proposal to increase sales tax by 0.25 percent. Similarly, Pasadena declared a fiscal emergency while holding a triple A rating, soon after which it introduced a cannabis tax. In 2012, The San Diego Union-Tribune reported that “[El Monte] city leaders are looking for a sugar fix. The [El Monte] City Council voted unanimously Tuesday to declare a fiscal emergency, so it can place a proposed soda tax on the Nov. 6 special election ballot.” When asked of the matter, investment management fund Lord Abbett’s Director of Municipal Research, Eric Friedland, stated “they’re nowhere close to being insolvent or threatening to file for bankruptcy. This is more of brinkmanship.” Lord Abbett manages about $20 billion in municipal bonds, including a mutual fund devoted to California’s debt.
As mentioned in the Summer 2016 issue of Consumers’ Research Bulletin, an increasing number of cities have sought to introducesoda taxes. Philadelphia, for example, passed a soda tax but did not first declare a financial emergency to do so.
According to Bloomberg, California municipal governments must contend with strong anti-tax regulations, dating from the introduction of Proposition 13 in 1978. Proposition 13 significantly limited annual property tax increases. 1996’s Proposition 218 additionally ensured that voters would have to consent to additional taxes. In order to propose a tax amendment, Californian officials must wait until a favorable election. Fees and other levies were subsequently made subject to Proposition 218. There has been backlash against Proposition 13 and related initiatives. KBPS, a local San Diego radio station, reported:
“As California struggles to pinch together the funds to cover one huge budget shortfall after another, as state services are strangled to the point that entire programs are on the chopping block and state workers are furloughed, some say now may finally be the time to re-evaluate Proposition 13…Its impact on California has been dramatic and lasting, and some claim Prop 13 ushered in a nationwide backlash against government spending.”