The City of Chino is teetering over a financial abyss so deep and dark, city officials say, that if any of them loses his or her footing, the corpse would never be recovered.
Despite the consideration that Chino has “historically maintained a healthy general fund reserve with the goal of maintaining adequate reserve levels to mitigate future risks,” according to City Manager Linda Reich, “over the last several years spending on the delivery of services and inflation has created annual deficits offset only by appropriations from those reserves.” Thus, according to Reich, “[I]t is anticipated that expenditures will outpace revenues yearly for the next 10-year period and beyond.”
As a consequence, according to Reich, “projected severe deficits in future city budgets” have thrown the city into financial distress. She said, “Revenue increases are being absorbed by the escalating operational costs of services, materials, and labor, and increased inflation, which impact the city’s ability to provide essential services to the community. Operational costs will ‘crowd out’ capital investments and other strategic opportunities.”
Accordingly, Reich has placed before the Chino City Council an item on the agenda for its November 21 meeting calling for the city to officially declare “a fiscal state of emergency.”
A look at the stark numbers shows the city is tumbling headlong toward financial ruin, according to Reich.
“On June 20, 2023, the Chino City Council adopted a two-year budget, covering fiscal years 2023-2024 and 2024-2025, that anticipates the City of Chino will be operating in a deficit during this period,” she said. “The city is projecting a structural deficit averaging $15 million annually starting in fiscal year 2024-2025. This fiscal year, the city‘s shortfall is projected to be $5.7 million, with reserves covering the difference.”
According to Reich, the city has functioned and can continue to function for the next five years or so with less money coming in than is going out through the expenditure of money it salted away in the past when the revenue-to-expenditure ratio was reversed.
At present, the city has over $70 million in sequestered savings. But given Chino’s current spending trajectory balanced against anticipated revenues, those accounts will be dry in roughly another five years.
“While the operating deficits will initially be covered by the city’s existing general fund reserves, long-term operating deficits are projected to exhaust general fund reserves by fiscal year 2028-2029,” Reich projected. “The persistent structural budget imbalance is projected to deplete the $73 million currently in the city’s reserves, making the city increasingly vulnerable to emergencies and other unanticipated factors, and threatening its ability to provide essential services. The city will face significant challenges that may force crucial city services and programs to be reduced or eliminated in the coming years unless additional sources of revenue for the general fund are secured. Protecting Chino’s long-term financial stability is key to maintaining essential city services for residents and businesses, including police, 911 emergency medical response, street repair, clean local drinking water, clean and safe public areas, while addressing homelessness, and maintaining senior, veteran, and youth programming.”
Reich’s pessimistic assessment accompanied an appeal or request that the city council also consider at next week’s meeting placing on next year’s ballot an initiative seeking city voter approval of a 1 percent sales tax increase applicable within Chino City Limits. If the council consents to that request, the measure could go before the voters as early as the March 5, 2024 California Primary. Reich figures that ploy would cure Chino of its financial infirmity.
In surveying “options to achieve a structurally balanced city budget,” Reich gravitated toward taxing the city’s residents and anyone passing through the city who frequent its commercial venues.
“Considering the gravity and severity of the anticipated fiscal crisis, staff was directed to evaluate potential expenditure reductions as well as existing and potential revenue sources to ensure a city budget that is both operationally and structurally balanced,” Reich stated. “Should the city remain in the status quo, it will become more difficult to protect the city’s valued quality-of-life programs and maintain vital services. To address higher costs, the city council will be required to prioritize the mandatory services needed to operate the city and may have to drastically reduce, eliminate, or choose among essential functions and services.”
Her evaluation of “revenue options to protect Chino’s future and maintain the current standard of service,” Reich said, led her and city staff to “explore… different approaches to generate revenue, with the goal of securing a stable, reliable source of general-purpose funding. The revenue sources considered include user fees, grants, fines and penalties, investment earnings and taxes.”
As to user fees, Reich said, “A city-wide cost-of-service study was recently conducted, and fees were adjusted. However, user fees are designed to cover the cost of providing a particular service and do not provide for general operating revenues.” Referencing grants, Reich offered, “The city identifies and pursues a wide variety of grants to fund projects and services. Most grants, however, provide only one-time funds for specific purposes.” With regard to fines and penalties, according to the city manager, “The levying and collection of fines and penalties is labor intensive and costly, reducing the benefits of potential increases for purposes of increasing revenues.” In assessing investment earnings, Reich said, “The city invests to maximize interest earnings; however, investment earnings are subject to market environments and cannot be relied upon to cover operations.”
This left taxes as the most viable way for the city to come to terms with its financial challenges, Reich said. Of the taxing options the city possesses, Reich said, “Property and parcel taxes are subject to 2/3 voter approval. A transient occupancy tax, also known as hotel tax, would not provide a significant revenue source in Chino.”
This led Reich to the easily-anticipated conclusion that city officials stood the best chance of being able to impose a sales tax increase on the populace and thereby meet its financial goals and then some.
Reich said her “recommendation” was to “increase revenues through sales tax. Given the limited options for increasing revenues to the levels needed to keep up with inflation and the exponentially increasing costs of materials, labor, utilities, and other operational factors, a local sales tax increase provides the best available option to ensure dedicated annual revenue to address the city’s fiscal emergency and ensure that Chino can continue to provide critical essential services. Additionally, a local sales tax measure guarantees that local funds remain in Chino.”
According to Reich, a 1% increase in the city’s sales tax would furnish the city with an estimated $28 million in additional revenue annually..
An advantage of imposing a sales tax, also referred to as a sales and transactions use tax, Reich said, is that the State of California would do much of the work for the city in collecting it.
“The California Department of Tax and Fee Administration collects the sales and use tax from local retailers selling tangible personal property or from the users of tangible personal property purchased from retailers outside of the State of California. California cities currently receive 1% of the total sales tax rate within its jurisdiction, which is known as the Bradley-Burns Uniform Local Sales & Use Tax. Chino’s sales tax rate is currently 7.75%, of which the city receives 1%. The State of California receives 6%, and San Bernardino County receives the remaining 0.75%. The current 1% local Bradly-Burns rate is a general tax and is allocated to all cities in California. It is unrestricted and received into the general fund for general city services.
Chino should get on the increasing local sales tax bandwagon, Reich reasoned, since doing so is permissible under state law and some other local cities have been able to convince their residents to tolerate such an increase in their jurisdictions. She pointed out that at present Ontario has an 8.75% sales tax, Corona has an 8.75% sales tax, Redlands has an 8.75% sales tax, San Bernardino has an 8.75% sales tax, Montclair has a 9.0% sales tax, Claremont has a 9.5% sales tax, Riverside has an 8.75% sales tax, Murrieta has an 8.75% sales tax and Pomona has a 10.25% sales tax.
“The proposed 1% measure will keep Chino competitive with other cities in the region, many of which already have local sales tax rates equal to or higher than the 8.75% being proposed for Chino,” Reich said. “The additional revenue generated by these cities has allowed them to make important investments in their communities. Ontario, for example, is receiving approximately $100 million more a year as a result of its local sales tax measure. In 2022 alone, 70 cities in California pursued sales tax increases to generate revenues for their communities, with many others expected to consider tax increases in the future.”
Chino might as well get in on the taxing bonanza now before some other entity such as a hospital district or school district or college district or water district does and deprives the city of its ability to collect further taxes, Reich asserted.
“State law authorizes city and county residents to adopt local transactions and use taxes in addition to the basic Bradley Burns tax,” Reich said. “The local portion of the sales tax that a county and a city within that county can levy together is capped at 2%. The San Bernardino County Transportation Authority currently collects 0.75% per dollar of sales, of which 0.5% has been approved by the voters of San Bernardino, leaving 1.5% available for other local sales taxes. “If the county or other local districts or agencies pass additional local sales tax measures, those would also apply toward the cap. Once the 2% cap is met in Chino, Chino voters would no longer be able to implement a local sales tax measure to support local city services. The City of Chino would, instead, become part of the county funding pool and receive only a portion of those taxes to support its programs.”
There is, however, the specter of Reich counting her chickens before they are hatched. The Chino City Council cannot simply vote to pass the tax. Rather, what it can do is put the measure on the ballot to see if the city’s voters are willing to impose the tax on themselves. Under the California Constitution, any new tax cannot be created without a majority of those who are to bear it approving it in a vote.
Reich made a pitch for the city’s residents to do just that.
“If Chino voters approve a local 1% sales tax measure, which is still under the 2% cap, all the tax dollars from that measure will be allocated locally to Chino to support its services,” she said.
While Reich is the prime mover toward the increase in sales tax and, at present, its most enthusiastic promoter and supporter, there are those who see some degree of hypocrisy in what she is doing. Her acknowledgement that the city is on the treadmill toward bankruptcy if something is not done to either decrease the city’s expenditures or increase its revenues is well taken, her critics note. It is just that the excessive spending the city is engaged in, they point out, is a function of overly generous salaries and benefits paid to city employees, of whom Reich is the most handsomely remunerated.
At present, Reich receives $337,890.61 in total annual compensation for serving as city manager, consisting of $233,452.59 in salary, another $38,230 in perquisites and pay add-ons, $53,950 in benefits and a $12,258.02 contribution toward her pension fund. Reich’s $337,890.61 contrasts with the $78,672 in median household income in Chino.
Since Reich earns well over more than four times what an average husband and wife in Chino bring home, she does not mind paying herself an added one percent tax on the items she buys, particularly since a portion of that money will go toward sustaining her pay, those skeptical about the tax say.