Last year, Larry Summers, the former Treasury secretary, said during a speech that “With the same values and preferences, and the same basic attitude about government activity versus private activity, you should expect government to be larger in the future than it has been in the past.” He explained the reasons:
- Society is aging, which calls for greater spending on retirees. The ratio of elderly Americans – those expected to be in the last 15 years of their lives – to all other Americans will rise about 50 percent from 2010 to 2030. (In California, those who fall in the 60 and older group will have an overall increase of 112 percent during the period from 1990 to 2020.)
- Inequality has soared, with living standards stagnating for the middle class and poor. Taxes push back against inequality. (Los Angeles County ranks seventh in income inequality out of the nation’s 150 largest metro regions.)
- Labor-intensive services, like education and medical care, have become more expensive, and they also tend to be the areas where the government spends money. (L.A. County spends close to $1 billion a year, alone, caring for and managing homeless people, with a majority of the money going to their health needs.)
- American military spending has not kept up recently with the spending by our main rivals, including China, Iran and Russia. (This trend is over. The $1.3 trillion omnibus bill signed by the President on Friday increased defense spending by $700 billion, the largest increase in 15 years. In CA, the U.S. Federal Government spends up to $50 billion a year in military related costs.)
Further proof is in the data. In 1929, federal spending as a percentage of gross domestic product (GDP) was 3 percent versus 22 percent in 2016. In L.A. County, the GDP is $700 billion, which represents almost 30 percent of California’s GDP. In the L.A. region, the public sector spend represents almost 13 percent of the region’s GDP and nearly 13 percent of the region’s overall workforce of 4.5 million. The two dominant spenders are L.A. County, whose annual budget is $30B and L.A. City, whose annual budget is $9.2B. The City of Long Beach, the next highest spender, ranks much lower at $2.6 billion.
In order to operate, L.A.’s governments need revenue. Since the great recession, a stronger economy has produced increased tax revenues, but a combination of decreased state and federal aid, and heightened obligations in areas such as pensions, healthcare, services, infrastructure and wages, have continued to burden local government budgets.
For the past few decades the City of L.A. has relied on the following revenues – property tax, utility users’ tax, license, permits, fees, and fines, sales tax and the business tax. The property tax remains the largest generator of revenue representing between 19 to 20 percent of the City’s annual budget revenue. Up until recently, the Utility Users Tax was the second largest generator of revenue and older City budget forecasts (I looked at 2004-05), believed the Utility Tax would remain number two for years to come.
But something else quietly happened. Today, the City of L.A. generates more revenue from licenses, permits, fees and fines than every other revenue category, except property taxes. Since the release of the City’s 2004-05 Budget, revenue from this category has more than doubled to more than $1 billion annually, from $439 million. This has far surpassed the slower growth of the Utility Tax, which has only increased by 12 percent.
Recent research shows that cash-strapped American cities are increasingly asking their residents to pay higher amounts for mundane services as they struggle to pay for mounting pension obligations, costly infrastructure improvements and replace revenue depleted by the last recession. Bills are rising for everything from parking tickets and 911 calls to sewer service and trash pickup. In 73 U.S. cities, fees and fines increased by a collective $182 million in 2017, according to financial reports analyzed by Merritt Research Services. That annual tally is up 11 percent since the last financial crisis in 2008.
Fees are expected to go even higher because of recent changes at the state and federal levels. New tax legislation passed last year by Congress, caps the amount of local property and income taxes Americans can deduct from their federal tax bills, making local tax increases more costly for residents and thus politically difficult for elected officials. Fortunately for L.A.’s elected officials, the recently passed sales and property tax increases to fund L.A. Metro and the City’s and County’s efforts around homelessness passed prior to the federal tax changes.
Most would agree that these revenue methods are needed to support government’s ability to provide vital city programs and services, such as law enforcement, road improvements, and other investments that improve the quality of life in the region, but at some point, without oversight, they begin to be seen more as revenue generators more than anything else, placing a more disproportionate financial burden on those residents in working class and underserved communities.
For example, recent research shows that cities and courts continue to extract millions in fines and fees from the poorest residents, by issuing thousands of citations each year. Within the past two years, the City of L.A. has been accused of managing a traffic ticket program that imposes very high costs on violators to plug the City’s financial budget holes and to unfairly apportion the costs of public services.
The trend by state and local governments to require more kinds of licenses to operate a business within their borders is also hampering workforce opportunities. The number of jobs–from cosmetology to interior design–requiring government-issued licenses is on the increase. About 29 percent now require one, up from less than 5 percent in the 1950s, according to economists Morris Kleiner and Alan Krueger. In that time, the share of licensed workers in the U.S. workplace has jumped fivefold. And the requirements on many occupations–including training and education, tests, fees and even character assessments–are also on the rise, say critics of the regulations. The implied economic and job-growth impediments have surely contributed to economic stagnation.
One last example is the City of L.A.’s newly imposed requirement that developers pay a fee into a trust fund managed by the city to provide new affordable housing and to help maintain some existing housing. The development community in L.A. sure seems like the go to piggybank for everything local government related. At some point someone has to pay the increased costs for the product – the housing unit – and the track record of government’s involvement in the housing market is not great. The City and County should be more focused on other ways to generate revenue from the development of their own underutilized real estate assets or through new incentives to nudge absentee landlords of underdeveloped and blighted privately owned properties to develop new housing units or mixed-use developments.
What is around the corner is more interesting. The real opportunity for local government to shore up its revenue opportunities will come from Smart City Technology initiatives. Data from Navigant Research estimates that global spending on smart cities technologies will surpass $27.5 billion by 2023. But for the City and County of L.A. to fully realize the potential of these new technologies, city and county leaders must be able to adopt them without increasing management burdens or going over budget.
Progress is being made in L.A. Data being generated in L.A. could ultimately be used to help lower the number of tickets written, reduce overhead by making parking enforcement workers more efficient, and ultimately help to keep busy streets clear of inappropriately parked vehicles. More than one-quarter of all tickets are written for cars parked at the wrong time in street-sweeping areas. The city’s IT department is working with the sanitation bureau to develop a GPS-based solution that would put location sensors on street sweepers and tie them to the existing 311 app. Citizens would be able to opt in to be notified when the sweepers have come and gone, and could move their cars accordingly.
But there is so much more to be done.