Thursday, December 27, 2007

Encinitas City Budget and Home Purchase Prices

A big chunk of the city of Encinitas revenues are based on home purchase prices. After purchase, property taxes rise 2% a year.

My economist friends think our city is nutz for believing there will be no price depreciation in Encinitas. Check out this graph:


Source: Christian Science Monitor

I have not once heard the NAR economists back up their analysis with data and findings. That is why you get things like this second figure:


Source: Voice of San Diego

Is the city of Encinitas in a tiny bubble sheltered from the big popping bubble? Will the city of Encinitas collect it's projected future revenue in order to build it's high end parks, fire stations and other infrastructure?

38 comments:

  1. Less than two months ago Jennifer Smith, Financial Director, gave a report that everything was fine and that the city's revenue estimates were very conservative. I didn't believe it then, and I don't believe it now.

    Smith gave her report after Governor Schwarzenegger was already asking for an across-the-board 10% budget cut in all state departments. Was she only saying what she had been told to say?

    Let's remember that this is the same city that had to borrow $19 million to pay for the library with Lease Revenue Bonds. The library will not produce a significant revenue stream, so the money to repay the bonds will have to come out of the General Fund.

    Mercy me!

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  2. Anon 2:56

    Wtih your logic, the City would not build parks or libraries since they don't have a revenue stream? That seems foolish to make all projects pass that test.

    The Library will cost more than it should, but it will be a world class facility, with a world class view. I can't wait until it opens.

    Reminder: The City does not depend exclusively on property taxes for revenue.

    While I am not a fan of the very generous pensions for City workers, in general, things are pretty good in Encinitas. Obviously, we need to be careful, just like all of us need to be careful with our personal finances. My guess is that the City is doing a better job of financial forecasting and management than all of us do with our personal lives.

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  3. anon 6:00,

    First,
    what do you base your guess on? Hope?

    Second,
    you badly misunderstand anon 2:56. The city's bonds for the library were approved as LEASE REVENUE BONDS. It is the council that is saying there is going to be a revenue stream.

    Unless overdue fines are going to be really big, the city is playing a charade. They are using a ruse to go millions into debt without having to tell the public or get their permission. The citizens of the state of california made it a requirement that they get to decide on going into debt. The debt should have gone to a vote! Jerome, Danny, Bond, and Houlihan decided they knew better and decided to illegitimately abuse the lease revenue bonding option. They should have all been recalled over this scam. Lease revenue bonds are more expensive to boot!

    Third, it is your logic that needs some clarification.
    You say we will have a world class library and that makes it fine to go $19 million into debt? Would it still be fine if it were $29 million? $39? How about a billion dollars? How much is a library worth? The city is not swimming in cash otherwise Leucadia would have been fixed long ago. Right?

    You sound like Dan Dalager, with his I don't care how much it cost, I like it, attitude!

    The city could have had a wonderful and fully useful library for less than half the cost. It wouldn't have been a trophy project.

    Is that the problem?

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  4. The $20 million library will be a drain on the city's budget. The upkeep and associated cost was once projected at over $1,000,000 a year that will be paid for from the general fund.

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  5. Anon 7:38

    Is it true that the City cannot go into debt without a vote of the people?

    Please elaborate/clarify this statement.

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  6. There are two ways to finance a project when money is borrowed: General Obligation Bonds and Lease Revenue Bonds. The former requires a 2/3 vote of registered voters. The latter only a majority vote of the city council (three votes). The city chose to do Lease Revenue Bonds on both the Hall property and the library.

    Of course, General Obligation Bonds allow the city to raise taxes. The amount appears on your property tax bill. With Lease Revenue Bonds the project financed is supposed to generate a revenue stream to repay the bonds. Could you borrow money to buy a house without having a revenue stream to make the mortgage payments?

    The Hall property and the library plus interest total around $85 million over 30 years. The city will need steady and increasing income to meet its obligations. When income declines there is a big problem. I have already heard that the raise for city employees has been agreed to and only needs to be announced to the public. The city will need even more money.

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  7. Anon 6:48

    Ok, thanks for the clarification between the two types of bonds. You do have a point.

    However, again, using your logic, yes, I can imagine a bank loaning me money to buy something even if that something did not generate a revenue stream. My house does not generate a revenue stream, but the bank loaned me money, because I have other sources of income.

    Adding up all interest and principal payments over the life of the loan is over dramatic in my opinion - do you do that for your mortgage? It always looks horrible when you do that.

    There is an article in the UT today about the Library. It is going to be spectacular.

    There is an organization called Friends of the Library that will help pay for books, etc.

    So, perhaps the Council "bent" the rules on which type of bonds they used (but I am no expert on that issue), but at the end of the day, I am glad that we have the Hall Property, and I am glad that we will have a world class library.

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  8. The library doesn't meet the minimum requirements for the population of Encinitas. It isn't a world class library. It is an over hyped library project that will quickly begin rusting and falling apart.

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  9. JP or whoever's in charge:

    Can you tell me why the City is not replacing the fencing at the new Hermes Ave Roundabout?

    It is disgusting to look at.

    Do you know what is going on with that? Is it in the plan to put new walls up from Olivenhain to 101 but leave out the HERMES Ave Roundabout area?

    Thanks!!!!!!!!!!

    Bobbi

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  10. "Bent the rules" would be an understatement. I believe it is criminal at worst and irresponsible at best. Let's not forget the vehicle that made all this possible, the SDWD. If the council were not also the board for the SDWD, the Lease Revenue Bonds would not have happened, but because they could shove out the SDWD from their previous site on the hill, and strap them with their current obligations, they could make it happen.

    I have always hoped we could someday separate these two before the council tries this again. If there were a separate SDWD board, they would never let this happen, it's fiscally irresponsible. Would you force your neighbor to pay your mortgage for you?

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  11. Why in the world would the city need to spend so much money on a library when almost anything you need can be found on the internet?

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  12. Over 60% of City Revenue comes from Property Tax. The good news is the people that bought from 2002 to 2007 will be paying the majority of our bills.

    Us old school get our nice little $1,000 per year tax bill while our young family neighbors pay $12,000.00 per year. Prop 13 is sure great for us old timers, but not so great for the young families raising kids.

    Oh well, its not like we didn't leave every form our government in huge debt for our future generations.

    There was the greatest generation that fought the big one WW2.

    Then there was the worse generation, us baby boomers. Spent all the money of the country on entitlement programs for themselves and sold out the countries future. We sure put the screws to our kids and grandkids. Oh well, thats for them to figure out. I know one thing for certain they better learn Chinese quickly if they want to do well after 2050.

    I just hope they don't get smart when they are running the country and cut all the special perks, free healthcare and free everything for us.

    Boy we really put the screws to them. Haaa Haa Haaaaa. Keep on borrowing. I only have a few years left until I'm pushing daisies.

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  13. If it wasn't for prop 13 their property taxes would be double at least.

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  14. I was around when Prop 13 was passed. It was intended (supossedly) for people to be able to stay in their homes, as property taxes were forcing older people out of their homes. I thought this was great. Unfortunately, there are many loopholes in Prop 13. A person can own many homes and they even if they rent them out they only pay the taxes that were in place at the time they purchased the home. And then there are the apartment owners etc. They really get the big tax break. They again only pay what they bought the apartment comlex for. I belive, if I am not wrong, that Property taxes can be raised by 2% per year under the Howard Jarvis Act (Prop 13). I wish that the law would tie up the loopholes. A person that owns and lives in their home should not be forced out because they cannot pay property taxes. Many of us in Encinitas would fall into that catergory, although I am not sure that the Council realizes this. Then people who had rentals or apartments, etc. should be able to pay what the going rate on property is. However, I doubt if this will even happen, as Prop 13 is one of the most sacred cows in California.

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  15. COMMENT: However, again, using your logic, yes, I can imagine a bank loaning me money to buy something even if that something did not generate a revenue stream.

    My house does not generate a revenue stream, but the bank loaned me money, because I have other sources of income.

    RESPONSE: It is not like a home mortgage. It is more like a small business loan. The bonds’ name say it all, lease REVENUE bonds. The bank would go after you for fraud if you tried pull something like this on them. They wouldn’t give you a business loan if your business plan was to only generate revenue through late fees.


    COMMENT: Adding up all interest and principal payments over the life of the loan is over dramatic in my opinion - do you do that for your mortgage? It always looks horrible when you do that.

    RESPONSE: I sure hope you are not on the council or work for the city. It looks horrible because it is horrible. Don't bury your head in the sand because you don't like what you created. If you are on the council I dare you say that in public, because it will get you recalled.


    COMMENT: There is an article in the UT today about the Library. It is going to be spectacular.

    RESPONSE: It BETTER be spectacular for the huge price tag on that thing.


    COMMENT: There is an organization called Friends of the Library that will help pay for books, etc.

    RESPONSE: Does that change the fact that the city went massively into debt for a trophy project?


    COMMENT: So, perhaps the Council "bent" the rules on which type of bonds they used (but I am no expert on that issue),

    RESPONSE: Strike the word perhaps. What they did was cheat the people out of a say on the library. I would have voted for a more humble and clean design instead of the ostentatious and overly expensive library. The council knew most of Encinitas would vote the same way and that is why they didn't issue general obligation bonds.

    COMMENT: but at the end of the day, I am glad that we have the Hall Property, and I am glad that we will have a world class library.

    RESPONSE: I wish we had a world class everything, don’t you. Unfortunately, we live on planet earth. We can't have it all because we are not that rich, so there are trade offs. What is a world class library worth to you? How glad are you? Would you rather have a "world class" library or Leucadia 101 streetscape? A library or a finished Hall Property Park? A library or raises for fire fighters? A library or more roundabouts? How much do you like this library, put in terms of what you are willing to trade for it. If don't see how massive debt causes tradeoffs then you really are very short sighted with tunnel vision.

    FINANCE LESSON #1. MONEY LOANED TO YOU IS NOT FREE MONEY, IN FACT, IT COMES AT A COST CALLED INTEREST.

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  16. I strongly disagree about raising property taxes on rentals. I own several rental properties and if I had to pay higher property taxes then I would be forced to charge higher rents. The majority of my tenants are college kids and single mothers who struggle to make it every month.

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  17. There was another reason for the $20 million debt. The city council had to cover their A's on the pension shortfall. They were able to pay over 3 million in cash to hide part of the debt on the city pensions. That wouldn't have happened without the borrowing.

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  18. That’s right over 60% of the City revenue comes from our property tax. And 96% of expenditures go to Staff salaries and overhead. Only 3-4% goes to building improvements in Encinitas.

    It’s very simple. If you want to really look at bettering Encinitas, look to cutting staff and spend more on the Capital Improvement Program Budget.

    1st Deadwood position- Art Coordinator. $100k + per year in salary and perks. In ten years that’s over $1,000,000. The list is long and it’s time to start.

    Council should pass an ordinance that states that they maintain a 10% reserve and a minimum 20% of the budget goes towards capital improvement projects. If they did that, Encinitas would be the most successful City in CA.

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  19. Cut out the "new" environmental consultant at $164,000 a year.

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  20. I wrote an essay called "The Financial Flimflam of Lease Revenue Bonds." J.P. posted it here on May 18, 2006. You can read it in the archives of this blog.

    The matter of a "revenue stream" is not trivial. The law requires that a project financed with lease revenue bonds have one. A city can build a project and simply finance it with money from the general fund. The general fund becomes the revenue stream. Likewise a bank doesn't require that a house generate a revenue stream. The revenue stream is the borrower's income and savings. The city builds roundabouts financed from the general fund. The roundabouts are not required to generate a revenue stream because there is no bonding.

    The total cost of the bonds including interest is not to be casually dismissed. The money is not borrowed for free. Our city makes repayments each year that include the interest cost. Likewise a homeowner repays to the bank the amount of the mortgage and the interest. The bank is not loaning the money for free.

    Our city likes to talk about the cost of project only in terms of what it cost to build it. This is fine if it is financed with the general fund. It is a deceptive practice if it is financed with borrowed money, and especially deceptive if financed with lease revenue bonds. Please read my essay to try to understand this better.

    The problems come when the city's income is declining and reserve funds are insufficient, which may be what is happening now. It is comparable to a homeowner who suffers a salary decrease or loses his job and doesn't have enough savings to continue to meet his mortgage payments. It's not a situation that I would personally want to be in.

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  21. Dear Landlord:
    Perhaps you could consider selling your rentals at what you originally paid for them to your tenants. That wowld solve your problem of having ot raise rents. It's hard to feel sorry for you.

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  22. I am not a financial wizard, but when I purchased my home in Cardiff 25 years ago, I did know how much the entire loan would cost. Not just the purchase price, but the WHOLE amount, including interest.Banks are forced to disclose this to person taking out the loan. It is true I could not calculate the taxes, but the interest was a lot more than the loan. In fact most of the mortgage at the beginning of a loan is interest, at least mine was. Jerry is absolutely right in his assessment.It is worth reading again.

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  23. Dr. Lorri you can calculate the taxes. They go up a steady 2% per year.

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  24. Re: 8:38 Libraries are a stepping stone to the internet for many. 6 years ago I kept telling an industrious friend of mine to sell his Aloha shirts on the internet. His excuse for not doing so: "Computers are too expensive". I said "Go to the Encinitas library and start selling on ebay". He did. And for several months his business grew and he finally broke down and bought his own pc. Today he's one of the largest shirt sellers on ebay. Just one story. But the overall benefits of libraries are countless I'm sure. I'm not defending borrowing that enormous amount of money, but I was on one of the hard hat tours and we are getting a gem. (If only the knowledge gained at our new library can put us in black again some day!)

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  25. I plan to get my money's worth out of this library because it is going to cost us a lot in the long run.

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  26. Once again. Staff consumes 96% of the budget. And it’s a 50 million plus budget. You want to see improvement and financial sustainability look to cutting staff. We need improvements in town; Not more staff milking the public tit.

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  27. (If only the knowledge gained at our new library can put us in black again some day!)

    Would have been easier if the library was built with function as its first design concern, instead of being flashy.

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  28. worth a read.

    http://www.inthesetimes.com/article/bursting_bubbles

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  29. Is it true that staff takes up 96% of the budget of the City? Who can verify that figure?

    If it is true, that is high.

    On the other hand, can anyone imagine just being governed by the County? We are getting something for our taxes, rather than having almost zero oversight.

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  30. Hey Beavis!!! Anon 6:56 said "tit"!! Heehhhhh, heehhhhhhh, heeehhhhhhh.

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  31. OK butthead. But the fact remains Staff spends 96% of our tax payer money. And as Forrest Gump says- That’s not right.

    Its time to start firing staff and building long awaited projects.

    Fire 25 staff and solve the Leucadia drainage problem.

    there is no reason why the City of Encinitas should be the biggest employer within Encinitas.

    Additionally most of the employees are not Encinitas residents.

    I say fire at will and lets improve this town.

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  32. Fire city staff?? Hahahahahahahaaha.

    96% of the budget goes to paying city employees??? Hahahahahahahahahah.

    Improving Leucadia drainage?? Hehehehehehehehehehehehehehehe!!!

    Giant trophy projects that suck $$$$ from the taxpayers?? Ooooohh,oooohhhh,hehehehehe,hahahaha!!!

    A city council that is more clueless than ever before!!??? HOHOHOHOHOHOHOHO!!!!

    Happy New Year Everyone!!! That giant sucking sound you here is the city wasting,...err cautiously spending your tax dollars!! HAHAHAHa
    HAHAHAHAHAHAHAHAHAHAHAHAHa
    Heheheheheheheheheh
    HOHHOHOHOHOHOHOHOHOHOHOHOHO

    JUST DON'T HURT MY PENSION!!!!
    Ex-City Manager

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  33. concerned taxpayerDecember 29, 2007 11:45 AM

    I agree our library is overpriced. I also agree that there has been a big "flimflam" that went down with the lease revenue bonds for both the Hall property and the library. Neither have a revenue stream.

    Using the SDWD for a lease revenue stream is a direct conflict of interest, in my opinion. This was to be the lease revenue "stream" for the Hall Property park. Council and the Board of Directors of SDWD should not be one and the same, separate in name only. We have more than one water district in this city. No one has been watching out for the SDWD ratepayers.

    I'm glad the City bought the park. I think the citizens would have agreed to do so through General Obligation bonds. We would have agreed to finance the library, also, but with more restraint and oversight. In fact, I would have voted to have more satellite branches, instead, perhaps adding on one room to the existing library for more computer access.

    Pacific View School would be far better as a satellite library. As a one story structure, the "earthquake retrofitting" could have been minimal. It appears to me, and to many, that it would have been far less expensive, and less destructive to our small town atmosphere, here, for the City to purchase the Pacific View property from the Encinitas Union School District, than to allow the overblown development that is being planned there, now, which will add to traffic and parking congestion downtown, increasing the density, changing the zoning.

    If we could have kept the SDWD where it was, we would not have had the fiasco of the Mossy Public Works Yard that was very profitable for Mossy, and a big loss for the city, including the citizens' trust in our city officer's good judgment and good business dealings.

    But that was then. What are we dealing with now? I so hope we can get new faces on City Council next year. Jerome Stocks & crew, with the exception of Teresa Barth, have just gone along with big spending for staff, including big, big perks. Maggie, please wake up and pull in the reins.

    Yes, Council, please start by eliminating the Art Director's job and the 101 Czar. That position can be for one year, only.

    Decrease Phil Cotton's salary, or get a new city manager. And if we finally get an elected attorney, dedicated to our city's, our citizens' business and legal challenges, only, then perhaps some of our ongoing legal expenses could be cut back, as well.

    Also, I am grateful that there are a few oldtime landlords in this town that can afford to charge reasonable rents. That is about the only affordable housing that exists, that and the homes that people purchased before prices started skyrocketting in the late 90's. I'm glad for Prop 13 and more recently, Prop 59, which our City Attorney ignores.

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  34. Barth LOVES the Art Director and voted along with Houlihan to spend $40,000 tax dollars on friggin GATES for the new library "monument" which will have a plaque including their names on it!

    We may not like him but Jerome Stocks was the only one with the brass to say "hell no" to $40,000 for two stupid gates.
    I will vote for Jerome Stocks! He is truly looking out for my tax dollars.

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  35. Oh, pleeze. Jerome Stocks is the developer's faithful friend.

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  36. Where was Jerome when all the unnecessary bells and whistles were being added to the overblown library? The only one to grumble about that was Bond, but he still voted for it. Did Jerome approve the art director and blue ribbon environmental director staff position? I think he did.

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  37. Yes he did, along with Barth and Houlihan!

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  38. Barth approved the environmental director but she had nothing to do with the art director or the library design.

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