Case Study: The Pacific Grove Library Tax

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1 Case Study: The Pacific Grove Library Tax By Douglas A. Brook, Ph.D. Visiting Professor of the Practice Terry L. Sanford School of Public Policy Duke University

2 Case Study: The Pacific Grove Library Tax Abstract What happens when a budget-stressed municipality reduces support to a popular public service and an energized constituency of citizens proposes to tax themselves and their neighbors to restore service levels? This is a short and deceptively simple-looking case about a proposed tax increase to support the city s public library. Underlying it, however, is a complex set of policy issues in public budgeting, taxation, economics, and citizen engagement. How should decisions be made about what city services to fund and with how much money? What is the proper role of citizen engagement in budgetary matters? What are the potential benefits and consequences of a la carte funding of public services? This case was written primarily for use in a public budgeting course but can easily be used in political science, public administration and economics courses.

Case Study: The Pacific Grove Library Tax The City of Pacific Grove, California (PG) is a residential and tourist community located on the tip of the Monterey Peninsula.

3 Case Study: The Pacific Grove Library Tax The City of Pacific Grove, California (PG) is a residential and tourist community located on the tip of the Monterey Peninsula. It has a population of approximately 15,000 and a general fund budget of approximately $17 million. Beginning with its budget, PG embarked on a cost cutting and revenue raising program to address serious temporal and structural issues in the city s finances. The FY budget proposed spending reductions totaling $391,000 including eliminating the fire division chief position and de-funding two authorized police officer positions, one (of two) full-time museum staff and the office assistant position in the recreation department. 1 In June, 2008, Pacific Grove voters approved a new local sales tax after previously rejecting a package on increased business, property and sales taxes. The sales tax measure was expected to generate an additional $850,000 in FY and at least $1.1 million annually. The city s next budget, for FY included general fund cost reductions totaling $2.2 million and elimination of 30 full time equivalent (FTE) positions. The cuts were applied to all major municipal functions. For example, the Fire Department will have 20% fewer firefighters to respond to major emergencies. The Police Department will no longer have resources for crime prevention programs in schools or dedicated traffic enforcement. Maintenance of streets, parks, and public buildings will be further curtailed, leaving enough resources only for infrastructure safety repairs, not aesthetic improvements or maintenance. 2 Included in this cost reduction package was a 50% cut to general fund support of the library and elimination of 6.75 FTE library positions. 3 1 Pacific Grove budgets can be accessed at 2 City of Pacific Grove, FY 2008/9 Budget, p.5 3 A summary chart of the general fund budgets from actual 2007/8 to projected 2013/14 can be found at

4 The Library Pacific Grove operates an historic Carnegie library. It was established in 1886 and boasts a collection of over 90,000 volumes, 23,000 books, and about 5500 reference titles. Prior to budget reductions the library was open seven days each week for a total of fifty-four hours. In 2007, the library averaged 488 visitors daily, items checked out totaled 256,561 and there were a total of 8,784 library internet users. Library Budget Funding sources for the library include the city s general fund (61%), bequests (15%), program revenues (7%), book fund (5%) and other (5%). General fund support of the library is shown below. FY 05/06 FY 06/07 FY 07/08 FY 08/09 actual actual budget budget $852,831 $806,245 $914,350 $452,560 The deep reduction in library general fund support resulted in a corresponding reduction in library services. According to the city s budget proposal the Library will remain open for 30 hours per week, but on a barebones basis with very limited services. For example, the reduced budget will enable basic functions to continue, including circulation, materials management, and administration. To the extent possible, the program emphasis will be on programs for children. Reference services, periodicals management, and other library programs would be scaled back. This model would rely on a small number of part-time staff and a strong cadre of volunteers to perform shelving and book covering duties. The strategy reduces funding for contracts, materials, and supplies to a minimal level [ ]. 4 Measure J Library Tax Round One Supporters of the library responded to the cutbacks in library services by proposing a special tax to support the library. The city is authorized by state law to impose qualified special taxes on property (called parcel taxes) upon approval by two-thirds of the voters. The tax must apply to all property owners and is not an ad valorem tax. Funds collected must be deposited in a special limited use fund. The city council approved putting Measure J on the ballot for November 3, Measure J would impose a $96 tax on each residential and commercial parcel in Pacific Grove and $75 for each unit of a multi-family residential building. There are approximately 6,000 taxable parcels in the city and it was estimated the new tax would generated about $630,000 in new taxes every year for the library until the tax expires ten years later. The campaign for and against Measure J was vigorous. Supporters argued that the library was a valuable community asset: A great library is a city s treasure, provides education and services to all [ ]. Opponents argued that the library funding issue was part of a larger fiscal crisis for the city: When profligate government spending forces a realistic possibility of bankruptcy, 4 City of Pacific Grove, FY 2008/9 Budget, p. 90.

5 citizens have to settle for essential government services. A library is not one of them. Supporters argued that the tax impact was minimal compared to the benefits: Is our library worth $1.85 a week [ ] Communities with strong libraries benefit from better educated citizens, less crime and higher property values. Opponents countered with: Do you value the library at $96 per year? If you do, shouldn t you pay a fee rather than voting for your fellow citizens to subsidize you? Supporters claimed that the additional tax revenues would ensure a library that s open at least five days a week and has the money to pay professional librarians. 5 Opponents pointed out that there was no guarantee of future general fund support and that revenues from the library tax might simply allow the city to reduce general fund support even further. The question on the November 3, 2009 ballot was: Measure J: Shall the City of Pacific Grove Library Funding Measure be approved to enact an ordinance to create a Special Parcel Tax and limit that revenue to the sole purpose of maintaining and improving services at the Pacific Grove Public Library? The vote was close and the outcome would not be known with certainty until the Monterey County Elections Office certified the results on November 23 rd. Measure J had failed to garner the required two-thirds vote by the narrowest of margins. Votes Percentage Yes 2, % No 1, % Measure Q Library Tax Round Two The 2009/10 city budget continued the austerity program. Reductions in personnel costs included deferral of a 9.25% negotiated pay increase for sworn police department personnel, a 5% furlough reduction for all non-sworn city employees and a $30,000 reduction in part-time personnel at the library with the result that the library hours would be reduced from thirty-one to twenty-four hours per week. The budget also proposed increases in library-generated revenue: Increasing the cost of inter-library loan services from $1.00 to 3.00 could generate approximately $10,000 in additional revenue. Increasing late-fee fines could generate another $5,000, for a total budget estimate of $15,000 for library services. 6 Historical library use, however, was increasing except for a slight reduction in average daily visitors not unexpected given the reduced hours Average daily visitors: Items checked out: 239, , , ,268 5 All quotes in this paragraph are from the official voter information package available from the League of Women Voters of California Education Fund at 6 City of Pacific Grove, FY 2009/10 Budget, p. 14, 99.

6 Internet Users: 8,296 7,525 8,784 11,438 7 Again, supporters of the library organized to address funding for the library. A library summit was held in February 2010 attended by over 100 citizens and forming an all-volunteer Library Steering Committee. The main result of this citizens effort was a revised proposal (Measure Q) for a special library tax. Measure Q provided for a parcel tax of $90 for each land parcel and $45 for each rental unit in an apartment building. The tax would add an estimated $600,000 to the library's annual operating budget. This proposal addressed some of the difficult issues associated with the previous Measure J. Measure Q required that all revenues from the parcel tax must legally go to the library and are not available for other city purposes. It also included a commitment from city government to continue to fund the library at 2.83 percent of the general fund for the duration of the tax measure. A citizen s oversight committee was included to address accountability issues and cost-of-living increases. Like Measure J, Measure Q contains a relief provision for low-income taxpayers. The city council voted to place the issue on the November ballot. Arguments for and against the tax were largely the same as before with the added argument by supporters that Measure Q strengthened the proposal by addressing the shortcomings in Measure J. The question on the November 2, 2010 ballot was: Measure Q: "Shall a new Chapter 6.70 be added to the Pacific Grove Municipal Code to impose a tax at the rate of $90.00 per year for all Owners of Parcels in the City of Pacific Grove as well as $45.00 per year per unit for multi-common Household units, in order to create a dedicated and restricted revenue source solely to provide, maintain, and improve core library services for the Pacific Grove Public Library in the City of Pacific Grove?" The vote was again close but Measure Q had failed to garner the required two-thirds vote. Votes Percentage Yes 3, % No 2, % Conclusion After the failure of Measure Q no more attempts were made to impose a special tax for the library. Over the ensuing few years the library operated at reduced hours depending heavily on volunteers. The city s budget cautiously says The library is currently open for 24 hours per week. A committee of library supporters [ ] is working with staff to analyze library funding and recommend funding options. The committee recommended that the library could be open for an additional 10 hours per week with the addition of 112 part-time employee hours per week, costing approximately $100,000 per year. This amount is reflected in the recommended budget plan. It is important that the wrong message not be received by Pacific Grove citizens, given that neither Measure J in 2009 nor Measure Q in 2010 were ultimately successful, 7 City of Pacific Grove, FY 2009/10 Budget, p

7 even though both received over 62% affirmative votes. This $100,000 will not restore the Library to full service; in addition, it is a commitment for only one year. 8 Case Study: The Pacific Grove Library Tax Teaching Notes This case has been used in public policy and public budgeting courses to (1) demonstrate policy complexity in a seemingly simple situation and (2) highlight specific issues in public policy and public budgeting. Originally it was used as a writing assignment. Depending on the course level, students were asked to identify, describe and analyze either a certain number (three) or as many policy issues as they can find. The case also generates vigorous class discussion and can be used solely as a reading and discussion assignment in seminars. Students can also be asked to research one or more of the policy issues of the case in greater detail for instance, they could research the history, intent, issues and consequences of extraordinary majorities in tax referenda. As a conclusion it is always informative to ask the students to indicate how they would have voted on the two tax measures and explain why they would have voted that way. Intended Disciplines or Courses Public Budgeting Public Finance Municipal Government Public Policy Political Science Public Administration Economics Learning Objectives 8 City Of Pacific Grove, FY 2012/13 Budget, p. 9.

8 Understand the resource allocation and prioritization functions of public budgeting. Understand the challenges involved with fiscal stress and explore solutions Comprehend the complexity of public budgeting policy decisions Explore the implications of citizen initiatives that mandate budgetary restrictions Identify the causes and consequences of some key issues of tax policy Discussion Topics and Questions 1. Topic: The terms of the debate. What are the main arguments made by the proponents and opponents of Measures J and Q? Do they view the public service aspect of the library differently? What do they see as the community benefits derived from the library? Who do they see as the main beneficiaries? Note for the instructor: There is an instructive contrast to be found in the arguments made by supporters and opponents of the library tax. 9 They do not use the terms but their essential argument is over whether the library is or is not a public good. Is the library a true public good or is it more of a club good? Experienced economics students will probably see this early on but there is a teaching opportunity here for the students without economics backgrounds. How does this debate condition the search for solutions to the problem of reduced library services? If the library is not a pure public good, other non-tax solutions might be appropriate for consideration user fees, volunteer staffing, privatization, for example. 2. Topic: Public budgeting as a resource allocation prioritization function? What are the city council s priorities for the city? How are they reflected in the budget? 10 Is the cut to the library budget excessive compared to other budget cuts? Is the library s fiscal problem separable from those of other municipal functions funded from the general fund? What if supporters of the police or fire departments had also proposed special taxes? 9 See League of Women Voters of California Education Fund at 10 Pacific Grove budgets can be accessed at

9 Notes for the instructor: V. O. Key first and most succinctly described the task of public budgeting: On what basis shall we allocate resources to program A instead of program B? 11 Students can be asked to rank the importance of various city services. In a period of significant budget stress, the city manager and the city council have cut the budgets of virtually all municipal departments, probably with resulting declines in service levels. The question becomes whether the cuts to the library are out of line with the rest of the budget. How would the students distribute the cuts according to their prioritization list? Students can be asked to consider whether the cuts to the library budget might be a Washington Monument budgetary strategy cutting a popular public service to generate public support. 3. Topic: The budgetary consequences if either Measure J or Q had been passed. How do Measures J and Q differ? What is the significance of these differences? What would have been the consequences for both revenues and expenditures in the city budget if either measure J or measure Q had passed? Would either Measure J or Q have restored library services? Would either of the parcel tax proposals have relieved some of the city s fiscal pressure? Note to instructor: In the case of Measure J the revenues from the special tax could simply have been used to replace general fund support for the library with no resulting increase in budget or service levels. But, would the city have had some kind of moral obligation to maintain the planned level of general fund support? In the case of Measure Q the city would have been required to maintain a specified level of general fund support for the library. This provision has budgetary consequences. It would have restricted a specified portion of the budget from discretionary authority of the elected city council; in effect placing the library funding in a privileged status and leaving the remaining department of the city to compete for the rest of available funds. In the most extreme situation a bankrupt city might have to honor the prioritization of library funding over other essential city services for the city s last dollar. Arguably the impact on the overall level of fiscal stress would be minimal. Measure J would have relieved fiscal stress only if the city viewed the additional revenues as an excuse to reduce general fund support further. Measure Q increases fiscal stress by placing a budgetary fence around library funding. 11 V.O. Key Jr., The Lack of a Budget Theory, American Political Science Review 34 (December 1940):

10 4. Topic: Dealing with fiscal stress? How else might the city have dealt with its fiscal crisis? Given the fact that one general tax package was defeated, a smaller sales tax increase was adopted, and two special tax proposals were defeated, is the city s only recourse to cut spending and reduce municipal services? How would you distribute the cuts? Where else might efficiencies be found? What other steps might the city take? What is the relationship between spending and service levels, i.e. what has happened to library services since the budget cuts? Note to instructor: A key question here is the extent to which the city s fiscal crisis is shortterm or long-term. The economic downturn certainly affected municipal government budget as revenues fell but some of the probable is also structural. The city is burdened with high personnel costs, high unfunded pension obligations, a weak commercial district and not much growth in its population or the local economy. It is clearly limited in its ability to increase taxes. Discussion can center on how the city can deal with the long-term problem. Some solutions that have been suggested include limiting pension entitlements and contributions, contracting out most city services, cooperative agreements with nearby jurisdictions for public safety and public works. Finally, students should look at the library usage data before and after the budget cuts to determine what the data show about the elasticity of demand for library services. Has library usage fallen in relation to changes in library hours? 5. Topic: Tax Policy What is the purpose of requiring an extraordinary majority to adopt tax increases? Does it deny the will of the majority or protect the rights and treasure of the minority? Is the two-thirds requirement so high as to make tax increases nearly impossible to pass? Is raising taxes never the acceptable solution to budget stress? What does the case tell us about voters willingness to increase taxes? Notes for instructor: This case offers an opportunity to discuss the revenue side of public budgeting. Some principles of taxation can be discussed: adequacy of revenue and equity, for instance. If the conventional wisdom is that voters want more government services than they are willing to pay for how does a nearly 2/3 vote in favor of the library tax square with this idea? The parcel tax is not an ad valorem tax. Rather, it taxes an equal amount on all

11 property and is thus a regressive tax. Students can debate whether that is a fair tax. 6. Topic: The role of citizen initiatives on budget issues. What are the benefits and limitations of citizen involvement in budgetary decisions? Should budgetary decisions be made by the city council or the voters? Note to instructor: This case involves asking whose responsibility is it to make budgetary decisions. What is the proper role of citizen s groups in public budgetary decision making? Many jurisdictions now employ formal mechanisms to facilitate citizen input on budget issues such as public hearings and on-line prioritization exercises. But in those cases the final decision rights remain with the city councils. Citizen initiatives tend to deal solely with one spending issue thus undermining Key s essential need to make choices between A and B.

Case Study: The Pacific Grove Library Tax

Case Study: The Pacific Grove Library Tax By Douglas A. Brook, Ph.D. Visiting Professor of the Practice Terry L. Sanford School of Public Policy Duke University doug.brook@duke.edu Case Study: The Pacific