San Marcos to put 1 cent sales tax on ballot
The city’s budget deficit is leading leaders and elected officials to move on a tax proposal to address infrastructure, add new fire stations and maintain services
Update: A link to the city’s webpage to download the feasibility study is below.
SAN MARCOS — A structural deficit, budget and staff cuts are leading the city to put forward a one-cent sales tax measure on the November ballot.
The City Council approved to further explore the one-cent sales tax and placing in on the ballot for the November election during last week’s budget workshop, according to Councilman Ed Musgrove. If approved, the tax would raise an estimated $20 million per year, which would put the city’s budget back into the black, he said.
The issue will come back to the council in the next several weeks for formal approval, Musgrove said.
City Manager Michelle Bender said the city’s budget has forced the layoffs of some employees, the elimination of all part-time employees and historical challenges led Bender to go with a zero-based budget approach to address the $10.8 million structural deficit.
With those moves, along with pulling funds from reserves, the city was able to reduce the deficit to $3.8 million for Fiscal Year 2023-24 and bring a balanced budget for FY 2024-25. The City Council directed city staff to develop a balanced budget for FY 24-25 without using reserves, which Bender and other department leaders accomplished.
“We are going to bring a budget in June that is balanced with no dipping into reserves,” she added. “It took a lot to get there. The structural deficit, if we didn’t make a number of deferrals or cuts or choose not to fund items, the true deficit is $10.8 million, which we would anticipate to grow to $18 million over five years.”
The city’s current sales tax rate is 7.75% and if approved, the one-cent sales tax would increase to 8.75%. The city does not have to share those funds with any other entity. Also, Bender said about 40% of the city’s sales tax revenue is generated from non-residents.
But she said it’s not sustainable, so the council approved a ballot measure during its budget workshop on Thursday calling for a one-cent general sales tax increase.
However, one-time funds from the American Rescue Plan Act (ARPA) from the federal government expire and the city must act to ensure it provides services, infrastructure improvements and repairs, maintain and add amenities to parks and build at least one new fire station, Bender said. The estimated cost for a new fire station is $20 million, according to Councilman Ed Musgrove.
He said city leaders debated about the best approach and how to sell the tax increase to voters, especially in a time where finances are tight for the city and some residents. He said there was consensus for the city to put the measure on the ballot, but not for the council to “push” it.
“This is our last opportunity without significant cuts,” Musgrove explained. “They are pushing the need to find the funding. It’s no secret (the city is) in the second year of a deficit.”
A brief history, state requirements
Proposition 13 was passed in 1978 by voters to limit property tax rates at 1% of the assessed value of a property at the time of purchase and restrict annual tax increases to no more than 2% until the property is sold, according to the measure.
When Prop. 13 was passed, San Marcos was mostly agricultural land, chicken farms and storage units, but city leaders knew the population would grow, so other revenue sources must be realized, Bender said. As for revenue from Prop. 13, Bender said if a home sells for $1 million, the city collects just $600, while the other tax revenue from the sale is allocated to the county, state and San Marcos Unified School District, which receives 24% of the property tax, Musgrove said.
“We receive the lowest amount of property tax in the county by a fairly significant margin,” she added. “When Prop. 13 went into effect, we were capped at 6.6 cents on the dollar. Coronado gets the most at 31 cents on the dollar. Escondido is next lowest compared to us at 10 cents on the dollar. That’s always been a challenge that we always knew would be a big impact once the city grew up.”
As a way to generate additional revenue, the city implemented several Mello-Roos districts, or special tax assessment areas, to finance specific public facilities and services, according to the San Diego County assessor website. Another mitigation tactic is the city’s robust real estate portfolio, which has been a savior as San Marcos is at nearly 100% leased and occupied, Bender said.
Additionally, new state mandates required by the state legislature have also increased cost for cities to operate, she said. Those include organics, recycling, environmental programs, prevailing wages for construction projects and many more. She said many of the mandates, such as organic waste collection, come with no additional funding from the state, so cities must cover the cost.
The pandemic also played a role in the city’s finances as revenues decreased and projections showed a structural deficit in FY 24-25, Bender said. While the city’s contract (about $21 million per year) with the sheriff’s department is cheaper than having its own police force, a 3% wage increase still leaves a mark, she added.
The city used $6 million in ARPA funds to fill temporary gaps, but Bender said the city still had to institute cuts to stay afloat and hold off on cutting services to residents.
“We got a lot of great fiscal policies in place,” she explained. “Each budget cycle anticipates putting 6% (of) General Fund dollars into these buckets for vehicle replacement, infrastructure maintenance and longer-term projects that aren’t necessarily capital improvement projects. So this year, we’re not going to transfer any money into the General Fund and that reduces the deficit by $5 million. We are going to defer some maintenance and maintain the hiring freeze (saving more than $1 million). We’ve cut a number of items that don’t include programming in community services or anything the public will notice or feel like there is a reduction in service.”
A new fire station
The city has needed a new fire station for years, according to San Marcos Fire Chief Dan Barron. Two standards of coverage analyses conducted by outside consultants — one in 2017 and one in 2023 — show the department must add a fifth station and possibly a sixth.
The city’s population has swelled over the past two decades and the level of service has dropped from the 98th percentile in the average response time under 9 minutes to the low 90s, Barron said. As more residents populate the city and fill the roads, the calls for service increase as does traffic congestion.
Barron said the call volume rose between 3%-6% for several years before the pandemic. In 2020, there was an 11% decrease and then a 13% increase in 2021 before leveling off to pre-pandemic norms, he said.
However, Barron stressed the tax proposal isn’t just for the benefit of the fire department, but for all departments and residents to ensure a well-run city.
“We’re not operating in a silo as a fire department,” he explained. “This is one team, one fight. This is a unified approach across the board. We really want to achieve a healthy homeostasis for everybody. This has been a struggle for all the directors and all our staff the last few years.”
Musgrove said the analysis shows the department is running 50% more calls with the same staffing. He said it’s not sustainable long-term, so at least one new fire station is needed.
To efficiently maintain a high level of service, the analysis recommends adding a new station in the northwest part of the city, Barron said.
The fire department and City Council had wrestled with several options of presenting a tax increase to the voters, Musgrove said. One could be a specific tax, which would require a two-thirds majority for approval. Another option was for the fire department to engage in a citizen’s initiative, which requires a simple majority (50% plus one) to pass. The other option is for a general sales tax increase approved by the City Council, which also requires a simple majority.
The council went with the third option, but Musgrove said he, nor anyone else on the council, will, or can, promote the tax as a fire department-specific measure since the money will be allocated for all city purposes.
Barron said it’s critical for the fire department to be part of the citywide effort as the city does not want to see its level of service drop any further. Bender said if the measure is approved, the city will outline priority projects including a new fire station.
Musgrove said it will take time, too, as the city must identify a suitable location, purchase the land and buildout designs. Barron said the costs for new fire stations have increased due to more health-related requirements such as systems for exhaust from trucks, and decontaminating clothing, known as turnout gear, in addition to building materials and construction costs.
Also, personnel costs are estimated at $2 million and the study showed a need for another ambulance, Barron said. The ambulance provides a fiscal offset as patients are charged for the service, he said.
The department’s budget for FY 23-24, meanwhile, is $21.5 million.
“In order to build a station, you need money,” he added. “If the city is healthy and viable enough to open a station, that means we’re not depleting somebody else’s department. That’s not the wise choice for us. The city of San Marcos has always been a great place to work. That’s the culture we’ve built here.”
Musgrove, though, said there are many other priorities for the council such as infrastructure maintenance, road repairs, stormwater projects, enhancing parks and trails, to name a few.