OPINION -- Dueling Tax Measures Offer Voters Easy Choice

By Marc L. Verville

July 23, 2022 -- Next Tuesday the City Council will vote on placing Phil Brock’s Transfer Tax initiative on the November ballot. The Council must vote Yes to give the voters the choice.

The recent disheartening budget discussions outlined a lack of funds for basic resident services such as libraries and parks, which are still largely off limits to the residents because of funding constraints. Apparently, there is not even enough money to maintain fields for our children to play unless parents can afford to pay for access.

Brock’s measure acknowledges that the City’s financial situation is not yet back to pre-Covid status. It also acknowledges that the situation is temporary, which is why it includes a sunset clause. It would provide a bridge while the recovery continues to address the issues of safety and resident access to critical services. Brock’s initiative would generate funds to expand the Fire Department’s Community Response Unit that has made a notable difference in management of the critical homeless situation.

The critical point is that while no one wants to pay more taxes, Brock’s measure is temporary, as it should be, given the fact that under the existing city tax structure, the annual general fund revenues are projected to exceed the pre-Covid amount in about 23 months.

Within 5 years from that point, the City projects that the annual general fund revenues will be about $65 million per year higher than they were pre-Covid, under the City’s existing tax structure. This does not even account for the anticipated impact of a revitalized Downtown and Promenade, which will add another $25 to $40 million per year in general fund revenues from improved sales taxes, on top of these basic City projections. There will also be major new hotels opening in the interim, adding more Transient Occupancy Tax revenue.

Confusion and misdirection endemic to Himmelrich's proposal
Against this financial backdrop, Mayor Sue Himmelrich’s privately funded ballot initiative inexplicably proposes to hit residents with one of the highest transfer taxes in the state. If the mayor believes her own finance department’s projections and the overall City outlook, why is it now necessary to also directly tax the residents, in perpetuity?

One answer may be Ms. Himmelrich’s admission in a neighborhood group meeting that wasteful city spending was a problem before she was seated on the Council and that she could not make headway with the issue. So, that suffices for a perpetual resident tax?

But the financial illiteracy gets worse. Since affordable housing generates virtually no property tax revenue under state law, it is only a net driver of escalating city municipal costs. By dedicating funding only to affordable housing construction in perpetuity, without also providing funds for infrastructure and services, the setup will only destabilize the city’s future finances, generating the need for yet more direct taxation.

Confusion and misdirection are endemic to this entire initiative. First, Ms. Himmelrich’s marketing materials improperly emphasized her “Mayor” title even though it had nothing to do with the city government. The misdirection extended to the title of the initiative including the term “Homeless Prevention”, another entirely marketing-driven term, misleadingly applied. The fine print says that this has nothing to do with the homeless crisis we are currently trying to address.

Then there is the question of what Ms. Himmelrich’s proposal does with the money. That is as confusing as the justifications. For starters, there are no stated outcomes to the spending. No defined scale. No success criteria. The only stated and quantified objective is collecting more money from the residents. Forever.

The $10 million annual School District gift was not even requested by the School District. Then 50 percent of the remaining balance (after paying up to 6 percent of the receipts for an entirely new and growing bureaucracy) is directed to affordable housing construction that does not benefit existing Santa Monica residents. And, finally, homeless prevention has nothing to do with the homeless crisis.

So, what are the issues supposedly addressed by this initiative?

“Affordable Housing”
There’s still no consensus on what Santa Monica requires. The affordable housing volumes that have been mandated to Santa Monica by the State are the result of an entirely arbitrary process that was heavily directed by special interest lobbying. Housing affordability is a regional issue. But, while Santa Monica has one of the densest affordable housing requirements, Los Angeles has created its affordable housing overlay in. . . the San Fernando Valley.

It also ignores the fact that roughly 10 percent of Santa Monica’s multi-family stock is affordable housing that has been built since the 1980s within the City’s current financial structure. There is no reason that would not continue.

“Homeless Prevention” is actually two issues -- rent assistance linked to rent burdening and rent burdening linked to homelessness. In Ms. Himmelrich and her husband Michael Soloff’s transfer tax presentation roadshow, they describe the problem as dire. Their support consists of a HUD website dashboard that notes its statistics are from 2014 to 2018, over four years old. The website portal posits that cost burdening (greater than 30 percent of income) impacts 9,585 renter households in the city, or roughly a third of Santa Monica’s total renter households.

While the HUD tables are labeled for Santa Monica, it’s pretty clear that Los Angeles County income data is being used as there does not appear to be a Santa Monica Area Median Income (AMI). The Himmelrich initiative’s “Section II: Findings And Purpose” only references the Los Angeles County AMI data being used to calculate the “burdening.”

This is also what our own Rent Control Board (RCB) uses in their 2021 Annual Report Affordability Analysis. The RCB report notes that “According to the U.S. Census Bureau, the median household income for Santa Monica is higher than the Los Angeles AMI. . . .” How much higher? Almost 25 percent higher, at $98,300. What is rent burdened at $80,000 is not rent burdened at $98,300. The $18,300 difference equates to $458 per month in additional income available for rent.

We can corroborate other data points on the issue. The RCB’s 2021 Annual Report references the “Housing is Key” state program that awards Covid-19 rent relief. To date, 2,337 Santa Monica households have received awards. This is only 24 percent of the claimed 9,585 rent burdened households. The award number as of April 5 was 1,878 households so with only 459 added in the last 3.5 months, the program seems to be winding down. Other reference points in the RCB report show that 434 means-tested fee waivers were granted in Santa Monica in 2021, less than 2 percent of total controlled units.

Finally, pre-1999 controlled units and market-rate controlled units leased in the last 6 years make up 69 percent of all rent-controlled units. Both the recent market-rate controlled units and the market rate non-controlled units have been leased out on a means tested basis by housing providers so that rents max out at 30 percent of income.

The data does not support the assertion of massive rent burdening. The casual approach to problem quantification as the basis for public policy is simply unacceptable.

Rent burdening is a risk factor in homelessness?
Linkage of rent burdening to homelessness risk has been endlessly repeated for dramatic effect. The research does not support this contention either. Rent burdening was not even listed as a risk factor for first time homelessness in the comprehensive California Policy Lab analysis “Predicting and Preventing Homelessness in Los Angeles” issued in September 2019.

The report noted that “The majority of single adults who will experience first-time homelessness or a return to homelessness are already clients of mainstream County agencies, which presents opportunities for intervention. . . . These clients are very vulnerable and are interacting with multiple systems, such as the mental health and criminal justice systems.”

This profile does not describe a third of Santa Monica’s renter households.

Like most policy initiatives in the city, no city-specific analysis was performed to define the problem and validate the thesis.

The actual level of research done for this perpetual proposal was revealed in a neighborhood group discussion with Ms. Himmelrich on the tax initiative. She disputed my assertion that the tax would disproportionately impact the residents by claiming that she had personally reviewed county transaction data. I supported my conclusion based on the review of the prior 12 months of broker transaction records. My conclusions were later confirmed with an admission that Ms. Himmelrich had looked at only 2 months of sales records.

This theme of superficial problem definition and analysis permeates the entire Himmelrich transfer tax initiative. It demonstrates clear disdain for the voters and the residents. It is marketed solely with virtue signaling to justify the objective of endlessly collecting more money from residents, not addressing their core concerns. The fact that it is permanent and shielded from future Councils is unacceptable. As such, this initiative has no merit and is destructive.

What little real research that was done was simply polling research. What really mattered was to determine the marketing approach to voters. It’s clear that Ms. Himmelrich considers polling research to be the only research required for policy formulation. It is self-evident that basing public policy entirely on polling can only make for disastrous policy. Santa Monica has suffered through enough bad policy. We do not need any more.

The Council must vote to present the voters with the more reasonable financial bridge alternative initiative presented by Councilmember Brock which is intended to address real resident concerns, on a temporary basis. In the meantime, they city needs to get serious about getting its financial house in order.

Marc L. Verville is vice chair of the Santa Monica Audit Subcommitte. He lives in Sunset Park.

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