Tue Apr 30, 2013 3:43pm EDT
* Improving economy helps fill coffers
* Focus remains on wages, pensions and healthcare costs
* San Jose eyes sales tax increase
By Jim Christie
SAN FRANCISCO, April 30 (Reuters) - Stockton, the biggest U.S. city to have filed for bankruptcy, forecasts $840,000 more in the current fiscal year than its officials initially anticipated, one sign of how local revenues in California are picking up after several years of declines.
How the modest increase plays out for Stockton, which has a $155 million budget, remains to be seen as the city of 300,000 is preparing a plan for adjusting its debt after recently winning court approval to press on with its bankruptcy case.
Other California cities have outlined more substantial revenue gains as the state's economy gradually improves.
But the budgets of California cities, which shocked the $3.7 trillion municipal bond market last year with three bankruptcies filed in a matter of few weeks, will remain tight and face long-term fiscal challenges from pensions and healthcare costs.
In Los Angeles, the state's biggest city, Mayor Antonio Villaraigosa has proposed pairing an additional $111 million in revenue with spending cuts, reducing funds for healthcare for many city employees and asking them to give up a pay raise to help close a $216 million budget gap.
San Diego's revenues have also been strengthening and are seen expanding by about $31 million in the next fiscal year over the current year, allowing the mayor of California's second-biggest city to propose spending increases.
The two Southern California cities are posting gains in revenue from property taxes as housing activity improves, from sales taxes as consumers shop more and from hotel-room taxes paid by tourists.
"Property values are increasing, retail sales are increasing, the city has an unprecedented number of visitors," said Miguel Santana, Los Angeles' city administrative officer and budget point-man. "Revenue, I think, is doing well."
Northern California's two largest cities, San Jose and San Francisco, are likewise collecting more money, thanks to high-tech businesses like Google Inc fueling their region's economy, which has been California's job engine in recent years.
California's jobless rate fell to 9.4 percent in March, one of the highest rate among all states but the lowest level in more than four years.
San Jose Mayor Chuck Reed said his city, California's third-largest, expects revenue to rise by 3 percent in its next fiscal year beginning in July. "There's a lot more money floating around," he said.
'WE CELEBRATE FLAT'
By contrast, Fresno's overall revenue is flat. But that's good news for Mark Scott, city manager of California's fifth-largest city. "It's been negative the past couple years so it's a better situation," he said. "We celebrate flat around here."
Despite improving revenue, California cities still face budget gaps and pressure to restore services cut in recent years, said Moody's Investors Service analyst Eric Hoffman.
At the same time, cities must find ways to pare spending on, or raise revenue for, retiree health care and pensions, two types of spending that have been on the upswing.
Both are key issues in the Stockton bankruptcy. Like other cities paying into the California Public Employees' Retirement System, Stockton's pension fund contributions will increase due to a new policy to fully fund the system over 30 years.
Moody's said on Monday it still expects more downgrades than upgrades this year for local governments, which "continue to grapple with ongoing credit pressures, including growing pension and healthcare costs and reduced support from higher levels of government."
"You might say that cities are treading water," said Moody's Hoffman.
Fresno is treading strenuously. Moody's in January downgraded to a junk-level Ba1 from Baa2 Fresno's lease revenue bonds, citing the city's "exceedingly weak financial position."
To balance its books, Fresno needs more revenue, salary and healthcare concessions from city workers, and voter approval to outsource garbage services, Scott said. "To break even next year, those three things have to happen," he said.
In contrast, San Francisco had its general obligation bonds upgraded by Moody's, to Aa1 from Aa2, in the first quarter in part because of solid revenue growth.
But San Francisco also faces a shortfall, of about $124 million in its 2014 fiscal year, and officials expect the cost of services offered by California's fourth-largest city, fueled by salary, pension and benefit costs, will outpace revenue growth over the next five years.
San Jose is on firmer financial footing after several years of austerity and a ballot measure last year to rein in pensions costs. Still, Reed wants to fill the city's coffers more in case Silicon Valley slumps and chills the local economy.
Reed, who expects a $5.5 million budget gap for San Jose's next fiscal year compared with a shortfalls of more than $100 million in 2011 and 2012, said he may try to rally San Jose's city council to put a tax measure to voters next year. "The most likely candidate based on the polling we've done is a sales tax increase," he said.
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