Editor Note: November marks the first anniversary of the unsuccessful attempt to incorporate Carmel Valley in 2009. Tom Adams, a financial analyst and media consultant, decided to find out whether this proposed 12-mile-long city would have been financially feasible.

Tom Adams examined tax data for Carmel Valley over the last fiscal year. He looked at revenues collected from sales tax, property tax and the hotel tax (TOT). With data provided by the Monterey County Tax Assessor office, Adams discovered that for the fiscal year 2011, the proposed city of Carmel Valley would have had a $2.29 million shortfall. LAFCO had predicted $10.63 in tax revenues for fiscal 2011, but the actual figure turned out to be $8.34 million. 


SPECIAL REPORT:
Shortfall of $2.29 Million in Fiscal Year 2011
by Tom Adams

Property Tax

FY 2011 property taxes were projected by LAFCO to be $3.34m. But the assessed value of property in the CV plan area was $2.9bn in 2010, and the Assessor’s office says we can assume 1% of that is paid in taxes with 10% of that going to the municipality. Assuming the assessor’s -2.5% change estimate “for a number of years” applies to FY 2011, we’re assuming $2.84m in 2011 property tax, a $500k shortfall from LAFCO’s projected $3.34m. We thereafter grow property taxes at 1 percentage point below the projected LAFCO growth rate. That would leave 2020 property taxes at $3.72m, or $1.36m short of LAFCO’s projected $5.08m.

Hotel Tax

TOT taxes were projected by LAFCO to be $2.98m in 2011. Instead, they fell to $2.55m in 2009 and to $1.974m in 2010, according to the county tax collector, with Quail open 4 months and the Ranch running at super-low occupancy for six months. Pull out Quail’s 4 months TOT, and assume occupancy recovers at the Ranch now that its remodel is 90% complete, and 2011 should come in at $1.77m. That’s a gigantic $1.2m shortfall (-41%) from the LAFCO projection. With consumer spending still crimped, assume 2% growth going forward rather than LAFCO 3%. So 2020 TOT would be $2.12m, not LAFCO projected $3.88m, a $1.7m shortfall.

Sales Tax

LAFCO projected $1.85m in 2011 sales taxes, up from FYE June 2008 actuals of $1.6m (page 83 of LAFCO report). County sales-tax receipts were $6.8m that year, and have subsequently declined to $5.4m (-21%). We can assume that declines in the Carmel Valley area were at least as steep with several restaurants and hotels closing or downsizing. But even it they only declined by the same 21% as the county, FY 2010 sales tax receipts in the proposed city would have been $1.26m. Even in the unlikely event that they don’t decline again in FY 2001, sales-tax receipts would be 32% below the LAFCO projections in the city’s first year. Assuming continued weak consumer-spending trends, and therefore annual growth going forward that averages 1 percentage point less than LAFCO’s projected rate, the city would come up $38% short of LAFCO’s $2.41m projection for 2011 at $1.5m.

Total Revenue

The impact of the Great Recession on Carmel Valley’s tax revenues would have been profound. Instead of having $10.63 in revenues in fiscal 2011, the city would have had $8.34, a $2.29m shortfall v. LAFCO projections. In 2020, total revenue would have been $10.35m, not the projected $14.69m, a $4.34m shortfall.

At projected expense levels, LAFCO projected:

The city would run a surplus (after Road Fund deficits) through 2015, and only small deficits thereafter, leaving it with a $3.77m cumulative surplus in 2020. On top of that, the city’s contingency fund would have about $9.1m in it.

As it turns out, the city would have started running deficits in fiscal 2012, even before it had to begin making “mitigation payments” to the county to recompense it for the tax base transferred to the new city. The deficits would have jumped dramatically to $2.57m in 2013 when mitigation payments to the county began. By 2020, the cumulative deficit would have been $29.5m. Of course, rather than building a contingency fund at $1m/year, the city would have devoted the contingency cash to reducing that deficit—but still, the $20.3m cumulative deficit would amount to $4,060 per valley home.

Proponents insisted this debt-ridden-city scenario couldn’t happen, and they are right, since who would loan money to people reckless enough to incorporate during the Great Recession, then militantly refuse to allow development to fill the budget gap? Banks don’t have that kind of forbearance. To avoid going broke, the city council would be forced to not only allow the development contemplated in the county General Plan that is 93% built-out already, as the county might do, but pursue development plans well in excess of what the county’s General Plan would allow. That’s what other peninsula cities are doing. That’s what all cities do.

Tom Adams is a financial analyst and media consultant in Carmel Valley. Report issued on Oct. 13, 2010.