Back in the Black

May 2016

Back in the Black

A fiscal strategy for investing in San Jose's future

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Co-authored with SPUR

The City of San Jose needs more money. Although the “capital of Silicon Valley” has the highest median household income of any major city in the country, years of budget cuts and staffing reductions have left the city in a precarious position, struggling to provide an appropriate level of public services with the resources it has.

Compared to peer cities in Santa Clara County and around California, San Jose has less revenue per capita from the two largest sources of local government revenue: sales and property taxes. This public-sector scarcity stands in stark contrast to the region’s wealth and San Jose’s considerable affluence, as measured by high property values and household incomes.

It doesn’t have to be this way. While there are some deeply rooted causes behind the city’s fiscal distress, San Jose has options. The purpose of this report, developed collaboratively by SPUR and Working Partnerships USA, is to provide a road map for San Jose to achieve the resources necessary to deliver high-quality public services.

This report identifies the following findings about San Jose’s fiscal condition:

  1. San Jose experienced acute fiscal strain and an imbalance of short-term revenues and costs between fiscal years 2002–03 and 2010–11 based on objective metrics of fiscal duress.
  2. A number of factors contributed to the city’s fiscal challenges. They included economic events such as the dot-com crash and the Great Recession, which were compounded by the city’s decision to increase pension benefits. San Jose also recovered from these recessions more slowly and more modestly than most other Bay Area cities, leaving it with fewer resources for providing services to its large population.
  3. The city weathered its fiscal strain by making major cuts in staffing and service levels, as well as drawing down its reserves and assets. The cuts were significant, affected employee morale and resulted in a loss of expertise. The cuts also negatively impacted the quality of life for residents as police response times increased, roads deteriorated, and libraries, parks and recreation centers were shuttered or understaffed.
  4. San Jose’s service costs have been competitive with other large cities, especially its low spending on public safety.
  5. San Jose’s overall fiscal health is shaped by many factors outside its direct control, such as state restrictions on property and sales taxes, high voter thresholds for new taxes, macroeconomic forces such as recessions and the pattern of business growth in the South Bay that put San Jose further from the geographic center of Silicon Valley than many of its neighbors.
  6. San Jose’s fiscal health is also affected by factors it controls directly, such as past pension policy decisions. Another is the city’s history of annexation, land conversions and largely sprawling development, which has left it with a significant amount of housing compared to its job base, a large and costly road network to maintain, and lower property taxes per acre compared to denser cities in the Bay Area. Starting in the 1980s, San Jose also financed a good portion of its development through its former redevelopment agency, which borrowed roughly $2 billion in property tax revenue. The costs of paying off that debt will deny revenues to the city, school districts, the county and other agencies for decades to come. This debt, combined with the limited return on redevelopment agency projects in the form of secondary revenue streams (sales taxes from retail sales, new business taxes, etc.) have limited San Jose’s current tax revenues.
  7. These internal and external factors have left San Jose at a comparative disadvantage. Compared to the other large cities in California, San Jose has relatively low per capita property tax revenue. Compared to large cities in Santa Clara County, San Jose is last in per capita sales tax revenues.
  8. Given this history, the city’s dwindled resources and its low revenue levels, San Jose will have trouble making new investments and keeping pace with rising costs. Should costs rise unexpectedly or should another recession hit, San Jose would be more vulnerable than it was before the Great Recession because it has fewer unrestricted resources to draw from and fewer costs and services to cut.
  9. To mitigate its risk to future downturns and to increase services, San Jose needs to attract investment as well as increase revenues.
  10. While the past shaped where San Jose is today, important market and demographic shifts may begin to work in the city’s favor going forward. San Jose remains one of the few communities willing to accept both job and housing growth, which should position it to attract growing firms and new residents.

Our recommendations to strengthen San Jose’s fiscal condition fall into four categories:

  • Strategy 1: Expand the city’s tax base through strategically attracting investment and supporting economic growth.
  • Strategy 2: Increase local resources through well-designed revenue measures for specific purposes.
  • Strategy 3: Increase local resources through well-designed revenue measures for general purposes.
  • Strategy 4: Reform the public finance system to provide more flexibility and to support the regionalization of revenues and services.

Ultimately, San Jose will need to grow investments and resources to align its ongoing costs and revenues, to invest strategically in essential and new services, to update declining infrastructure, and to continue attracting residents, businesses and visitors with a strong economy and a high quality of life.

Read the full report