Monday, October 14, 2013

Sunnyvale Government -- the big picture financial environment

If you didn't know, I live in Sunnyvale, California.  I really have an enviable quality of life here and compared to almost any place else, there is nothing to complain about.  Complain we Sunnyvale residents do, though.

Let's look at the city's infrastructure.  We have a large number of parks that are decently maintained.  The bathrooms in the parks are functional though older.  The grounds are kept fairly well though not immaculately.  So I'd assess them as functioning, but nearing a time when they will need to be refreshed.  We have a small number of city pools.  The flagship pool, built in the late 1980s, is shared with Fremont High School and is in good shape.  The locker rooms for it could use investment as they break down fairly regularly.  The heater for it has broken down a number of times in the last year.  The other pools run very short hours and are suitable only for recreational swimming.  Some lack changing facilities.  They generally look to have been built in the 1960s and 1970s.  They show their age and are in need of investment.  In a city of 146,000, we have one library.  The building for it is well maintained and the offerings are decent.  But it, too, is showing its age.  A few years ago, a bond measure to replace it failed.  Really, for a city the size of Sunnyvale, I would expect a large main library and three or four branch libraries.  There is a large civic center with theater, athletic courts, senior activities, etc.  The bulk of it appears to have been built in the 1960s or 1970s with the senior-focused area perhaps built in the 1980s.  It is well maintained, but once again, could use investment.  City Hall also dates from the 1960s.  To sum it up, most of our city amenities are between 30 and 50 years old with most closer to 50.  These are not buildings of great architectural value or interest.  They are very plain and obviously designed for function, not beauty.  While they have been well maintained, they could all use updates that are more than incremental.

Sunnyvale sits in the middle of the most economically productive region in the country, Silicon Valley.  It's quite common to find neighbors who work at companies like Cisco, Google, Facebook, Apple and so on.  I believe something like 30% of the population has a graduate degree.  You can look it up, but average home prices in Sunnyvale make people in other parts of the country cry.  According to this link:, average household income is ~$94K.  In the southern part of the city, it is much higher.  As you can tell, this is not a remotely poor city.

Let's look at city revenue for Sunnyvale and its neighbors. The city budget shows me that the city expects to collect $31 million in sales tax revenue this year or $213 per resident and $49 million in property taxes or $339 per resident.  This compares favorably to Cupertino as they expect to collect $270 per resident in sales tax and $219 per resident in property tax.  Mountain View is our neighbor to the north and they expect $208 per resident in sales tax and a whopping $751 per resident in property tax.  I suspect the expansion of the Googleplex has led to a very large expansion in Mountain View property tax.  Santa Clara borders us to the east and they expect $356 per resident in sales tax and $239 per resident in property tax.  Los Altos expects $483 per resident in property taxes and $87 per resident in sales taxes.  But Los Altos is not a good comparison -- if you live here, you know why.  In summary, Sunnyvale tax revenues are lower than all of its neighbors except Cupertino.

While Sunnyvale tax receipts are lower than just about all of its neighbors, it's about to get worse.  Cupertino is looking at a large property tax increase from the new Apple campus.  Reports are that Apple will spend $5 billion on their new headquarters which would increase Cupertino property tax revenue by more than $140 per person. Just about every bit of Cupertino retail space is being renovated so they can expect sales tax increases as well.  Santa Clara will have the new 49ers stadium which won't boost property taxes since the city will own it.  But it will certainly boost sales taxes and profits from the stadium would go to the general fund.  So while Sunnyvale is currently second to last, it will soon be dead last.  Sunnyvale will still have more population than its neighbors.  But all of those neighbors will have the means to make improvements that will make Sunnyvale look substandard in comparison.  Although, in general, their facilities are already nicer than Sunnyvale's.

Before I go on, I need to point out the impact of Proposition 13.  Sunnyvale has a lot of residents who have been here a long time.  I met a man this weekend who told me he's lived here 67 years.  I went to a city council meeting and many of the residents who spoke pointed out their very long residence in the city.  believe it's good to have people of all generations in a community.  But Proposition 13, by limiting the property assessment increases to 2% per year, has institutionalized a tremendous financial privilege for long term residents.  On my street, there are two styles of houses.  One style has ~1350 square feet with a two car garage and the other ~1550 square feet with a one car garage.  Lot sizes range from 6000 square feet to 10,000 (weirdly shaped) square feet.  Tax values range from less than $80,000 to over $1 million.  I'm not kidding.  Some residents are paying more than 12 times the property taxes of other residents.

This is the reality Sunnyvale city council members are facing.  It's not clear that tax revenues are high enough to sustain what is already in the city.  Amenities are nearing their end of life dates and will need refurbishment or replacement soon.  They are likely more expensive to maintain already.  Neighboring cities already have nicer amenities and are looking at large revenue increases in the present or near future.  As a city council member, you have a responsibility to safeguard the future of the city.  And to do that, the city needs more revenue.

There are two ways to increase tax revenue for Sunnyvale.  One way is to increase the property tax base.  New housing is selling for ~$700 per square foot and developers will put it in densely.  So a spare five acre plot could add $120 million to the tax base.  New headquarters for a company like LinkedIn is likewise going to add several hundred million dollars to the tax base.  Do this half a dozen times and pretty soon you've added a couple of billion dollars to the property tax base and maybe $20-30 per resident in increased property tax.  The other way is to boost sales tax revenue.  I haven't studied it, but I imagine Sunnyvale sales tax looks less robust than it used to.  There are a couple of vacant car lots and the big box stores are not doing so well.  The downtown redevelopment is finally coming together, but that has been a real hairball.  Even though Sunnyvale has not been good at this, I think sales tax is where the city should be looking for growth.

There are a few reasons why I think this is the way to go.  First of all, new housing increases demand on city amenities.  In the tax per resident ratio, you're increasing the denominator and the numerator.  Also, if you consider the preponderance of people working in different municipalities than where they reside, new office space or housing will increase demand on transport resources at peak times.  New retail, however, increases transport demand more equally.  Furthermore, the city can get new sales tax revenue without new development.  There is lots of empty and underutilized space throughout the city.  The shopping center at the southeast corner of Fremont and Mary lacks an anchor tenant as does the center at the southwestern corner of El Camino Real and Bernardo.  The old Trader Joe's space on Sunnyvale near El Camino Real is vacant.  There are empty car lots.  Finally, the city can increase sales tax revenue by attracting retail that better matches the demographics of the city's new residents.

I'm not weird for Sunnyvale.  I moved here because of the schools and to be close to employers.  For five years, I both worked and lived in Sunnyvale.  I now work in Santa Clara.  But just about all of my shopping, from groceries to clothes, takes me out of the city.  I eat dinner in Cupertino and Santa Clara restaurants both more than in Sunnyvale.  About the only thing I don't leave Sunnyvale for is DIY home improvement supplies and Sports Basement.  This is happening because the retail in Santa Clara and Cupertino match me better.  If you did a poll to find the best restaurant in Sunnyvale, In 'n Out Burger would probably win.  I like In 'n Out and I like Five Guys.  And I might eat in either of those once, maybe twice a month.  When my wife and I hire a sitter and have a date night, we end up outside Sunnyvale.  Like I said, I'm not weird.  When I talk to the parents of my kids' classmates, we hear the same thing.  There is just little entertainment and non-fast food dining in the city.  Yes, there are lots of holes in the wall doing fish and chips or sushi.  On date night, I'm not looking to order my food from a formica counter.  Indian food in Sunnyvale is an exception to all this.  Too bad I'm not Indian.

So where does this all point?  I don't completely know.  I want the city to match me better in terms of entertainment and retail.  And I think it would be good for the city and its future.  But it may already match people who have been here longer than me.  I am aware that I'm kind of asking for gentrification.  But come on.  30% of the population has graduate degrees and average income is quite high.  Fine dining and shopping is completely appropriate for Sunnyvale.  I don't really want more housing, but it's not because I dislike density (I actually don't.)  I just don't want any more strain on the schools.  The school districts bet wrong on future demographics in the 1980s and sold off too much real estate.  So there's no place to add school capacity.  I suppose the school district could do a bond issue for buying up land, but that's another discussion.  Or maybe our schools have to get more dense with multiple floors.  I'm not too keen on that latter idea and would pay more taxes to avoid it.  But Prop 13 disallows that option.

I think more than anything else, I recognize that being a city council member is hard.  They're balancing a bunch of contradicting interests.  And I don't actually think the members are corrupt.  One is a troll.  And some more trolls are running to join him.  I don't vote for trolls, no matter how pure their motivations are.  The idea that the city has gone to hell and it's because the council is in the pocket of developers is just not supported by any evidence.  Maybe city salaries are higher than they need to be.  But the real culprit is that Prop 13 makes things more difficult for cities over time.  Inflation has averaged 3.7% since 1975.  Since 1975 consumer prices have quadrupled while Prop 13 has only allowed assessments to a little more than double.  Of course property values have increased more so turnover has made things not quite as dire.  But all that does is push the reckoning further out.  This is kind of hard to explain, but remember related rates from math class?  Ultimately, to keep what it has, Sunnyvale has to turn over its population and increase development or get Prop 13 reformed.  The latter is beyond the scope of Sunnyvale politicians and stopping the development will lead to a downward spiral.  I'm not asking anyone to move out of Sunnyvale, but you have to recognize that an $80,000 tax assessment when the city only gets 0.15% does not generate enough taxes to pay for itself.  The money has to come from somewhere and the city council members are responsible for figuring out where.  We can disagree with where they're trying to find it and hold them accountable on that.  But, once again, the money has to come from somewhere.


ben said...

You should thank us, then. We moved here only 3 years ago. Our property tax is very high.

Galen Davis said...

Me too. We bought in 2006. I'm part of the 12X group.

Andrew said...

"Proposition 13, by limiting the property assessment increases to 2% per year, has institutionalized a tremendous financial privilege for long term residents."

Don't forget that it also institutionalizes a huge financial privilege for large businesses, who no longer buy california property, but instead buy/sell holding companies who own the properties, making the properties never legally change hands.

Galen Davis said...

Good point. I hadn't thought about how tax would be avoided on commercial property.