California city plans sales tax measure to pay for infrastructure, essential services

BY SourceMedia | MUNICIPAL | 08/05/22 02:46 PM EDT By Keeley Webster

The Ontario City Council approved a sales tax measure Tuesday for the November 8 ballot to fund $1.2 billion of infrastructure projects, and other local governments in California are expected to take similar steps.

The November midterms are expected to be particularly popular this year for tax and bond measures among cities, counties and school districts, because California has an abortion measure on the ballot, which should increase voter turnout, said Michael Coleman, a California fiscal advisor and consultant and creator of CaliforniaCityFinance.com.

If voters approve Proposition 1, California would be one of the first states, if not the first, to create explicit constitutional rights to both abortion and contraception.

The November election could see 60 to 80 similar measures from local governments, which has been typical for gubernatorial elections over the past decade, Coleman said. Both gubernatorial and presidential election years are popular for ballot measures, he said.

The city expects to generate $95 million annually to pay for essential city services such as public safety and cover $1.2 billion of infrastructure and neighborhood improvements. If a majority of city voters approve it, the sales tax would rise to 8.75% from 7.75%.

The additional revenues would support $242 million of improvements to its water and sewer system, a $59 million plan for a great park and other park and playground improvements, $41 million for a Real Time Crime Center and two annex buildings with 25 additional police officers, $118 million to provide low-cost high-speed internet services, and $15 million for housing and mental services for homeless people.

Neighboring cities ? including Corona, Redlands, Riverside, San Bernardino and Claremont ? have an 8.75% sales tax rate or higher, said Dan Bell, the city's communications and community relations director.

Ontario, a city of 182,000 located 35 miles east of downtown Los Angeles, has experienced significant growth as Los Angeles home prices spiked in the mid-aughts and industrial warehouses popped up to serve goods movement from the twin ports in Los Angeles and Long Beach. The Ontario International Airport was recently ranked as the fastest-growing airport in the U.S. and the largest outbound cargo gateway, according to the city's annual comprehensive financial report for the fiscal year ended June 30, 2021.

The city isn't facing financial difficulties, but is concerned about rising costs, Bell said.

"Ontario prides itself on being able to maintain its high level of service through fiscal responsibility and operational efficiency," according to the ballot measure text. "Despite having an operationally balanced budget, Ontario still faces challenges with its ability to fund infrastructure maintenance and enhancements."

The city has been able to sustain its "operationally balanced structure with continued expenditure restraint, ongoing fiscal monitoring, and the use of additional fund balance reserves," Armen Harkalyan, Ontario's executive director of financial services wrote in a letter attached to its ACFR.

The city issued $236.6 million of taxable pension obligation bonds on May 12, 2020, for the California State Public Employees Retirement System public safety plans. It received an AA-minus from Fitch Ratings and a AA from S&P Global Ratings on the POBs, and holds a AA issuer default rating from Fitch and AA from S&P. Both assign stable outlooks.

The pay down of the city's CalPERS safety plans' unfunded actuarial liability could save $110 million over the life of the bonds, according to the city's ACFR for the fiscal year ended June 30, 2021. The POBs will help the city stabilize existing CalPERS costs, but depending on actual market performance, "actual contributions related to the unfunded actuarial accrued liability could be higher than expected," Fitch analysts wrote in the March 2020 ratings report, adding it expects the city to be able to manage the risk.

In addition to pension expenses, the city also faces increasing medical benefit and employee costs, Harkalyan wrote, "and it's crucial that recurring operating expenditures are strategically contained and are not outpacing recurring revenues."

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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