Darren Hernandez
City Treasurer, City of Santa Clarita

Interview by Leon Worden
Signal Multimedia Editor

Sunday, October 3, 2004

[WATCH the television interview conducted September 30, 2004]

Darren Hernandez     Newsmaker of the Week" is presented by the SCV Press Club and Comcast, and hosted by Signal Multimedia Editor Leon Worden. The program premieres every Wednesday at 9:30 p.m. on SCVTV Channel 20, repeating Sundays at 8:30 a.m.
    This week's newsmaker is Darren Hernandez, city treasurer for the city of Santa Clarita. The interview was conducted Sept. 30. Questions are paraphrased and some answers may be abbreviated for length.

Signal: When you think of local government finance in California, you think crisis. Is the city of Santa Clarita having a budget crisis?

Hernandez: No. We are not having a budget crisis. But we are certainly affected and impacted by any budget crisis that may be occurring in Sacramento, because local government finance — city finance — is very heavily impacted by decisions made in Sacramento.
    The city of Santa Clarita, as you know, is very conservatively managed. We are very careful with the funds that are placed in our trust by the taxpayers of the city. We have been very careful with the decisions we have made, and unlike many cities throughout California, we were very careful during the times of economic prosperity. We did not commit our funds, for the most part, to ongoing new projects or to lavish pension increases or pay and benefit increases. We invested our windfall, our surplus if you will, during the times of economic prosperity, in projects in the city such as the Aquatic Center. And during the recent budget crisis and the recent slowdown in the economy, we were able to weather that much better than nearly any other city in California because of the conservative approach we took during those good times.

Signal: You'd think that most cities, and even the county board of supervisors, would say they manage their money conservatively. Is it just by accident that some of these other municipalities undertook ventures that Santa Clarita was foresightful enough to avoid?

Hernandez: I think there are a number of reasons why we are very fortunate. Certainly we have a very strong local economy. We are very heavily — as all cities are in California, but even more so for us — very heavily dependent on sales tax. Nearly half of our general fund budget — and a general fund, for people who aren't experts in municipal finance, the general fund is really our primary operating fund; it is the pot from where we get our revenue, our funds to provide most of the services that the people in the city enjoy — nearly half of our general fund revenue comes from sales tax.
    We have been very successful in Santa Clarita in expanding and developing our sales tax base and we have been fortunate in that regard. We're probably more heavily sales-tax dependent than most other local governments. So certainly our efforts in terms of economic development have been successful and have paid off for us.
    Also, on the expenditure side, we're very careful in Santa Clarita with how we spend our money. We go through a very rigorous budget setting process where we are very careful to consider any new expenditures for new or expanded programs, and the scrutiny that those expenditures go through is far greater here than any other city in which I worked. And certainly we take the lead from the City Council, which is very careful in how they spend money and the budget increases that they permit or the new programs that they initiate.

We have been very successful in Santa Clarita in expanding and developing our sales tax base and we have been fortunate in that regard. We're probably more heavily sales-tax dependent than most other local governments. So certainly our efforts in terms of economic development have been successful and have paid off for us.
    The other thing, though, is — there are a lot of cities in California, particularly full-service cities, that during the times of economic prosperity, when the stock market was going great and doing very well, gave very significant increases to their police and fire departments in terms of pension increases — some as high as 50 percent — a 50-percent increase in pension benefits.

Signal: Riding the dot-com wave?

Hernandez: Right. Fortunately, we have a very good deal in terms of public safety with our contract with L.A. County for sheriff's service, and fortunately L.A. County was one of the few organizations that did not increase pension benefits for their sheriff officers to the tune of 50 percent, because if they had, certainly we would have seen a dramatic increase in the cost of our sheriff services.

Signal: But the city pays a bit more per capita for sheriff services than the county, because the city has been able to hire an extra deputy or two, above the normal contract level.

Hernandez: Correct. Well, in terms of budget, the budget that we have for sheriff services is around $12 million to cover 160,000-plus people, approximately 50 square miles. By comparison, the city I worked for prior to coming to Santa Clarita was in Orange County — it was a full service city; it had an area of about 7.5 square miles and a population of 60,000 people, and that city's police department budget was $12 million dollars also. So certainly by contracting with Los Angeles County for sheriff's service, we get a much better deal and we are able to provide actually more service, have more officers on the street, for our $12 million than the city I worked for previously with their $12 million.

Signal: Which city was that?

Hernandez: It was La Habra in Orange County.

Signal: How does Santa Clarita's healthy revenue stream translate in terms of staff? How fat is Santa Clarita compared to cities of comparable size?

Hernandez: I think that if you compared us to cities of comparable size, that we run a rather lean operation. ... What I like to say to people who ask me what I think of Santa Clarita compared to other places where I've worked that it's the most functional organization in which I have ever served. The morale in the city — I mean, you walk around City Hall and it's just a very positive organization. Very high morale, so the productivity is outstanding. People really enjoy coming to work, and they enjoy working for the city, and that is important.

Signal: What do you think fosters that?

Hernandez: I think that it comes down from the top. It comes from having a highly functional City Council. It comes from having enlightened leadership that has hired well. I think it clearly — from my experience and my observation, Santa Clarita is staffed (with) a tremendous amount of young overachievers. The staff is very talented. If you've only worked in this city or if you only have experience with this city, you wouldn't know how it is different from other places. Just by sheer comparison, you can see how different this organization is and really how different the employees are.

Signal: How does the city attract them? Does it pay better?

Hernandez: Not really. Not really. For me, the pay boost wasn't really that great. The pay scale in my other city was very close to what the scale is here. So you could almost say that the other city paid well for their size. But we have a reputation in local government for being a place of excellence, and people who are bright — people who are overachievers want to work in a place where they can overachieve. So I think that is one of the reasons why we are able to attract and retain really good employees. And I think that is one of the reasons why we provide excellent service, and that is certainly one of the reasons why we are able to manage our finances so well.

Signal: Let's go back to revenues. If nearly half of the general fund revenues come from sales tax, how big a threat is new retail right outside city limits? How much does Wal-Mart take away? What is Santa Clarita doing to defend itself against the competition as the west side grows?

Hernandez: Well, we are very pro-business and very pro-economic development in the city of Santa Clarita, and we have provided good opportunities for expansion of our retail sales tax base here in the city. And certainly — you know, there a number of developments that are in the planning stages and are coming on line where major retailers will be locating. You have several stores — Wal-Mart, three stores — two Wal-Marts and a Sam's Club — coming right into the city of Santa Clarita, and certainly that will be beneficial to us. That helps us retain our edge in terms of sales tax, the sales tax revenue that we ... need to provide the services that the community expects.
    And certainly the "Shop Santa Clarita" program was intended to educate (residents) as to the importance of sales tax and encourage them to keep their sales tax revenue in the Santa Clarita Valley by shopping in the city of Santa Clarita.

Signal: The last few years of the "Shop Local" campaign, the message seemed to be, don't shop in Los Angeles when you can make a comparable purchase in the Santa Clarita Valley. This year it's "Shop Santa Clarita," and people are being told to keep their shopping dollars between Interstate 5 and Highway 14 — the message being, if you shop in unincorporated areas like Stevenson Ranch, you're not helping Santa Clarita. It has become "us versus them" in our "one valley." Why the shift in the message?

Hernandez: Well, I wasn't here when the other programs were conducted, (when) the other Shop Local campaigns were performed. But I will tell you that the Shop Santa Clarita campaign that we're in the middle of now is very similar to programs that were conducted within other cities in which I've worked.
    Particularly here in California, sales tax is very important to cities in California. Sales tax is not as important in California to counties. Counties are very heavily financed through property tax and assistance from the state. Where nearly half of our general fund revenue comes from sales tax, for Los Angeles County it's less than one-half of 1 percent. For them, the sales tax is negligible — sales tax revenue is negligible. For us, it is air and blood and water. We could not survive without sales tax. Cities in California could not survive without sales tax. Sales tax for counties is clearly just not as important.
    In that regard, I think that illustrates how important (it is) for us in Santa Clarita to expand our retail sales tax base, to maintain our retail sales tax base, and to encourage people to shop in the city of Santa Clarita, because that is the only way that we can ensure that their sales tax revenue stays in the Santa Clarita Valley.
    If people are going to buy something — if they are going to buy a car, if they are going to buy clothes, and they live in the Santa Clarita Valley, it is really in their best interest to shop in the city of Santa Clarita. If they are not going to shop in the city of Santa Clarita, then by all means they should shop in the Santa Clarita Valley.

Signal: We've heard that vehicle license fees are important, too, and that cities and counties are struggling because Gov. Schwarzenegger lowered it. Can you explain the current deal where the state is backfilling the loss with property tax?

Hernandez: Well, it's all tied into Proposition 1A, which is on the November election ballot. And yes, the plan is to eliminate this annual ritual where cities are going up to Sacramento and lobbying legislators and the governor and trying to protect a significant portion of local government revenue.

Since the early '90s when the state started raiding local government coffers to balance their budget, $12 million from the city of Santa Clarita has been taken by the state. We could build another Aquatic Center in the city of Santa Clarita with the money that the state has taken from us — money which we will not see returned.
    The general fund of the city of Santa Clarita is right around ... $58 million and change. Our vehicle license fee revenue is about $9.5 million — not as important as sales tax but certainly a very important revenue source for us. And every year — certainly this year, during the budget process here in which I've participated and in prior years in the other city in California in which I've worked — every budget cycle we're on pins and needles, waiting to find out what was happening with that important revenue source. There are some cities — unlike Santa Clarita where half of our revenue comes from sales tax — some newer, smaller, recently incorporated cities where vehicle license fee was nearly half of their revenue. And certainly for them it was a question of whether they were going to stay as a city or disincorporate if they lost their revenue.
    Fortunately, with the compromise that has been reached, as it has been encapsulated in Proposition 1A, if that proposition is passed, the vehicle license fee will be permanently replaced — a good portion of the vehicle license fee, almost 90 percent of its effect on the city of Santa Clarita — will be replaced with property tax. So we will get increased property tax; we would get decreased vehicle license fee, and we would no longer be captive to decisions in Sacramento as to whether or not each year they are going to fund that important revenue source to cities.

Signal: Evidently Proposition 1A will make it harder for new cities to incorporate because they won't get the same level of property tax to compensate for the vehicle license fee revenues they won't be getting. If the city of Santa Clarita is interested in not seeing a second city form in the Santa Clarita Valley, Proposition 1A would help, right?

Hernandez: Well, it's interesting that you mention that. I was reading an article on that today. It may not sound very fascinating, but I read a lot of articles on municipal finance. I find them interesting. Most of my friends, though, when I start talking about it, they change the subject to baseball or football or something. But I was reading an article about that today, and it seems like it is an unintended consequence of that act, because the swap — this is kind of getting technical here — but the swap of VLF for property tax is based on the vehicle license fee revenue that you got in 2004-05, and that is what is written into the law. And obviously if you're not a city in 2004-05, it's based on the number of zero.

Signal: If you weren't around to lose it, you don't get it back.

Hernandez: But newly incorporated cities rely very heavily on vehicle license fee, particularly. The way it used to work, vehicle license fee revenue was used to actually give new cities a boost. They got actually more money — for a seven-year period, they had more money coming to them than they should have, and it's to give them basically a head start on incorporating, building up reserves, doing capital purchases like buying a city hall, city vehicles and whatnot.
    The way the law is currently written, the way it just changed just with this budget, really just this summer, would seem to not only discourage but also prevent new cities from incorporating. I find it hard to believe that was their intent, and I find it hard to believe that that provision of the law will remain. You would think that they would clean that up and change that.

Signal: Getting back to the basics, why do we need Proposition 1A?

Hernandez: Proposition 1A would end — by amending the state constitution — end the annual state act of state government plundering revenue that should go to cities, counties and special districts in order to balance the state budget.
    Proposition 1A, if passed by the voters in November, would, again, amend the state constitution not to give cities or counties or special districts more money, but to protect the money that they are getting, that they should be getting to protect that money which is local government revenue.
    This is necessary because since 1992, the state has been taking — it first started with property tax and then it went into vehicle license fees, and then this last year when they got into sales tax, that's when we really started to worry, because sales tax is so important to the finances of the city of Santa Clarita. The state started going into all those revenue sources, which are dedicated to local government, to paper over the budget deficit in Sacramento.
    While we budget very conservatively and handle our money very carefully in Santa Clarita, we all know what goes on up in Sacramento, and certainly their discipline was even discouraged when they knew that if they really got into bad trouble, they didn't have to raise taxes, which was unpopular; they didn't have to cut programs, which was unpopular; they could just take money from local governments and have local governments deal with it.
    Right now, not only are local governments in a bind because of the slowing economy and the state taking revenue from them, but a lot of local governments have to face increased pension costs. That is also a result of the market taking a dive, the stock market taking a dive. And there are cities all up and down the state of California (which), this November, have revenue measures on the ballot. They are going to implement utility users taxes or raise their property tax or raise their sales tax to keep from having — they are trying to avert crisis. One city, the city of Salinas, has three measures on the ballot. Again, we are lucky here — because we are so conservative and we are so careful and we've been blessed with a growing local economy — that we are able to provide really good services and good facilities and not have to do that.

Signal: So you're not planning to put a tax-raising measure on the ballot in Santa Clarita?

Hernandez: I don't think tax increases are very popular anywhere, and I wouldn't see them being very popular in Santa Clarita.

Signal: But from what you're saying, maybe you don't need one.

Hernandez: Well, we don't need it for general purposes. We don't need it to balance our general fund budget.
    Proposition 1A, it is important to note — that is essentially what Proposition IA would do. It would prevent the state from reaching into the pockets of local governments to balance their budget.

Signal: It stops that tax grab forever.

Hernandez: Correct, with a couple of exceptions. If the state does get into tremendous fiscal hardship where the governor declares a fiscal emergency and where the Legislature approves of his declaration by a super majority, by a two-thirds vote, the state can borrow money from local governments. But that money must be repaid with interest, and they could never do a subsequent borrowing until the prior borrowing is repaid.

Signal: And only twice every 10 years?

Hernandez: Twice every 10 years, correct. And they couldn't do the second one until the first one (is repaid).

Signal: Do you think if the state borrowed money, it would ever pay it back?

The way the law is currently written ... would seem to not only discourage but also prevent new cities from incorporating. I find it hard to believe that was their intent. ... You would think that they would clean that up and change that.
Hernandez: They would have to. They would have to now.

Signal: Isn't there already some money that's supposed to be paid back in 2006?

Hernandez: Yes. Correct. They took about $2.9 million of our vehicle license fee revenue, and just last year — and if Proposition 1A passes, they would be required to repay that. They are not required to repay that right now. When 2006 comes along, the state could just say either we don't feel like repaying it, or we can't repay it, and then they can stiff us and not repay that money.
    Since the early '90s when the state started raiding local government coffers to balance their budget, $12 million from the city of Santa Clarita has been taken by the state. We could build another Aquatic Center in the city of Santa Clarita with the money that the state has taken from us — money which we will not see returned.

Signal: What does Proposition 1A mean to the taxpayer?

Hernandez: (Proposition) 1A really means nothing to the taxpayers in terms of the amount of money that they pay. It does not reduce taxes; it does not increase taxes. It does not take funding from any other local government, it doesn't redistribute funding, it doesn't take money from schools. It simply prevents the state from taking money which cities currently receive in revenue.

Signal: Voters might be confused when they walk into the booth and see Propositions 1A and 65 on the same ballot. Tell us about that.

Hernandez: Proposition 65 was placed on the ballot by the League of California Cities and other organizations in cooperation with many local government officials. We had members of our own City Council collecting signatures to get Proposition 65 on the ballot. Proposition 65 contains many of the provisions of Proposition 1A. Proposition 1A is a compromise which still provides significant protections to local governments to protect the state from permanently taking revenue from local governments. We are supporting — local governments are supporting — Proposition 1A instead of Proposition 65.

Signal: If both win and Proposition 1A gets more votes, Proposition 65 doesn't take effect?

Hernandez: Correct. It's kind of confusing. If they both pass, then some of the provisions of each could go into effect.

Signal: What is the proposed annexation of the Valencia Commerce Center all about?

Hernandez: The Valencia Commerce Center is an industrial park just outside the city's borders. Many of the businesses in that industrial park have expressed an interest in joining the city of Santa Clarita. We have expressed an interest in them joining the city of Santa Clarita. There would be significant cost savings to the businesses in that industrial park to annex into the city.
    It's really a great deal, because their services would become greater and better and their costs would go down. Their sheriff's protection would increase dramatically from — let's see, during the daytime, from the two cruisers — the two officers that they have patrolling the 500 square miles of the ... unincorporated area outside the city — to being patrolled by the 15 officers that we have patrolling the city's 50 square miles during the daytime.
    More importantly, when you're talking to business ... they like talking in terms of dollars and cents. "Is it going to cost me more, or is it going to cost me less?" One business that we analyzed in the Commerce Center, REMO (Inc.), which is a drum manufacturer, would save over $25,000 a year by not having to pay the utility tax that is levied against businesses in the unincorporated areas. So 5-percent tax on electricity, telephone and natural gas — that's over a quarter of a million-dollar savings over a 10-year period without having to move, without having to change their letterhead or change their business cards. Simply by annexing into the city of Santa Clarita.
    So you can see, in those terms, when you go to a business person — if you're a salesperson and you're trying to sell a product or a good or a service to someone and you can tell them, "Guess what? We're going to cut (the) price and we are going to give you more product," it's a very easy sale. And certainly that is why so many businesses and property owners in the Commerce Center are interested in joining the city of Santa Clarita. It's good for their business. If they save money and they are able to expand their businesses, it could mean more jobs, more people that they are able to employ.

Signal: Does the city have any current hopes of annexing Wal-Mart and the rest of the Valencia Marketplace?

Hernandez: I haven't been part of any discussions in terms of annexing the Valencia Marketplace.

    See this interview in its entirety today at 8:30 a.m., and watch for another "Newsmaker of the Week" on Wednesday at 9:30 p.m. on SCVTV Channel 20, available to Comcast and Time Warner Cable subscribers throughout the Santa Clarita Valley.

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