HomeMy WebLinkAboutStaff Report 2.B 02/08/2016DATE: February 8, 2016
TO: Honorable Mayor and Members of tthheeJCity ouncil
FROM: John C. Brown, City Manager
Agenda Item #2.B
SUBJECT: Workshop Discussion Related to Placing a Tax Measure on a 2016 Ballot
BACKGROUND
The City Council will recall the specifics regarding Measure Q, the City's effort to implement a
local sales tax in 2014. By way of background for others who may not be as well- versed, the
Measure sought approval to impose a local transactions and use tax (sales tax) of one percent
(1 %) for governmental purposes. It was estimated to generate $10 million a year in tax proceeds
for the City. The tax was proposed as a permanent increase, and as a general tax rather than a
special tax. The difference between the two is that a general tax requires a simple majority to
pass, and a special tax requires a 2/3 majority to pass. A special tax also requires proceeds be
directed to specific purposes, pursuant to an expenditure plan ordained by the governing body. A
general tax can be used for general governmental purposes at the discretion of the governing body.
Although Measure Q was proposed as a general tax, the Council did identify spending priorities
for using the proceeds. Priorities were based on the information gained during several workshops
conducted with the City Council in the months leading up to the election and included: street and
sidewalk maintenance and repair; the Rainier crosstown connector /interchange project; Facilities
Improvements, flood protection and storm drainage; vehicle replacement; and restoring public
safety positons. Together the estimated need in all these areas ranged from $366 million to $466
million, the difference, in the main, dependent on treatment of street and sidewalk work.
Despite polling well in surveys conducted in November 2013 and June 2014, Measure Q was
defeated in the November election by a margin of 13.4% (56.7% — 43.3 %). Some of the reasons
for this result identified in post election surveying were that voters were uncomfortable with the
amount, with permanency, and because priorities were not dedicated as they would have been had
the tax been structured as a special tax.
The set of needs that existed in 2016 remain unmet. Economic recovery has stabilized the City's
finances for the time - being, but has not provided resources that can be used to address the areas of
need discussed in 2013/14. And, as you will have seen by the time this item is discussed on
February 8, 2016, the City's five -year financial forecast continues to project expenses in excess of
revenues in each of the next four years, declining fund balances, and imbalance by the end of
fiscal year 2017/18 and beyond. These projections illustrate that existing revenues will not
increase such that they can be used to fund our unmet needs.
In March 2015, the City Council adopted its goals for the two -year period including 2015 and
2016. Included in the priority to " Enhance Revenues" is the task "Evaluate and take appropriate
legislative action to establish new revenue sources and means of financing City services and
infrastructure projects ". This recognizes the need to establish new stable -based funding sources to
address the unmet needs facing the City.
DISCUSSION
Some City Councilmembers have expressed interest in placing a tax measure on the Novermber
2016 ballot. This item is presented as a workshop to provide the Council an opportunity to discuss
these matters. The purpose of this workshop is not to immediately seek Council direction, but
rather to determine broader Council preferences. The primary question is whether the City Council
wishes to engage in the activities necessary to move a ballot measure forward. Other questions
regarding structure follow from that answer, and will need to be answered over time, with and
through process. Following are the main considerations the Council will need to address in the
months to come, if it wishes to move forward with a sales tax measure in 2016:
Tax Rate and Term
Capacity exists within the existing maximum tax rate, to increase the sales tax in Petaluma by as
much as one and one - quarter cent. Petaluma's rate continues to be among the lowest in Sonoma
County. Following is the current status of sales tax rates in Sonoma County, based on State Board
of Equilization records as of July 1, 2015.
Jurisdiction Rate
Cloverdale
8.25%
Cotati
9.25%
Healdsburg
8.75%
Petaluma
8.25%
Rohnert Park
8.75%
Santa Rosa
8.75%
Sebastopol
9.00%
Sonoma
8.75%
Sonoma County
8.25%
Windsor
8.25%
Based on a current sales tax estimate of approximately $13.1 million for FY 2015/16, of which
approximately $12 million is considered to be recurring and subject to the local transactions and
use tax formula, estimates of proceeds from full and fractional portions of a one percent (1 %)
increase are as follows:
One cent (1 %) $12,000,000 annually
Three quarters of a cent (.75 %) $9,000,000 annually
One -half cent (.5 %) $ 6,000,000 annually
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Increases would likely generate more, particularly over time. The Finance Director has cautioned
using a higher estimate, however, because the State's apportionment of sales tax revenues is based
on a formula that takes more into account than local sales taxes alone.
Given some of the responses expressed in post election polling, a majority of voters may not
support a one percent increase option. If so, the Council will want to consider whether to seek
that rate of increase, or choose a lesser increase option. Pursuing that latter course of action will
restrict the program of work that can be accomplished using new tax proceeds. Such amount
would be further limited if a term is placed on an increase, such as post - election polling indicated
would have been preferable to some voters. The following projects proceeds, using the
percentages noted above, for varying terms:
Estimated Sales Tax Proceeds, by Increase and Term
Increase 1 year
5 years
10 years
20 years
30 years
0.5% $6,000,000
$30,000,000
$60,000,000
$120,000,000
$180,000,000
0.75% $9,000,000
$45,000,000
$90,000,000
$180,000,000
$270,000,000
1.00% $12,,000,000
$60,000,000
$120,000,000
$240,000,000
$360,000,000
The estimated cost of the projects and programs that the City Council prioritized for funding in
2014 ranged between $366 and $466 million. Those totals exceed the amounts projected in the
foregoing table, even at the highest rate of increase for the longest fixed term used. The Council
will have to determine the appropriate term for any increase that is not intended to be permanent.
Among the considerations in selecting a term will be the amount of work that can be done with the
resulting proceeds. Another consideration, if the Council wishes to borrow against this revenue
source to accelerate the work program, will be a term that is viewed by lenders as viable when
structuring debt financing. Such a term would most likely not be less than ten years, and could be
20 or 30 years, depending on amounts borrowed and financing instrument employed. Even
though various percentage increases and terms were tested in 2013 and 2014 surveying, and longer
terms and higher rates polled well, another important consideration in selecting a term would be
current voter preferences.
Priorities
As noted in the Background section, spending priorities for 2014 were street and sidewalk
maintenance and repair, the Rainier crosstown connector /interchange project, facilities
improvements, flood protection and storm drainage, vehicle replacement, and restoring public
safety positons. These priorities were selected in two ways: they polled strongly (street
maintenance and traffic congestion relief, vehicle replacement, and Rainier ), or represented
pressing needs with no funding sources (public facilities, public safety staffing, and flood
protection/storm drainage). While it is highly likely that the conditons of our streets is still a very
high priority among our residents, the polling that helped shape all these priorities is two years
old, and may no longer be sufficient to accurately identify the Community's strongest interests.
It is recommended that further polling be done, to confirm or adjust priorities. As such, options
that represent the breadth of the City's needs should be tested in that surveying to determine which
of those are deemed most important to the voters.
That said, of the priorities established in 2014, street maintenance, facilities improvement, and
public safety staff continue to the the most pressing from staff's perspective. Funding for these
uses is insufficient, on the decline, and /or unavailable. Funding for storm drainage and flood
protection is also currently insufficient but could be obtained through a property -based assessment
or similar funding mechanism. Therefore, unless this item tested well in polling, which it did not
in 2013 and 2014, removing it from the priority list is recommended. Similarly, staff will be
presenting a financing proposal to the City Council in the coming months to finance vehicle
replacement. This would address immediate and short term needs, but would help modernize
the City fleet. Accordingly, staff would also recommend removing vehicle replacement from
sales tax prioritization unless polling dictates otherwise, or the Council wishes to focus on a more
permanent solution to vehicle and equipment replacement. Finally, the Council can remove the
Rainier project from sales tax consideration. Traffic Mitigation fees will be collected over time
sufficient to finance that project. The project was included in 2014 priorities with the intention of
accelerating construction of the project in advance of collecting the traffic mitigation fees
associated with the project. Removing it from the priority list means that the project will not be
delivered as quickly. The following represents the list of priorities staff suggests the Council
should consider funding with a sales tax increase, and their current cost estimates.
Priority Cost Range
Street Maintenance and Repair $76 -128 million*
Restore Public Safety positions $17 -34 million* *
Public Facilities $ 33 million
TOTAL $126 -195 million
* Ten year treatments, to accelerate pavement improvement
* * 1.7 million annually, for ten years and for twenty years. Cost estimate increases proporationately with
longer periods of time.
As noted above, street work estimates represent a ten -year program of work. Public Works and
Utilities staff costed the work in two ways, on a pay -go basis, and accelerating the work over ten
years. Because streets will continue to deteriorate over time, the longer it takes to improve them,
the more costly the endeavor. Accordingly, borrowing money in advance, to complete all
necessary work in a ten year period is far more cost effective, is the cost that is shown and the
approach that is recommended. Street maintenance and repair costs have changed since they were
presented to the City Council in 2014. The costs above do not include an estimate for sidewalk
repairs. The range of costs represents the difference between bringing the City street system up to
a pavement management index (PMI) rating of 70, and to a PMI rating of 82. The latter number is
to the recommended Metropolitan Planning Commission treatment. These ratings represent
system -wide averages, meaning that while most streets would see some street work, not every
street would meet the rating standing alone. The higher rating of 82 would insure that all streets
would be brought to a higher individual rating. Further, Public Works and Utilities staff believes
that improving to the higher rating will allow them to maintain all streets at a cost that is very
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similar to the amount of street funding that is currently available. They do not believe that same
result can be achieved by improving to the 70 rating.
Facilities cost estimates are updates of those presented to Council in 2014, and address needs with
the three fire stations, the police station, and the Museum building. Monies are set aside, and
collected, in a Public Faclities fund, supported by development impact fees. The City's fee
program attributes only the cost of these facilities to new growth that is required to serve that new
growth. The fees do not, and cannot, capture the cost of replacing buildings that serve existing
population. As such, the Public Facilities Fee captures approximately one fifth (115) of what is
needed for these and other improvements to public buildings. A funding source to provide the
remaining 4 /5ths does not exist.
Public Safety staffing cost estimates are the high -end estimate provided in 2014, and as noted
illustrate ten and twenty year funding programs. Again, revenues are not sufficient to support this
needed additional staffing.
Accordingly, it is strongly recommended that the City Council consider all of these needs when
structuring a tax measure. Comparing the estimated cost of these needs to the chart on the third
page of this report, a rate of at least one half percent is needed to support costs at the lowest
estimate, a rate of at least three quarters of a percent is needed to support costs at the high end, and
both would require a term of at least twenty years to provide sufficient funding. These estimates
do not yet account for borrowing costs and capacity, which will demand additional revenue to
supply the amounts needed to complete proposed programs of work.
General Tax vs. Special Tax
As previously noted, a General tax would allow the City Council broader discretion in using
proceeds. A special tax designates the use or uses to which tax proceeds are restricted.
Under the Revenue and Taxation Code, passage of local transactions and use taxes requires a 2/3
vote of the legislative body offering the tax, for either a special or a general tax. In the case of the
Petaluma City Council, a 2/3 vote requires at least five (5) affirmative votes. A local transactions
and use tax for specific purposes then requires a 2/3 vote of the qualified voters. A local
transactions and use tax measure for general governmental purposes requires only a simple
majority of the qualified City voters to pass the tax. While the general tax measure has a lower
voter approval threshold, it will not satisfy some voters need for a "guarantee ". Polling in 2013
and 2014 did not directly test for these preferences, any future polling that may be conducted
should, to assist the City Council in deciding how to present a tax measure to the voters.
Oversight Committee
A feature of Measure Q was an oversight committee, which would have to review and report
annually on the uses of tax proceeds. The Council will want to consider and determine the
benefits of incorporating an oversight committee in any tax measure going forward.
Conclusion
In summary, this item is presented to the City Council to provide the opportunity to initiate
discussion and to begin to frame preferences. The workshop also provides an initial opportunity
for the Council to request additional information it may need in order to assist with making the
decisions associatd with initiating a tax measure. As noted several times in this report, staff
recommends additional community polling, and to that end, acquiring the services of a qualified
and successful consulting firm to conduct and assist the City Council in interpreting polling
results, and to assistwith any education campaign that then may follow. I have not discussed
timing elsewhere in this report, but a measure built on reliable data will require several months
effort. There is sufficient, but not excess time, to complete this work if efforts are intitiated now.
It is my intention, in the absence of a concensus of a majority of the City Council to the contrary,
to retain preliminary consulting support. An agenda item, to expand the scope of that support can
be brought back to the City Council at it's February 22, 2016 meeting for consideration.
FINANCIAL IMPACT
Funding for a tax measure, consulting and polling, and for elections is not budgeted for 2015/16 or
for 2016/17. These amounts will need to be fully determined, and transferred from reserves this
year and budgeted for 2016/17. Based on estimates provided by the County Clerk, the cost of
placing a measure on the ballot ranges from approximately $46,000 to approximately $61,000
depending on voter turn -out in November 2016.
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