HomeMy WebLinkAboutStaff Report 4.C 02/26/2018• • •
DATE: February 26, 2018
TO: Honorable Mayor and Members of the City Council
FROM: John C. Brown, City Manager
SUBJECT: Discussion and Direction Regarding 2018 Revenue Measures
RECOMMENDATION
It is recommended that the City Council receive a report on a tax survey conducted in February
2018 and detennine City Council policy, as appropriate, regarding potential June and November
2018 ballot measures.
BACKGROUND
In February 2017, the City Council adopted its goals and priorities for the 2017 and 2018
calendar years. Adopted within the priority "Establish New Revenue Sources" were the tasks
"Revisit Consideration of Initiation of a Sales Tax Increase" and "Consider Other Tax
Opportunities ".
On April 24, 2017, the City Council conducted a workshop to re- initiate discussions regarding
new sources of revenues to balance projected deficits; meet ongoing staffing, capital,
infrastructure, equipment, and vehicle needs; and. address pension cost escalation. The City
Council reviewed then - current long -term forecasts, which showed General Fund balances in
deficit beginning in FY 2.019. One of the primary reasons for the projected deficit is the steep
escalation of PERS costs over the next decade.
The Council reviewed the list of available options, including: Sales Tax, Transient Occupancy
Tax (TOT), Parcel Tax, Business License Tax, Property Tax for Debt, Real Property Transfer
Tax, and Admissions Tax. The Council received estimates of the revenue generating potential
from each of these sources, allowable uses, and voter approval requirements. Annual revenue
generation ranged from a high of $6 -12 million for a '/2 to 1 cent sales tax increase, to a low of
approximately $500,000 with the Admissions Tax. The Council expressed its preferences, and
narrowed focus to the TOT, Property Transfer, and Business License taxes. There was neither
strong nor unanimous preference shown for the latter two sources. Other options were viewed as
less promising for reasons including too little revenue generated, limitations as a special tax, and
perceived lack of voter support. The City Council's conversation regarding new revenue sources
was continued, and resumed in July, 2018.
On July 24, 2017, a follow -up to the April workshop was conducted. The Council considered
updated financial forecasting extending to FY 26, and reviewed revenue projections related to
TOT and Property Transfer taxes. Business license revenues were not discussed due to the
complexity of the taxing structure, and the effort and time needed to restructure it as part of an
increase proposal. The Council then reviewed the changes in the long -range forecasts when TOT
and Transfer taxes were included in future assumptions.
The extended forecast, to FY 26, covers the ten -year period during which PERS rates experience
the greatest escalation. A "base case" — one that does not include new revenue sources in its
assumptions - projected a General Fund deficit in FYI 9, growing to $37.1 million in FY 26.
The Council reviewed the projected growth in TOT from the construction of existing and
prospective new hotels, and the effect on that growth from increasing the TOT by percent.
Growth could add $1.6 million over the next three years; increasing the expanded base by two
percent could add another $870,000 per year. Increasing the Transfer Tax from $2.00 to $4.00
per $1,000 of assessed valuation would net approximately $1.15 million per year. Factored into
the long -range forecast, these enhanced revenues pushed the projected General Fund deficit out
to FY 22 and reduced the base case ending deficit in 2026 from $37.1 million to $9.5 million.
These sources alone were not sufficient to eliminate the projected deficit through 2025/26. It
was noted, the forecast did not account for any economic downturns. A downturn would
dramatically affect both TOT and Transfer tax sources.
The City Council agreed to further consider TOT and transfer tax increases, although there was
not unanimity on the rate of increase for the latter. Council asked that staff confer with members
of the lodging and real estate industries regarding these potential increases. Council also
discussed election timing, with a June 2018 date receiving slightly stronger support than
November 2018, due to concerns with the effect of "stacking" potential State, County, and City
tax measures.
On September 11, 2017 and at my request, the City Council appointed a subcommittee to assist
with education and outreach activities, leading to a June 2018 election. Appointed were then-
Vice Mayor Barrett, and Councilmembers Miller and King. In addition to education and
outreach assistance, it was noted the subcommittee could also be utilized during the process of
developing questions for a resident survey.
DISCUSSION
As requested, staff met with representatives of the lodging and real estate industries during the
latter part of 2017. Neither group was supportive of increases in the taxes affecting their
respective memberships. The lodging industry indicated it would oppose increasing the City's
TOT rate. Their preference is to. implement a two percent increase in the TOT with a Tourism
Improvement District (TID), and convey those proceeds to the lodging industry for self -
promotion. A TID need not be approved by voters, only by the lodging industry. Their counter
proposal included funding the activities of the City's Economic Development division, and the
Petaluma Visitor's program from the TID but this would amount to about half of what the City
would realize from a two percent increase on existing hotels and those under construction.
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The real estate industry indicated serious concerns with the effect of an increase to the Transfer
tax on the affordability of home sales, and indicated strong opposition to an increase.
Education and Outreach activities were hampered by a shift in focus to the Sonoma Complex
October 2017 fires, and by the holiday season, with the effect that work related to potential tax
measures was deferred to January.
Given the responses of the two industries, and in particular the real estate industry, it was
suggested to the subcommittee that further discussion of the Transfer tax would be counter-
productive. The strong and effective performance of Public Safety personnel during the October
fires resulted in what has been a well- deserved and continued showing of appreciation and
support for police and fire personnel by the public. Given the unmet need, however, of our
public safety departments, in the areas of staffing, equipment, vehicles and structures, and the
strong public support for Public Safety, it was also suggested to the subcommittee that rather
than the Transfer tax, the City should consider placing a general sales tax increase on the ballot,
for Public Safety, with proceeds used to address the aforementioned needs, and retirement costs.
Finally discussed with the subcommittee was the utility of surveying the public for both a TOT
and a sales tax for Public Safety increase; separately, jointly, in June, and in November 2018. In
January 2018,1 contracted with the firm of Fairbank, Maslin, Maullin, Metz & Associates (FM3)
to conduct surveying. FM3 surveyed both general and special purpose sales taxes for the City in
2016, and is widely recognized for the quality of its work. City staff worked with FM3 to
develop polling questions. Drafts were also shared with the subcommittee members to allow for
their participation in the survey development process. The survey was conducted electronically,
online, and telephonically, with respondents using both landlines and cell numbers. The survey
anticipated a minimum of 600 statistically representative respondents, chosen from a group of
most - likely November voters, with a subset of most likely June voters also counted.
Surveying was completed earlier this month and sought to determine voters' level of support for
a general sales tax increase that would primarily support public safety, and a two percent TOT
increase. The survey further sought to determine preferences between a '/2 and a 3/4 -cent sales tax
increase, between 20- and 30 -year terms, differences in support for measures placed on either a
June or November ballot, and voter support for two measures placed on the same ballot. As
with past surveys, this one also sought to determine voter satisfaction with Petaluma
government, and the most immediate concerns respondents have with City services.
Between online responses, and phone calls, over 1,000 responses were logged, and evaluated.
Attachment 1 provides a summary of FM3's survey results. Some of the take -away from that
summary are:
A majority of voters generally approve of local government.
Voters are largely unfamiliar with the City's financial situation, but see the need for
additional revenue.
The most important funding areas relate to maintaining emergency response times,
ensuring 24 -hour staffing of police and fire, repairing potholes, and maintaining fire
protection equipment. Ensuring funds stay local is very important in terms of
accountability provisions.
• Their biggest concerns are potholes and traffic. Nothing else is seen as a very serious
problem by a majority.
• A slim majority (51 %) offers initial support for a 3/a -cent sales tax. A half -cent rate
receives slightly stronger support (56 %).
• A 20 -year term is viable; a 30 -year term is not.
• The proposed TOT is also comparable initially, with 52% support initially.
• Positive messages resonate with voters. After messaging, support for the sales tax grows
to 57% and the TOT grows to 66% support.
• Accountability, the idea that tourists pay the taxes; the need for fire protection and safe
infrastructure for fire and police, are the strongest messages.
• After negative messaging support for the sales tax goes down to 53% and support for the
TOT goes down to 62 %.
• "Stacking" measures on the same ballot nets negative results, neither tax would pass.
An FM3 representative will be in attendance at the February 26, 2018 meeting to deliver a
presentation regarding the survey and to answer any questions about it you may have.
As noted in the attached memorandum, FM3 indicates (and as we have discussed many times in
the past), a strong education and outreach effort is necessary to strengthen public support for any
tax increase. FM3 further recommends that a tax measure should be held until the November
elections.
During the time this survey was conducted, the League of California Cities advised the
California Business Roundtable, a group representing a number of large corporate interests, is
circulating petitions to place a measure, the "Tax Fairness, Transparency, and Accountability Act
of 2018 ", on the November 2018 ballot. The measure, if it qualifies for the ballot and is passes,
would have serious implications for local government financing by effectively eliminating local
government's authority to pass general tax measures. There is much to be concerned with in
this initiative, however, provisions regarding retroactivity to January 2018 are of immediate
importance to the Council's consideration of placing a measure on the June ballot. The
initiative, if passed, would make null and void any 2018 general tax measure passed on or before
November, 2018 if it did not pass with a 66 2/3 majority and contain the phrase "tax revenue
available for unrestricted general revenue purposes" in the ballot language.
With respect to the two measures tested, the TOT increase surveyed in the end with a 62 percent
support rate and could pass as a general tax measure on the June ballot without significant
education and outreach, and if it had no strong opposition. If it needed to pass as a special
purpose tax, it's viability in surveying should have been in the low 70's to account for a +/- 4.9%
margin of error. Without viability in the low 70's, there is a reasonably high chance the measure
would fail to reach the required supermajority threshold required to pass a special tax. This is
important, because if the Business Roundtable initiative passes, the TOT increase would need to
have been approved by a 66 -2/3's of those voting and would be void if it was not.
Given the City's past experience with tax measures, and the time, effort, and cost associated with
a revenue measure, and the significant risk involved in passing a measure before the outcome of
the Business Roundtable initiative is known, moving forward to place any measure on the June
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2018 ballot is not recommended. Based on surveying, it appears that only one measure, if any,
should be placed on the November 2018 ballot, which would allow for education and outreach
and to first determine whether the Business Roundtable initiative will qualify for the ballot.
In the alternative, the Council could choose to place a TOT measure on the June ballot. To do
so, enabling legislation and findings of fiscal emergency would need to be adopted at your
March 5, 2018 meeting. This alternative is not recommended.
FINANCIAL IMPACT
The cost of the survey discussed in this report was $30,000, which was supported by salary
savings present in the Finance Department budget.
ATTACHMENTS
1. F3 Memorandum, "Key Findings from Petaluma Voter Survey"
� F M �3-a%
TO. John Brown
City of Petaluma
FROM David Metz and Lucia Del Puppo
FM3 Research
RE: Key Findings from Petaluma Voter Survey
DATE February 22, 2018
OPINION
RESEARCH
& STRATEGY
ATTACHMENT 1
Fairbank, Maslin, Maullin, Metz & Associates (FM3) recently completed a survey of likely voters in the City of
Petaluma to assess their support for potential ballot measures to provide funding for vital City services.' The
results show that while a majority of local voters would back increases in the City's sales tax and transient
occupancy tax (TOT), the margin by which they would do so is relatively slim and is sensitive to several structural
elements of the proposed measure. After a series of educational messages, support for both measures --
particularly the TOT increase -- increases significantly. Given the results of the survey, the most likely path to
success would involve placing the TOT increase and the sales tax on separate ballots, with the November
election likely the best position for the sales tax increase.
Among the key specific findings of the survey are the following:
• Local voters are generally pleased with the direction of the City and the performance of City government.
Fifty -five percent of voters say the City is headed in the "right direction." Nearly three in five approve of the
job being done by City government (58 %) and a majority approve of the City Council (53 %).Additionally,
nine in ten say "the City of Petaluma is a safe place to live" and nearly three - quarters say "the City of
Petaluma provides adequate services and takes care of the needs of local residents" (73 %).
• More than three in five voters see a need for additional funding for City services. Sixty -two percent of
voters say there is at least "some" need for additional funding, with one in five saying there is a "great"
need. Only 30 percent of voters say there is "a little" or "no real need." This perception of need is
comparable to that shown by voters in a March 2016 survey of likely November 2016 voters conducted by
FM3, when 64 percent of voters saw a need for additional funding and only 20 percent saw a "great" need.
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RESEARCH
• A majority of voters initially backs a sales tax increase and an increase in the TOT, but by relatively slim
margins. As shown in Figure 1 below, after hearing hypothetical ballot language for the measures, 51
percent of voters say they would vote "yes" on the proposed sales tax and 52 percent say the same for the
TOT. Approximately two -in -five voters oppose both measures. The level of support for the sales tax is
comparable to March 2016 levels, when 50 percent of voters said they would be willing to support a one -
cent tax for vital City services and 47 percent indicated they would oppose it.
Figure 1
Initial Support for Potential Revenue Measures
• The presence of both measures on the ballot simultaneously, however, is likely to diminish their chances
for support. When survey respondents were asked how they would vote on either measure if they knew
both would appear on the ballot concurrently, the level support for both measures decreased; 47 percent
indicated they would vote "yes" on the TOT measure and 45 percent would vote "yes" on the sales tax
under these circumstances.
• A number of structural factors are likely to have a significant impact on the sales tax measure's chances of
winning support. Voters' willingness to support the sales tax is affected by the rate of taxation, its duration,
and the election date of the measure:
• Voters are more likely to vote "yes" on a half -cent sales tax measure than a three - quarter cent one.
Fifty -six percent of voters said they would support the measure at the half -cent rate, representing a 5-
percentage point increase in support, relative to the three - quarter cent measure.
• When voters were asked about potentially collecting the sales tax for 30 years, rather than 20 years,
support declined from 51 percent to 47 percent.
• Support for the measure is strongest among those who turn out less frequently and vote in general
elections, like that in November, and weakest among the voters who cast a ballot in every election and
participate in primary elections.
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RESEARCH
• Petaluma voters express clear priorities for how revenue from finance measures should be spent.. Voters
prioritize "requiring that all funds be used locally" and using the funds raised by the measure on
"maintaining rapid 911 emergency response times, "ensuring 24 -hour police and fire staffing," "repairing
the condition of local roads and highways" and "repairing potholes." (Figure 2).
Figure 2
Priority Assigned to Potential Uses of Funds (% "Extremely /Very Important ")
• Additional information yields a notable improvement in support for the measures. As shown in Figures 3A
and 3B on the next page, voters' support for both measures increases as they learn more about each one.
After hearing educational statements about the benefits of the proposed sales tax, voters' support grows to
57 percent; after exposure to criticisms, 53 percent say they would vote "yes." Support for the TOT grows to
two- thirds when voters hear about its benefits and drops to 62 percent after negative arguments.
P, p;e __s I ]
RESEARCH
Figure 3A
Progression of Support for a 3/4 -Cent Sales Tax Increase
Figure 3B
Progression of Support for a 2% TOT Increase
In conclusion, the data show that while there is a path to approval of two revenue measures to provide revenue
to support critical City services, the measures will need to be carefully designed and sequenced, and there will
need to be a solid program of public education to ensure that the public understands the ways in which the
measures would address the City's revenue needs.
i Methodology: From February 11 -19, 2018 FM3 completed 1,172 interviews with Petaluma voters likely to cast
ballots in November 2018. Interviews were conducted on landline and wireless phones and online. The margin
of error for the full sample is +/- 4.0% at the 95% confidence interval. Margins of error for subgroups within the
sample will be higher. Some numbers may not sum to 100% because of rounding.
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